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My wife and I are retired and own a small one studio co-op vacation home.
We are thinking of selling this vacation home for $138,000. We bought it years ago for $38,000, so there would be about $100,000 capital gains profit. Is there any way to lower taxes for eliminate taxes we would owe?

thanks in advance for any suggestions
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My wife and I are retired and own a small one studio co-op vacation home.
We are thinking of selling this vacation home for $138,000. We bought it years ago for $38,000, so there would be about $100,000 capital gains profit. Is there any way to lower taxes for eliminate taxes we would owe?


Assuming that you've never used it as a rental property, you could move into it and use it as your primary residence for 2 years before selling, thus becoming eligible for the exclusion of gain from sale of a primary residence. It wouldn't get rid of all the gain (because of the recent changes in the law addressing periods of nonresidence), but it would get rid of most of it.

If it has been used as a rental, or if you converted it to that use, you could do a section 1031 tax-free exchange for other income property, but that wouldn't eliminate the tax on the gain, just defer it, and you wouldn't be able to take any cash from the sale.

Phil
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It wouldn't get rid of all the gain (because of the recent changes in the law addressing periods of nonresidence), but it would get rid of most of it.

Isn't the exemption prorated? If they live in it 3 years starting sometime this year, would they not have at least 2/3 of the $500,000 exemption? Sufficient to cover the $100,000 gain.

Debra

P.S. We have converted a rental into primary residence. I would not go through this for the taxes on $100,000.
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Isn't the exemption prorated?

Not in this case.

Phil is talking about the new non-qualified use provisions which started on 1/1/2009. Any gain (not the exemption) attributable to non-qualified use is fully taxable. Gain attributable to qualified use (that is, use as a principal residence) is eligible for up to the full exclusion under section 121.

--Peter
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There is a special zero capital gains tax rate through 2010 for people with low enough taxable income to be in the 10 or 15% tax bracket. I’m not a tax pro but I would think that this would probably apply to real estate sales but I am not 100% sure. (Any definitive answers?)

If you don’t already fall in that range you may be able to structure your 2009 or 2010 income so that you have vey little taxable income in order to get most of the capital gains taxed at the zero percent tax rate.

If you qualify for the zero percent capital gains tax rate it doesn’t automatically mean that all of the capital gains would be at zero percent. It could be that after you crunch the numbers that $60K would be taxed at 0% and the rest taxed at a higher rate.

Greg
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P.S. Remember that other capital losses can be used to offset the capital gains.
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There is a special zero capital gains tax rate through 2010 for people with low enough taxable income to be in the 10 or 15% tax bracket. I’m not a tax pro but I would think that this would probably apply to real estate sales but I am not 100% sure. (Any definitive answers?)

Yes, it applies to real estate sales as well. I don't remember if the original post dealt with a vacation rental property or just a second home. If it was a rental property, there are some other considerations that apply.

Ira
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Phil is talking about the new non-qualified use provisions which started on 1/1/2009. Any gain (not the exemption) attributable to non-qualified use is fully taxable. Gain attributable to qualified use (that is, use as a principal residence) is eligible for up to the full exclusion under section 121.

--Peter


Are you certain? Everything I have read states that the exemption is prorated based on qualified/non-qualified usage. Recaptured depreciated is a separate issue.
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Phil is talking about the new non-qualified use provisions which started on 1/1/2009. Any gain (not the exemption) attributable to non-qualified use is fully taxable. Gain attributable to qualified use (that is, use as a principal residence) is eligible for up to the full exclusion under section 121.

Are you certain? Everything I have read states that the exemption is prorated based on qualified/non-qualified usage. Recaptured depreciated is a separate issue.


I don't know what you're reading, but either it's wrong or you're misinterpreting what it says.

Ever since the 1997 change to the exemption of gain if you don't qualify under the 2 year rule but do meet one of the exceptions to the 2 year rule, the exemption is prorated. That has not changed. Likewise the recapture of depreciation has not changed.

