Selling home, tax question

[mac3]

What is the name of your state? CA

I am planning to sell my home next year and trying to plan my taxes. Since I have lived in it for over 10 years continuously, the gain will be taxed at 15%, I believe. However, does this count toward my gross income for the year so that all my other income will be pushed up into an extremely high bracket? I just don't understand how that works.

I also saw something that said if you expect big gains to give a child a portion of the home in advance, but you would still be limited to a gift of under 10k, I believe, and that won't be enough to make a dent. Is there an exception when gifting property to a child?

 

[Snipes5]

If you have lived in and owned your home for at least two years, $250,000 of the gain will be excluded if you are single, and $500,000 if you are married.

Any gain above that will be taxed at either 5% or 15%, depending on your tax bracket, and yes, it will be included in your taxable income for the year.

Don't try to gift it to avoid taxes in this instance, it can create a tax mess for whomever you gift it to.

Snipes

 

[mac3]

Snipes5, thank you so much for the fast response. I'm not married, so the 250k is still going to leave me with a lot of gain. I know that sounds good until you realize that I'll have to pay out a great deal on my next home, even though I am sizing down, and, from what you say, the tax on my regular income will now be in at least a 50% bracket - maybe more with AMT and Calif. tax. This was actually one of the biggest, and quietest, tax hikes in history for some of us in California - with little fanfare since it "only affected the rich" at the time. Well, I'm not rich, it was just all I got out of a divorce, and 30 years of work. I had hoped it would allow me to retire one day. That day gets further and further away.

I wasn't seriously considering the gifting thing, just wondered why anyone would even suggest that.

Perhaps something like a contractual installment sale would help - I reallly don't know.

Sigh.

Thank you again. If anyone has any other ideas I would appreciate it.

 

[Snipes5]

An installment sale is an excellent idea. There is no 50% tax bracket, and I can't think of any reason you would be subject to AMT, unless you have an extrememly high amount of itemized deductions, or more than 5 dependents.

Go see a tax professional before you do anything, to find out more accurately what the tax consequences will be.

You seem to have some misconceptions that may be adding to your concern about selling.

Snipes

 

[LdiJ]

Snipes5, thank you so much for the fast response. I'm not married, so the 250k is still going to leave me with a lot of gain. I know that sounds good until you realize that I'll have to pay out a great deal on my next home, even though I am sizing down, and, from what you say, the tax on my regular income will now be in at least a 50% bracket - maybe more with AMT and Calif. tax. This was actually one of the biggest, and quietest, tax hikes in history for some of us in California - with little fanfare since it "only affected the rich" at the time. Well, I'm not rich, it was just all I got out of a divorce, and 30 years of work. I had hoped it would allow me to retire one day. That day gets further and further away.

I wasn't seriously considering the gifting thing, just wondered why anyone would even suggest that.

Perhaps something like a contractual installment sale would help - I reallly don't know.

Sigh.

Thank you again. If anyone has any other ideas I would appreciate it.

Just make sure that you understand what a gain is.....I am sure that its possible that you can have a gain that is more than 250k.....but many people don't realize that the gain is the difference between what you paid for the home, plus improvements, and the price you receive for the home.

 

[mac3]

I sure hope you guys are right. Although there is no 50% tax bracket, people would be surprised at how high your marginal rate can be. Once you reach a certain level of income, they wipe out your amt exemption, for one thing. I know that when I was still married we never got medical or childcare deductions - things like that. Even some actual losses were disallowed on some real estate because they were "passive losses". Not that I really understand a lot of it, but I've been doing some reading on the amt and it looks like I might be better off taking the hit all in one year or my amt exemption could be wiped out several years in a row. A long-term installment sale might help except with the new house I will have MUCH higher property taxes.

The gain (price minus basis of what we paid and improvements) is going to be about 1.5 million. To stay near family and friends, a smaller house is in the 750k range - and I'm not talking big or luxurious. What is left over seems like a lot, but my doc thinks I need to stop working and I'll have huge property taxes and medical insurance to pay, plus two boys to insure and put through college and grad school. It won't go very far over the next 20 years, and I'm old enough to have seen massive inflation eat into the retirements of people who thought they were set for life. I suppose I would be rich if I were willing to move to Ohio.

