Capital gains tax on property sale

[RAE]

I'm looking for some confirmation that I'm understanding the IRS rules correctly for taxation of capital gains on a sale of some property that I own, and am planning to sell (vacant forest land - no structures on it). I've owned the property for many years (so this is a long-term capital gain), and may be selling it this year. My understanding is that I would owe no capital gains tax on the sale as long as our total income (for my wife and I, as we file jointly) is below $74,900. In other words, if our income for the year is $50,000, and the total cap. gain on the property sale is $60,000, I could apply $24,900 of that $60,000 gain to our income (and owe no cap. gains tax on that portion) - but I would owe cap. gains tax (of 15%) on the $35,100 that is above the $74,900 limit. So, in this case, the cap. gains tax owed would be approx. $5265.

Does that sound about right? Just want to make sure I understand this correctly......thanks.

 

[clifp]

Yes it does. There maybe some strange rules with forest or farmland that I am unaware of.

 

[gauss]

Not to split hairs but the $74,900 number is not total income (1040 line 22) but rather "taxable income" (1040 line 43) -- that is to say your AGI less standard or itemized deductions then less exemption deductions.

Taxable income could be $20,000 less than total income in the case of a married filing jointly filers who take the standard deduction and are under age 65. The difference would be even more in other cases (Schedule A / over 65 / additional dependents/blindness etc)

The difference would be even more if you have adjustments to income on the bottom third of 1040 page 1 (ie IRA deduction, HSA deduction, alimony paid etc)

The bottom line is that this could be another $20,000 of capital gain that could be excluded by staying within the 15% marginal tax bracket in your example.

You may wish to create a provisional tax return using tax software to verify your understanding of this if you have not done so already.

-gauss

 

[pb4uski]

RAE, you need to also factor in deductions and exemptions as gauss indicates whihc will make the capital gain subject to zero tax greater.

Also, if you do an installment sale of the property you can spread the gain out over a couple of years if you need to and the buyer is accommodating and pay no tax on the gain at all.

 

[mathjak107]

although you are well under the threshold as a point of general information you have to remember while up to 74k can be tax free all other income you get goes in the bucket first.

any other income taxed at higher rates first gets put in , if it is 50k worth of income then only 24k of the capital gain will qualify for zero , the rest will be taxed at 15%.

depending on the amount of the gain though you could see capital gain taxes as high as 24%. one other kicker is also if income is high enough you trip the AMT tax penalty too on all other income.

we had a large capital gain last year and hit the amt. so we had 24% in capital gains rates (20% rate and 4% surcharge ) and a 16k amt penalty on top of the regular taxes due.

states don't recognize special capital gain rates either so everything is taxed at regular rates on the state side.

 

[marko]

So we're talking about property that one does not live in/on here, right?

I believe the cap gains exemption is $250K/$500K for property you live in.

 

[RAE]

Many thanks much for the replies, folks. I was a bit unclear on whether the $74,900 limit applied to Taxable Income or to the AGI, so thanks for clearing that up, Gauss. That definitely makes the cap. gains tax hit a little smaller than I had anticipated.

 

[gauss]

Many thanks much for the replies, folks. I was a bit unclear on whether the $74,900 limit applied to Taxable Income or to the AGI, so thanks for clearing that up, Gauss. That definitely makes the cap. gains tax hit a little smaller than I had anticipated.

If you look up yearly tax bracket definitions on the Internet, they are almost always show based on "taxable income" (ie after all adjustments/deductions and exemptions have been applied).

-gauss