What did change effective 1/1/2009 is the introduction of what I call "qualified ownership." We've gone over it in detail before, but what it boils down to is that if you do not use the property as your principal residence continuously from 1/1/2009 until you move out of it the amount of gain available for the exclusion is prorated based on time it was used as your principal residence divided by total ownership time.

This is based on the law (section 121) as revised in 2008.

Phil
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What did change effective 1/1/2009 is the introduction of what I call "qualified ownership." We've gone over it in detail before, but what it boils down to is that if you do not use the property as your principal residence continuously from 1/1/2009 until you move out of it the amount of gain available for the exclusion is prorated based on time it was used as your principal residence divided by total ownership time.

This is explained in IRS Pub. 553, Highlights of 2008 Tax Changes, www.irs.gov/pub/irs-pdf/p553.pdf. (Yes, the title refers to 2008, but the current version, dated June 2009, contains current year tax changes as well.)

Ira
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Are you certain?

Quite sure. It's in IRC section 121(b). There are two sub-paragraphs numbered (4) there. (Hey - it's one of those things waiting for a "technical corrections" act.) The second sub-paragraph (4) is the one of interest here.

Let me quote the first paragraph:
(A) Subsection (a) shall not apply to so much of the gain from the sale or exchange of property as is allocated to periods of nonqualified use.

Subsection (a) is the main clause excluding $250k of gain on the sale of a principal residence. So the exclusion does not apply to any gain allocated to nonqualified use of the residence.

The law [IRC 121(b)(4-should-be-renumbered-5)(C)] then defines nonqualified use to be any period of time on or after 1/1/2009 during which the house is not used as a principal residence. And of course, there are exceptions. (It wouldn't be tax law if there weren't exceptions.) There is an exception for a temporary rental AFTER moving out of the house and before you sell it. There is also an exception for military and foreign service. And there is an exception for temporary absence up to two years for a change in employment, health, or other unforeseen circumstances (which are to be specified in regulations yet to be written).

Once you determine the length of nonqualifed use, you divide that by the length of total ownership to get a fraction. That fraction is the portion of the total gain which is going to be taxable. The remaining gain still can qualify for exclusion under IRC 121(a).

--Peter
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This is explained in IRS Pub. 553, Highlights of 2008 Tax Changes, www.irs.gov/pub/irs-pdf/p553.pdf. (Yes, the title refers to 2008, but the current version, dated June 2009, contains current year tax changes as well.)

Ira


The equation is in this document.

Total nonqualified use during period of ownership after 2008/Total period of ownership.

For the calculation is there any limitation on the total period of ownership? If a property was purchased in 1990 and rented, does the period of ownership start from 1990?
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For the calculation is there any limitation on the total period of ownership?

Nope.

If a property was purchased in 1990 and rented, does the period of ownership start from 1990?

Yup.

The people who benefit a lot of the grandfathering of pre-2009 ownership are people who had a non-rental vacation home for many years, then eventually convert it to a principal residence.

Phil
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Yup.

The people who benefit a lot of the grandfathering of pre-2009 ownership are people who had a non-rental vacation home for many years, then eventually convert it to a principal residence.

Phil


Doesn't this also apply to those who have owned rentals for a long time and convert them to a primary residence.

Thank you for the correction.
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Total nonqualified use during period of ownership after 2008/Total period of ownership.

That is correct.

For the calculation is there any limitation on the total period of ownership?

No.

If a property was purchased in 1990 and rented, does the period of ownership start from 1990?

Yes.

The nonqualified use starts 1/1/2009, assuming the property is still rented, and ends when the owner makes the property their principal residence.

For example, Robert and Roberta buy a rental house in 1990. They rent the house until the end of 2010, when they convert it to their principal residence. They live in the house until 2015. Then they sell the house for a $500k gain. The nonqualified use is for 2 years, 2009 and 2010. The total use is 25 years. So 2/25 of the $500k (or $40k) is taxable. The remaining gain - $460k - is eligible for the secion 121 exclusion. (I'm ignoring any depreciation issues for the moment.)

