amt & homesteaded property

[lazygood4nothinbum]

does the alternative minimum tax kick in on capital gains from homesteaded property? i bought this dump for $67.5 some 13 years ago. now a bunch of people seem to think it's worth about $500k. i was planning to hold until i'm 55 (6 more years) and then trade it for a boat to live aboard. i figure i'm looking at cap gains tax on about $150k today and that could increase substantially over the next 6 years. increases slowed from the crazy 30+%'s last year to current 13-17%. over the past 20-30 years this area has averaged about 8-11% increases and was undervalued for many years. currently the area is at complete built-out and redevelopment underway. housing inventory is low & not expected to keep up with population growth. so even with (i think) a conservative 7-8% increases over the next few years i'm looking at selling near $750-800k.

my only other income at that time will be whatever i'm earning off approx. (projected) $1.2-1.6m in investments. (& small pension at age 65).

if amt will apply, what sort of hit might i take? should i consider selling the house before that?

sorry if these are stupid questions. i've been living my entire life on either allowance or salary and trying now to get up to speed on the financial learning curve without wiping out. i seached and read the amt info on this web site and others but still do not understand if that just involves investments or homestead as well.

thank you in advance.

 

[wabmester]

By "homesteaded," I assume you mean that the home is your principal residence (rather than you being a squatter).    I think (well, I hope, anyway) that your homeowner's capital gain exclusion applies before any consideration of your tax bracket.   After that exclusion is subtracted, whatever remaining gain is treated like any other capital gain.     AMT will affect your ability to deduct interest and property taxes, but it shouldn't affect your capital gains exclusion.

To take full advantage of the exclusion, you should sell once you hit the max ($250K for single, $500K jointly).    I think you can do this every 2 years, so move often. 

 

[Craig]

If you're talking about state homestead laws that protect your investment in your home, those would have no effect on the taxation of a sale.

 

[lazygood4nothinbum]

those would have no effect on the taxation of a sale.

By "homesteaded," I assume you mean that the home is your principal residence (rather than you being a squatter)... AMT will affect your ability to deduct interest and property taxes, but it shouldn't affect your capital gains exclusion.

To take full advantage of the exclusion, you should sell once you hit the max ($250K for single, $500K jointly). I think you can do this every 2 years, so move often.

i'm only a squatter in one part of the principal residence and i'm sure that was way too much information.

i tried to find the post on amt but just now couldn't. i think it said that if capital gains are more than a certain amount. i think it was $230somethingk for single person, that this mysterious amt thing kicks in. my concern is if i have, say $500k plus of cap gains (over the $250k exemption) on selling principal residence, will i be taxed at more than 15% on those gains?

i'm already 150 over the 250 and as i want to stay in this area for a few years at least, i'm locked into my current residence by property taxes. homestead here means i only pay $1,000 per year in taxes. if i moved to a different, similar house i'd pay about $11k. also my insurance would skyrocket because i'd be paying on the entire amount for the property and not just for the structure which is what i pay now because premiums would be based on property appraisal. my old appraisal would cover my current structure. so a move, here, would increase my yearly housing expenses by about 14x's.

property price increases have slowed by not bubbled and local population growth rates seems to indicate it worth holding on to what i got.

so does this make financial sense? and again, does amt increase taxes by more than the standard 15% taxed on cap gains from the sale of a principal house if the cap gains are more than any certain amount? or is amt even more mysterious than i thought.

 

[mathjak107]

YES...a large gain will trigger the amt...the 15% tax actually came out to about 17.2 % flat rate on every dollar including my regular income and interest..here in nyc the state and local ran 11.8%...it was about 30% total for both in taxes this year

 

[lazygood4nothinbum]

YES...a large gain will trigger the amt...the 15% tax actually came out to about 17.2 % flat rate on every dollar including my regular income and interest..here in nyc the state and local ran 11.8%...it was about 30% total for both in taxes this year

30% yikes, and i'm a socialist (sort of). at least i'll be saved the state and local tax in florida. none of that on cap gains on property here.

there is so much for me to learn on this stuff. i don't understand why this wasn't taught in high school (or maybe i just missed that day.)

 

[Martha]

Here is the AMT thread with the exemption amounts and calculators: http://early-retirement.org/forums/index.php?topic=6740.15

 

[wabmester]

Martha, it looks like the other thread was dealing with cap gains on property other than principal residence. Can you confirm that for your principal residence, the $250/500K cap gains exclusion applies before any AMT consideration?

We're going to have a gain pretty close to $500K on our former principal residence, and my assumption is that we'll pay no taxes on that gain (other than evil state excise tax and the Realtor(TM) tax).

 

[Martha]

Martha, it looks like the other thread was dealing with cap gains on property other than principal residence. Can you confirm that for your principal residence, the $250/500K cap gains exclusion applies before any AMT consideration?

We're going to have a gain pretty close to $500K on our former principal residence, and my assumption is that we'll pay no taxes on that gain (other than evil state excise tax and the Realtor(TM) tax).

Right, for federal tax/federal AMT purposes, you ignore the 250/500 gain.

 

[Craig]

lazygood4nothinbum ... get married, with a solid prenup, sell the house, avoid the taxes, exit the "marriage" ...

OK, just kidding.  But, it could work ... sort of like the "green card" movie / concept ...

 

[lazygood4nothinbum]

lazygood4nothinbum ... get married, with a solid prenup, sell the house, avoid the taxes, exit the "marriage" ...

moving every two years might be easier. i wanted to see some of the country over the next 5-6 years before i move aboard anyway. now i suppose i have to figure cost differences between staying in this house and this amt thing that i don't yet understand and moving around & those expenses. i'm pretty sure working wasn't as much work as this. i miss my paycheck.

ps martha thanx for that link. will review all the materials there again and see if i can't wrap my financially feeble brain around this.

 

[mathjak107]

heres a little tip too....if your holding any tax free municipal money market or bond funds and it looks like you will be hit with amt get out of them asap...we sat in the fidelity municipal money market all year using it as our core account and checking account only to find under amt 1/2 the interest was now taxible..so not only did we get the lower tax free rate but now owed tax on it too....

 

[Craig]

Moving every two years doesn't seem to solve the immediate problem, but I was joking of course anyway.

All kidding aside, just buy a 2005 tax software package like TurboTax, enter your 2005 data, also put your assumed home sale data in there as if you had sold last year, and voila ... you'll immediately see the exact impact of a sale. Run it without the sale, and you'll have your comparison.

Best of luck.

 

[lazygood4nothinbum]

All kidding aside, just buy a 2005 tax software package like TurboTax, enter your 2005 data, also put your assumed home sale data in there as if you had sold last year, and voila ... you'll immediately see the exact impact of a sale.  Run it without the sale, and you'll have your comparison.

thanx, good advice. and i actually bought the premier disc just yesterday based on other forum members talking about running scenarios on turbotax for other situations.

only to find under amt 1/2 the interest was now taxible..so not only did we get the lower tax free rate but now owed tax on it too....

this is not early retirement. this is training for my new career as tax accountant.