Deferred Capital Gains

[Stephen1]

Washington State - Prior to 1997 the IRS allowed capital gains to be deferred (rolled over) into the purchase of a new principal residence. I sold my principal residence prior in 1992 and purchased a new residence. I am now selling that 1992 purchase. Is the basis for computing capital gains the purchase price of the home I sold in 1992? There was no deferred capital gains going into the house sold in 1992.

 

[Taxing Matters]

Washington State - Prior to 1997 the IRS allowed capital gains to be deferred (rolled over) into the purchase of a new principal residence. I sold my principal residence prior in 1992 and purchased a new residence. I am now selling that 1992 purchase. Is the basis for computing capital gains the purchase price of the home I sold in 1992? There was no deferred capital gains going into the house sold in 1992.

Prior to 1997 as long as the new home you bought was at least the same price as the one you sold you could defer the capital gain and this would continue until you either finally downsized your home (thus taking cash out) or elected to use the once in a lifetime exemption of up to something like $150,000 of gain after age 55. But each time you deferred the gain in those transactions the starting basis of the new home was the adjusted basis of the old home plus the additional money you put in to buy the new one. That way, while you were deferring the gain, you weren't eliminating any gain by the rollover.

So, for example, if you had a home that you bought in 1982 for $100,000 and then sold in 1992 for $150,000 and then bought a new home in 1992 for $200,000, you would have been eligible for the deferral of the gain and if you elected to do that you'd not pay tax on the $50,000 of gain that otherwise would have been realized on that sale. But then your basis in the new home would be $150,000, not the $200,000 purchase price of the new home. That's $100,000 basis in the old home + $50,000 over the $150,000 sale price that you had to put into the new home. If you then kept the home until today with no upward basis adjustments for improvements made to it and no downward basis adjustments for depreciation that would mean that selling it today the basis would still be $150,000. If you sold it today for $700,000 you'd have a gain of $550,000 but if you are married filing a joint return you may be eligible to exclude up to $500,000 of that gain from income. That assumes, of course that the home had been your principal residence for some or all of the last 5 years.

ETA: On the other hand, if you sold that 1982 home in 1992 for $150,000, reported the gain on the sale and paid the tax (thus not electing the deferral), then the basis in the new home that you bought for $200,000 would be that $200,000 purchase price.

Also, fixed my example to account for the extra amount put in to buy the new home.

 

[Stephen1]

I'm thinking:
Bought in 1987 for $74,500.
Sold in 1992 for $124,950.
Expenses at both ends (closing of purchase, closing of sale, fix-up for sale) $13,783
Capital gain: $36,667 did not report any gain on my taxes.

For now I'm thinking either (a) subtract the $36,667 from the purchase price of the 1992 purchase before computing the capital gain that will be realized in the current sale OR (b) compute the capital gain for the sale of the 1992 house without considering the $36,667 and then add the $36,667 to that amount. The total being the capital gain that is taxable if it exceeds the $500K joint exclusion for my spouse and me.

 

[Taxing Matters]

I'm thinking:
Bought in 1987 for $74,500.
Sold in 1992 for $124,950.
Expenses at both ends (closing of purchase, closing of sale, fix-up for sale) $13,783
Capital gain: $36,667 did not report any gain on my taxes.

You didn't report the capital gain. Therefore you deferred the gain under the old rules. That means that your basis in the home you bought in 1992 started at $74,500, the basis of the old home on the date you sold it, plus the additional money, if any, that you put into buying the new home, which I failed to mention before. You'd then add to that the cost of improvements (but not repairs) to the home and subtract any depreciation you took or could have taken on the home, e.g. if you had a home office deduction or rented out all or part of the home for some period of time.

For now I'm thinking either (a) subtract the $36,667 from the purchase price of the 1992 purchase before computing the capital gain that will be realized in the current sale

That would get you the right result.

 

[FlyingRon]

The question not asked, and so TM didn't answer, is that once you compute the capital gain of the sale of the current house, is what the tax implication is. Is this now your personal residence? If it has been for the past five years (or more), then you get to exclude $250,000 of the gain (twice that if you're married).