--Peter
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Doesn't this also apply to those who have owned rentals for a long time and convert them to a primary residence.

It does, but since they must deal with the recapture of depreciation, there's less gain to be affected.

Phil
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That is what I am confused about. ON a $100,000 capital gain, would my tax be 15% of $100,00 or $15000 and if I am in the 25% tax bracket of income the actual tax be 25% of $15000 or actually $3750 federal tax?

In other words is the $15000 capital gain added to my income before figuring the tax?
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That is what I am confused about. ON a $100,000 capital gain, would my tax be 15% of $100,00 or $15000 and if I am in the 25% tax bracket of income the actual tax be 25% of $15000 or actually $3750 federal tax?

In other words is the $15000 capital gain added to my income before figuring the tax?


The long-term capital gain is first added to all of your other income. So it increases your AGI. That will affect anything that is AGI dependent, such as your deduction for medical expenses and your allowable dependency exemptions.

Then, when you get down to taxable income, you essentially split that long term capital gain back out. You do the normal tax calculation for the rest of your income, then add in the tax on the capital gain. That tax will be at either 0% or 15% (or perhaps a portion at each of those rates), depending on how much other taxable income you had.

--Peter
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sorry still confused---

adjusted gross income 65000

long term capital gain on sale $100,000

tax on long term capital gain $15000 i guess

what would be the actual additional tax for selling vacation home?
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adjusted gross income 65000

long term capital gain on sale $100,000

what would be the actual additional tax for selling vacation home?


There's no way to know exactly without looking at all of the details of your tax return.

Given the info provided, it will be roughly $15k.

If there are a lot of itemized deductions AND you're married filing joint, some of that $100k gain might get taxed at 0%. So that would make the total tax a bit lower.

If you're confusing AGI with taxable income (a very common error), the tax might be a bit more than $15k due to phaseouts on deductions and other items.

If all you're doing is trying to figure out what cash you'll have left after the sale, $15k is a decent approximation. If you're trying to figure up what to pay in estimated taxes, you'll need to get into a little more detail.

And don't forget to consider your state tax (if any) in your planning.

--Peter
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thanks that clarifies all---- and i was thinking about the state tax in New York.

Lee






adjusted gross income 65000

long term capital gain on sale $100,000

what would be the actual additional tax for selling vacation home?

There's no way to know exactly without looking at all of the details of your tax return.



Given the info provided, it will be roughly $15k.

If there are a lot of itemized deductions AND you're married filing joint, some of that $100k gain might get taxed at 0%. So that would make the total tax a bit lower.

If you're confusing AGI with taxable income (a very common error), the tax might be a bit more than $15k due to phaseouts on deductions and other items.

If all you're doing is trying to figure out what cash you'll have left after the sale, $15k is a decent approximation. If you're trying to figure up what to pay in estimated taxes, you'll need to get into a little more detail.

And don't forget to consider your state tax (if any) in your planning.

--Peter
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thanks that clarifies all---- and i was thinking about the state tax in New York.

New York does not offer any tax rate reduction for capital gains, so you would just add the taxable gain on top of your other taxable income and figure your tax on the higher number. This may place you in a higher tax bracket for part of your income.

Ira
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what would be the New York state tax on the long term capital gain of $100000 in New York State----if our state net income is $30000.

any help would be appreciated
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And don't forget to consider your state tax (if any) in your planning.

--Peter


New York state income is about $40000---- $100000 long term capital gain

What is the long term capital gain tax for new york state?

thanks in advance
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New York state income is about $40000---- $100000 long term capital gain

What is the long term capital gain tax for new york state?

thanks in advance


New York does not have a special capital gains tax rate. Capital gains are just another form of income.

Ira
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