Yes, I know this story isn't likely to garner sympathy, but that isn't what I'm looking for. I just want to try to save what I can out of what appears to others to be a huge windfall. The fact is, I took a huge risk stretching to buy something when property values had really crashed and, even then, we put every dime into the house to pay it off. 20 years of coupon cutting, no vacations, never eating out, cutting my own hair, etc. Back then, you could sell your house and buy one of equal value without a "gain". You could also take your property tax with you if you were over 55. The government puts these things in place and you hope you can plan your life - but you can't.

I am now waiting for them to cut some of us out of social security and medicare after encouraging all those IRAs. I fully suspect they allowed those "tax benefits" just so they could set people up for a "means test".

By the way, when I talk about paying 50% or more, I am including California. I know when I had to sell some stock the feds took 42% and California added on their 10%, plus one year I paid AMT because I had huge legal bills to write off.

This is the site that explains how capital gains can affect AMT. http://fairmark.com/amt/topten.htm

I wish I could afford professional advice, but that is why I'm here. The roof needs fixing before I can even put this place on the market, and since many of my bills pretty much doubled last year (house insurance alone went to 6000 from 3000), it was the first year I was unable to save. Even the dental work I need is going to have to wait.

 

[justalayman]

Come on ...this guy is talking about realizing 1.5 mil from a house sale and says.."I wish I could afford proffessional advice." How he has to pay AMT and so. He can't crack open the piggy and lay out a couple of bucks for an attorney...well I think I'm going to cry...that is so sad.

Get a life.....

If this guy doesn't hire the proper professionals to deal with his specific situation, he gets what the he deserves.

 

[mac3]

justalayman, as you can probably tell from my last post, I was expecting this attitude, and I truly understand that there are many people out there who would love to have this problem. However, let's keep in mind that this is the tax forum. People who don't earn much don't have much of a tax problem, so you kind of have to assume that folks asking questions here are going to have some assets. That doesn't mean they should give more than they should to the tax man, right? I haven't told you the entire story, and don't intend to go into all of it, but the fact is that all the money is in my house and I can't spend anything until it it sold. BTW, I am a female. My ex has died and it is my responsibility to educate my boys - have you looked at the price of college lately? One of them was just accepted to Harvard, and I'm not going to undo all of his work by saying he'll have to go to a JC or work his way through (he already works part time). Without the prospect of being able to work myself, I can't currently get any kind of loan, nor could I pay it back if I did. And I'm smart enough to know this money will go fast if I don't handle it well.

Half the people I know are either living off of you and me (via government subsidies) or have gone bankrupt at least once, thus borrowing from others and failing to return what they borrowed. If you want to get down on someone, try them, not someone who has worked and saved in order to avoid being social baggage. I paid off my house instead of buying shoes and going on cruises. So sue me if I would like to keep as much of it as I can. I've always taken care of myself and my family, and always plan to do that.

 

[justalayman]

Yes part of my post is lack of concern because of the levels of money involved. Not sure where the AMT kicks in but I believe it's somewhere north of 100k. When a person reaches income at that point and above the actually have the benefit of being able to enjoy the fruits of their labor. People who make much less struggle. Yes you should be admired that you saved and scrimped to get where you are but the fact is you should have much more disposable income than people earning 50k or less. If you don't then you are living beyind your means by choice. They don't have the options in life you do at this point. Whether one makes 50k or 250k taxes are a concern.
The other part of the post is actual concern. Like you stated this is a forum. On this forum it is unlikely and improbable you will get the very specific advice you SHOULD have for a given situation. Although they answer question as specifically as they can most of the advice here gets generalized or at least simplified.

I don't know why you say you cannot get any type of loan but I would imagine a bank would jump at the chance to loan you 100k on your home. Get an interest only payment until you sell your home.
You must have some sort of income to pay for taxes, utilities etc
By the way...if you have no job...why would you worry about the AMT. It sounds as if you are bragging about how much you make in this quote from an earlier post.
"the tax on my regular income will now be in at least a 50% bracket - maybe more with AMT and Calif. tax. This was actually one of the biggest, and quietest, tax hikes in history for some of us in California - with little fanfare since it "only affected the rich" at the time" HHHHHMMMMMM....

 

[Snipes5]

Neither one of you really knows what you are talking about.

OP~ Hire a professional, and leave the ranting and emotionalism at home. Do it as an installment sale.