 

[davew9128]

The question not asked, and so TM didn't answer, is that once you compute the capital gain of the sale of the current house, is what the tax implication is. Is this now your personal residence? If it has been for the past five years (or more), then you get to exclude $250,000 of the gain (twice that if you're married).

Actually TM addressed it in his first response.

 

[Stephen1]

Washington State. Another capital gains tax question.

Spouse & I bought a personal residence. We sold that residence some years later. For discussion purposes let's say the capital gains is $300k.

For part of the time of occupancy we had a home office and claimed depreciation on our federal taxes. For discussion purposes let's say we claimed $5K for depreciation.

Now, as a married couple we are allowed to exempt up to $500K of the capital gains related to the sale of the house. I'm trying to understand where the $5K of depreciation which needs to be recaptured fits in.
- Do we have $305K ($300K + $5K) of capital gains for tax purposes and can exempt all of it because it is less than $500K? or
- Do we have $300K of capital gains for tax purposes from the house sale and can exempt it because it is less than $500K but the $5K from the depreciation is handled (and taxed) separately? or
- Something else?

Plenty of time on this. Just signed the closing papers on Friday so this will be for next year's return.

 

[davew9128]

The unrecaptured depreciation is taxable no matter what.

 

[LdiJ]

Washington State. Another capital gains tax question.

Spouse & I bought a personal residence. We sold that residence some years later. For discussion purposes let's say the capital gains is $300k.

For part of the time of occupancy we had a home office and claimed depreciation on our federal taxes. For discussion purposes let's say we claimed $5K for depreciation.

Now, as a married couple we are allowed to exempt up to $500K of the capital gains related to the sale of the house. I'm trying to understand where the $5K of depreciation which needs to be recaptured fits in.
- Do we have $305K ($300K + $5K) of capital gains for tax purposes and can exempt all of it because it is less than $500K? or
- Do we have $300K of capital gains for tax purposes from the house sale and can exempt it because it is less than $500K but the $5K from the depreciation is handled (and taxed) separately? or
- Something else?

Plenty of time on this. Just signed the closing papers on Friday so this will be for next year's return.

What percentage of your home did you declare to be a business expense?

 

[Taxing Matters]

Now, as a married couple we are allowed to exempt up to $500K of the capital gains related to the sale of the house. I'm trying to understand where the $5K of depreciation which needs to be recaptured fits in.

Very generally how depreciation recapture works is that part of your capital gain is treated as ordinary income. This means that your depreciation recapture amount will never exceed the amount of gain that you had. So, if you sold the property at loss (after taking into account in your adjusted basis the reductions in basis for the depreciation, of course) then there would be no depreciation recapture. The depreciation recapture itself is not capital gain. While IRC § 121(a) will exclude from income your gain on the sale of a qualifying principal residence up to a maximum of $250,000 ($500,00 for married filing a joint return) § 121(d)(6) expressly states that the exclusion does not apply to the portion of gain that is treated as depreciation recapture. Bottom line is, as davew9128 said, you can't avoid including in your income the depreciation recapture amount given your facts.

 

[Stephen1]

"121(d)(6) expressly states that the exclusion does not apply to the portion of gain that is treated as depreciation recapture." Ah, referring back to the actual regulations. Thanks, at least now I have the specific subparagraph.

 

[Taxing Matters]

"121(d)(6) expressly states that the exclusion does not apply to the portion of gain that is treated as depreciation recapture." Ah, referring back to the actual regulations. Thanks, at least now I have the specific subparagraph.

I quoted from the actual statute, not the Treasury regulations. The Treasury Regulations do not address it since the exception of the depreciation recapture from the gain exclusion in the statute does not really need any further explanation.

 

[davew9128]

Very generally how depreciation recapture works is that part of your capital gain is treated as ordinary income.

It's worth clarifying that unrecaptured depreciation under 1250 is considered capital gain not ordinary income. It's in the extremely rare instance that you have excess depreciation over straight line that it would be ordinary income.

 

[Stephen1]

Thank you all. Looks like it will be another year when we run it by the CPA, just like the year we closed an LLC and sold its investment property. Not items we deal with every year.