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Hello, I have a question I hope someone here can help with. We bought a new house 2 years ago and moved out of our old house we owned and were living in for the 15 years prior. We didn't sell the old house and haven't rented it in the interim. We're now looking to sell it, and will end up with a profit. Is this simple to report at tax time? I'm familiar with reporting stock gains, and am guessing this is analogous, but how specifically do I report the gain? Thanks for any advice.
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You report the gain on Sch D just like a stock transaction.

If you meet the requirements for the exemption, you also claim it on Sch D. Generally the requirement is you owned the property for at least five years and lived in it for two of those years. You get a $250K exemption if single, or $500K if married.

And if your gain exceeds the exemption, you can adjust your cost basis to include the cost of improvements over the years following the same rules as before. Improvements are deductible but not repairs/maintenance.

There's an IRS publication available on the irs.gov website that provides details for all of this.
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We bought a new house 2 years ago and moved out of our old house we owned and were living in for the 15 years prior. We didn't sell the old house and haven't rented it in the interim. We're now looking to sell it, and will end up with a profit.

First, you should understand the rule that will allow you to exempt $500k (if MFJ, which I assume you are, since you said 'we'; if not MFJ, then your exemption would be up to $250k) of the gain from taxation. You need to have owned the home for 2 out of the last 5 years, which you have. You also need to have lived in the house as your residence for 2 out of the last 5 years - so at this point, you have 1 more year left to sell the house. Details of the exemption are available in IRS Pub 523 - Selling your Home https://www.irs.gov/pub/irs-pdf/p523.pdf

Is this simple to report at tax time? I'm familiar with reporting stock gains, and am guessing this is analogous, but how specifically do I report the gain?

It's not difficult. Pub 523 has worksheets and directions on how to figure the basis, the capital gain, and how much (if any) of the gain is taxable. If none of your gain is taxable, you don't have to report it at all, unless you received a Form 1099-S, or you may want to sell your current house in the next 2 years, and you anticipate having a larger gain that you will want to claim the exemption for that gain instead of using it on the gain on your old house.

If you do need to report the gain, just follow the directions in IRS Pub 523. It will be reported on Form 8949, and then flow through to Schedule D.

AJ
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You report the gain on Sch D just like a stock transaction.

If you meet the requirements for the exemption, you also claim it on Sch D.


Close, but it needs to be reported on Form 8949 first, which will then flow through to Schedule D. The exemption is also claimed on Form 8949. From the Schedule D instructions https://www.irs.gov/pub/irs-pdf/i1040sd.pdf

You may not need to report the sale or exchange of your main home. If you must report it, complete Form 8949 before Schedule D.

and

How to report the sale of your main home. If you have to report the sale or exchange, report it on Form 8949. If the gain or loss is short term, report it in Part I of Form 8949 with box C checked. If the gain or loss is long term, report it in Part II of Form 8949 with box F checked. If you had a gain and can exclude part or all of it, enter “H” in column (f) of Form 8949. Enter the exclusion as a negative number (in parentheses) in column (g) of Form 8949. See the instructions for Form 8949, columns (f), (g), and (h). Complete all columns. If you had a loss but have to report the sale or exchange because you got a Form 1099-S, see Nondeductible Losses, later, for instructions about how to report it.

AJ
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My in-laws have a bit of appreciation in their house. Like from purchased in 1962 for $48,000. Value today in the vicinity of a million. He is in hospice, which we interpret to mean he will shortly be a goner. My understanding is that the house will be reappraised at today's value. MIL can sell it with no capital gains. Is this correct?

CNC
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If you inherit the property, you inherit it at the stepped up basis. That is its fair market value on the date of death of the deceased. You can then sell it paying little or no income tax. But if its jointly owned its more complicated to the surviving spouse.
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My in-laws have a bit of appreciation in their house. Like from purchased in 1962 for $48,000. Value today in the vicinity of a million. He is in hospice, which we interpret to mean he will shortly be a goner. My understanding is that the house will be reappraised at today's value. MIL can sell it with no capital gains. Is this correct?

Maybe. Maybe not.

Assuming that they are joint tenants with a 50/50 split of ownership, AND they live in a community property state, then her basis will be stepped-up on the entire value of the house. Therefore, when she sells, there will likely be little/no gain, or possibly even a loss because of the costs to sell.

If they are joint tenants with a 50/50 split of ownership and they don't live in a community property state, then there will only be a step-up in value on his 50% when he dies. However, if she sells within 2 years of his death, she can use the full $500k exemption that MFJ couples are eligible for, which would likely exempt the rest of the gains.

If only his name is on the deed, then whoever the heirs are will get a step-up in value on the entire value of the house. But it depends on his will, or, if he doesn't have a will, the laws of the state, who the heirs will be, and therefore, who will be able to sell the house.

There are probably a lot of other possible scenarios, depending on exactly how the house is titled and where they live, but these are probably the most common.

AJ
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Thanks very much, pauleckler and AJ, that's exactly what I needed!
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paulecker: If you inherit the property, you inherit it at the stepped up basis. That is its fair market value on the date of death of the deceased. You can then sell it paying little or no income tax. But if its jointly owned its more complicated to the surviving spouse.

Drat. Does this mean we have to put out a hit on MIL too?

CNC
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Hubris: Thanks very much, pauleckler and AJ, that's exactly what I needed!

Dittoes.

CNC
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MIL can sell it with no capital gains. Is this correct?