And whether you like it or not, it IS rather irritating to hear the "woes" of someone who is looking at profits of 1.5M and is concerned about having to put kids through college, and grad school yet.

Try doing that on under $50K a year.

Snipes

 

[justalayman]

Neither one of you really knows what you are talking about.

OP~ Hire a professional, and leave the ranting and emotionalism at home. Do it as an installment sale.

And whether you like it or not, it IS rather irritating to hear the "woes" of someone who is looking at profits of 1.5M and is concerned about having to put kids through college, and grad school yet.

Try doing that on under $50K a year.

Snipes

Snipe**************Where is there an incorrect statement?

 

[mac3]

I admitted I didn't understand taxes. I also said I wasn't looking for sympathy, but the fact is that a professional is going to want money I just don't have at the moment, so I came here. I apologize, and do appreciate your responses, Snipe5, and justalayman. To explain further, I have had income this year, but have to quit my job for health reasons. Alimony also stopped completely with his sudden death and I have had high medical bills, as well as paying for some of his expenses. I have never lived even close to my means but I did put everything possible into future investments - a future that just came about a year too soon.

And I DID do this on under 50k a year. Go back (or forward) 30 years and consider what you would have if you had spent nothing on things you didn't need, even to the point of buying your clothing in thrift stores. You start with a condo and move up from there, paying down each mortgage as you go.

That is how my parents did it, that is how my kids will do it. If MORE people did it maybe taxes wouldn't be so darned high!

In the meantime, I will just have to work something out.
Thanks again.

 

[Snipes5]

Come on ...this guy is talking about realizing 1.5 mil from a house sale.

There is is. Are you happy? The OP stated that this was the gain. So, he gets to exclude $250,000. He is still going to have to pay 15% on 1.25M. That's rather a lot of money.

OP... I realize you don't feel you have a lot of money to spend on tax assistance, but if you see an Enrolled Agent (be sure to ask for one specifically) at your local H&R Block, and set up an installment sale on your property, your tax burden can be greatly reduced, and spread out over time.

I am talking about $200-$300 here, for something that could potentially save you a great deal. The $$$ are only for any tax return prepared, not advice. Advice is completely free. You really have nothing to lose there.

Snipes

 

[justalayman]

There is is. Are you happy? The OP stated that this was the gain. So, he gets to exclude $250,000. He is still going to have to pay 15% on 1.25M. That's rather a lot of money.

OP... I realize you don't feel you have a lot of money to spend on tax assistance, but if you see an Enrolled Agent (be sure to ask for one specifically) at your local H&R Block, and set up an installment sale on your property, your tax burden can be greatly reduced, and spread out over time.

I am talking about $200-$300 here, for something that could potentially save you a great deal. The $$$ are only for any tax return prepared, not advice. Advice is completely free. You really have nothing to lose there.

Snipes

Ya I get that..the fact is the OP went from no income to having to pay under AMT rules and somewhere in there obviously paying the bills with money from God knows where. Now there was alimony where she keeps stating "did it on my own". Get real. Her situation obviously requires much more info than anybody can give her here. She has so many options that people with less don't have. Hell for an interest against her house I would consider loaning the money to get it rolling. Sounds like a bragger more than a person really concerned with the problems.

 

[abezon]

Y'all are getting mighty worked up about this.

Mac -- the way capital gians work, you figure your taxable income, then back out the gains & figure the taxes on the ordinary income as if you had no capital gians. Then you add the tax on the gains (15%). In other words, a big capital gain does not push the rest of your income up into a higher tax bracket. AMT is similarly structured.

A large gain will, however, eliminate your itemized deductions & personal exemptions, and will prevent you from claiming most credits, like the education credits. It may be better to take the hit in one year and be able to claim education credits in future years. If you get slapped with AMT in 2006 but not in 2007, you can claim an AMT credit in 2007.

I advise you to see a good tax pro & run the numbers both ways to figure out if you are better off with a cash sale, an installment sale, or with a partial installment sale (maybe $1M cash & a $500,000 note secured by the home). I also advise you to talk to a number of financial advisors about what to do with the money & whether carrying a note is a good idea for your situation.

Finally, did you get the home outright, or did your ex's name stay on title? Many property settlements are structured so that A & the kids stay in the home, then the home is sold & the proceeds split between A&B. If that was the case, you may have gotten a basis step up when your ex died.