Technically no, as explained by AJ and others upthread. But I have a somewhat different opinion. Just make sure she DOES NOT SELL IT BEFORE HE DIES, or the taxes will be owed on the original basis. His “half” steps up only upon death.

Using simple numbers, the house started at $0 and is now worth $1,000,000. Upon his death she inherits his $500,000 “worth” of house at the stepped up value. So the “basis” is now her $500,000 which she can sell and claim a $250,000 exclusion. (She doesn’t get the full $500,000 exclusion because she is now just one owner, not the couple.) She will pay tax on the $250,000, or about $50,000 at 20% cap gains.

If she sells now the cap gains is on the full $1,000,000, except there’s a $500,000 exclusion (because they are both alive), meaning she will pay on $500,000, or $100,000 at 20% cap gains.

This may be completely wrong, and if so I’m sure someone will jump in and correct me.
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His “half” steps up only upon death.

This is correct if they do not live in a community property state. If they live in a community property state, and the house is part of the 'community' then entire value is stepped up on his death.

Using simple numbers, the house started at $0 and is now worth $1,000,000. Upon his death she inherits his $500,000 “worth” of house at the stepped up value. So the “basis” is now her $500,000 which she can sell and claim a $250,000 exclusion. (She doesn’t get the full $500,000 exclusion because she is now just one owner, not the couple.) She will pay tax on the $250,000, or about $50,000 at 20% cap gains.

Sorry, that's not correct. As already stated, if they live in a community property state, the entire basis is stepped up to the value when one spouse dies.

If they don't live in a community property state, only 'his' half gets stepped up. However, if she sells within 2 years of when he died, she can still claim the entire $500k exemption. From IRS Pub 523 https://www.irs.gov/pub/irs-pdf/p523.pdf under the section for "Widowed taxpayers"

Also, you may be able to increase your exclusion amount from $250,000 to $500,000. You may take the higher exclusion if you meet all of the following conditions.

1. You sell your home within 2 years of the death of your spouse;
2. You haven’t remarried at the time of the sale;
3. Neither you nor your late spouse took the exclusion on another home sold less than 2 years before the date of the current home sale; and
4. You meet the 2-year ownership and residence requirements (including your late spouse's times of ownership and residence if need be).


So, if she follows all the rules, then she will be able to exclude the entire $1MM value - $500k from the step up in basis, and then another $500k from the exemption.

If she sells now the cap gains is on the full $1,000,000, except there’s a $500,000 exclusion (because they are both alive), meaning she will pay on $500,000, or $100,000 at 20% cap gains.

Well, some of the capital gain is likely to be taxed at 15%, depending on what their other income and deductions are. If there are a lot of medical expenses, it's possible they have little/no other net income, in which case, some of the capital gains will also be taxed at 0%.

This may be completely wrong, and if so I’m sure someone will jump in and correct me.

Done.

AJ
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If she sells now the cap gains is on the full $1,000,000, except there’s a $500,000 exclusion (because they are both alive), meaning she will pay on $500,000, or $100,000 at 20% cap gains.

By the way, in 2019 for MFJ, the capital gains rate doesn't hit 20% until there is at least $488,301 in taxable income. And assuming that both are over 65, the MFJ standard deduction is $25,300. So even if they sell now, with a taxable capital gain of $500k, they would have to have at least $13,301 in other taxable income before a single dollar would be taxed at 20%. (Note, for 2017, an income level of $513,301 would be in the 99th percentile for income https://dqydj.com/household-income-percentile-calculator/ ) So unless they are 1%'ers, the tax on a $500k capital gain is probably going to be $75k, rather than $100k you suggested.

Also in 2019, the Single capital gains rate of 20% doesn't start until taxable income is at least $434,551, with the standard deduction of $13,300 for those over 65. Those numbers will likely be adjusted slightly upward for inflation each year, so in 3 years the combined total is likely to be at least $450k. So even if they live in state that doesn't have community property and she doesn't sell until more than 2 years after he dies, she would probably have to have at least $200k in other taxable income before any of the $250k capital would be taxed at 20% - her capital gains tax as a single filer would probably be closer to $37.5k than to $50k.

So, yes, there may be tax impacts, but likely not as high as you suggested.

AJ
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So, yes, there may be tax impacts, but likely not as high as you suggested.

Just something else to throw into the mix - for anyone with RMDs, it can be tougher to control income and tax ramifications.
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Just something else to throw into the mix - for anyone with RMDs, it can be tougher to control income and tax ramifications.

I would agree with that. But even with that, as a single filer in 3 years, to have all $250k of capital gains from the house taxed at a 20% rate, as was suggested, there would need to be $450k in other taxable income. Say there is $30k in taxable SS income ($35.3k in total SS income, since a max of 85% is taxable), and $70k in taxable pension income.

With a standard deduction of $25k, that would mean that there would have to be $375k in additional taxable income for the entire $250k in capital gains to be taxed at a 20% capital gains rate. For someone who is 90 years old, there is an 11.4 year life expectancy. To have a $375k RMD at that age, the total in Traditional accounts would have to be $4.275MM Even at 95, with a life expectancy of only 8.6 years, the Traditional accounts would still have to be $3.225MM for the entire $250k of taxable capital gains to be entirely taxed at 20%

I just wanted to point out that hypothesizing that the entire taxable capital gain from the sale of a house will be taxed at 20% seems excessive for at least 99% of taxpayers. Granted, TMF probably has more 1%'ers than many other websites. But even if it's 10% - that still means that the estimate is excessive for 90%

AJ
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