Selling a home and taxes

[pb4uski]

It may be even better than that. CA is a community property state, so the step up in basis if the property was appropriately titled, is 100%, so both halves (not just 50%).
Basis of Inherited Property (Community and Non-Community Property) - CFP | Investopedia
Step-Up in Basis Rule-Common Mistakes | Financial Alternatives Inc

CABarb, based on where you are located, you can stop by a AARP TaxAide location during tax season (Feb-Apr) and our wonderful volunteers can help you with your taxes (for free). Google it.
I volunteer at South Bay locations here in Bay Area. PM me if you'd like.

Good point. I forgot about the community property difference. Even better.

 

[pixelville]

So you may actually have no capital gains. Example:
Original purchase price: 95K
FMV when DH passed away: 400K
Stepped-up basis (community property): 400K
Remodels, investment in property: 75K
Sale price (net of commissions): 720K
Profit: 720k-75k-400k = 245k
Exemption (single): 250k
Income subject to capital gains: 245k-250k I.e. $0
Capital gains tax: $0

Seeing the market around me, 700K for single family home in Silicon Valley seems low right now! Of course, land size and location would determine it.
As someone else pointed out, if you sell this and buy a condo (or house for a lower price), you would be able to transfer your property 13 tax basis to it. County restrictions apply.

 

[RockyMtn]

Don't over improve in a hot market. Just sold a house in Denver and I'm not going over the top on the typical "anal house inspector" report. Just say no. If there are things that are safety oriented fine...fix them. But if someone says your landscaping slopes towards the house or there is a crack in your sidewalk tell them they can fix it if they think it is a problem.


Home inspectors just love to point out things that most people live with every day of their lives.

 

[Fermion]

This transfer of assessment seems crazy. Is it meant to reward people for never leaving the state and punish people who move there?

 

[CABarb]

OMG! Such great advice and information. Thanks so much for sharing your inputs and experiences. I wish I'd come here when homes were going for much less because people had bought more house than they could afford. My own neighborhood had homes standing empty for a while and some were just abandoned by their owners.

I've been wanting to sell for a long time and I did look at homes in 2005/06. The RE agents were always taking me to homes I couldn't afford at the time. I should have bought when home were less expensive. I have managed to save up and it would've been smarter to buy even 3 years ago.

When I first thought of fixing up the house, I was going to make it so it showed like a model home. Now, I'll stick to painting and flooring. The driveway has a crack but the new owners can fix that. I had thought of getting a landscaper to fix up the back yard also. We have a severe drought and the yard is brown. Hopefully, El Nino will make it greener and all I have to do is maintain it the way it is.

I truly appreciate your inputs and experiences. It has eased my mind because I was having many sleepless nights due to stress of remodeling the house.

 

[pb4uski]

This transfer of assessment seems crazy. Is it meant to reward people for never leaving the state and punish people who move there?

I agree... I'm sure it was well intended to stabilize property taxes but it seems to me that the end result is very inequitable. I like the way we do it better, where appraisals are fmv and property taxes are income sensitive.

 

[W2R]

OMG! Such great advice and information. Thanks so much for sharing your inputs and experiences. I wish I'd come here when homes were going for much less because people had bought more house than they could afford. My own neighborhood had homes standing empty for a while and some were just abandoned by their owners.

I've been wanting to sell for a long time and I did look at homes in 2005/06. The RE agents were always taking me to homes I couldn't afford at the time. I should have bought when home were less expensive. I have managed to save up and it would've been smarter to buy even 3 years ago.

When I first thought of fixing up the house, I was going to make it so it showed like a model home. Now, I'll stick to painting and flooring. The driveway has a crack but the new owners can fix that. I had thought of getting a landscaper to fix up the back yard also. We have a severe drought and the yard is brown. Hopefully, El Nino will make it greener and all I have to do is maintain it the way it is.

I truly appreciate your inputs and experiences. It has eased my mind because I was having many sleepless nights due to stress of remodeling the house.

Since the real estate market will affect how much you get for your present house, as well as how much you have to pay for your next house, it all evens out I think. I recently moved. The market here is on the upswing, too, so I managed to get and accept a surprisingly high offer on my house in less than a week (which is very unusual around here). It was before I had a chance to get it fixed up to sell, too. Since I got a pretty good deal on my dream house, everything worked out just fine despite the resurgence of the local real estate market. You may find this is the perfect time to sell.

 

[Another Reader]

California taxes capital gains at ordinary income tax rates. If the net gain is $400,000, she will be writing a large check to the FTB.


What's confusing to me about this is whether this sale would drive the capital gains rate to 20 percent and if the 3.8 percent Medicare surtax applies. I would love to sell my Silicon Valley house, but I rolled the gain from my starter house into this one under the old rules plus the gain is larger.


I figured on extracting the maximum equity via a refi and renting the house out instead of selling. Let the heirs get the stepped up basis and thumb their noses at Uncle Sam and Uncle Jerry.

 

[AllDone]

Thanks to Prop 13.

I've been informed a couple of times by non-Californians on this board that taxes in California don't work that way. It's horribly inequitable, but it is how they work.

The OP is probably over 55 given the number of years that she has owned the house, so she ought to take tax base transfer into account for her plans, if she wants to stay in CA. If she wants to leave CA, she should be prepared for much higher property taxes in her budgeting for many states.

 

[AllDone]

This transfer of assessment seems crazy. Is it meant to reward people for never leaving the state and punish people who move there?

No, it's strictly an anti-tax measure although it was sold as making it possible for the elderly to continue living in their in high-value houses without paying increased taxes.

Prop 13 applies to commercial properties, too, so there are complicated deals where 95% of a commercial property is sold, the original owner retains 5%, and the original tax base applies to the property.

 

[Accidental Retiree]

California taxes capital gains at ordinary income tax rates. If the net gain is $400,000, she will be writing a large check to the FTB.

There is a $500,000 homeowners' exclusion for California, too, for MFJ filers,
just as with the feds, as long as you've lived in the house 2 out of the last 5 years and are over age 55 (IIRC).

OP should have $250k excluded.

 

[AllDone]

California taxes capital gains at ordinary income tax rates. If the net gain is $400,000, she will be writing a large check to the FTB.


What's confusing to me about this is whether this sale would drive the capital gains rate to 20 percent and if the 3.8 percent Medicare surtax applies. I would love to sell my Silicon Valley house, but I rolled the gain from my starter house into this one under the old rules plus the gain is larger.


I figured on extracting the maximum equity via a refi and renting the house out instead of selling. Let the heirs get the stepped up basis and thumb their noses at Uncle Sam and Uncle Jerry.

California capital gains tax are paid on the portion of profit over the $250K/$500K exclusion and range from 1-9.3% based on total taxable income, not "20%". Paying interest on a loan would quickly wipe out the advantage from not selling the property.

 

[Another Reader]

I'm not looking at 20 percent for California. I live in California and the top rate used to be 9.3 percent, but I believe it was raised a couple of years ago.


What's confusing is how the federal tax rate on capital gains is computed. For example, if you are in the 15 percent federal tax bracket, your capital gain tax rate is zero, unless the gain pushes you out of the 15 percent bracket (income plus gain exceeds the 15 percent bracket limit). My question is if the gain pushes you into the top bracket, does the federal tax on the capital gain go to 20 percent, and does the Medicare surtax kick in?

 

[kaneohe]

I'm not looking at 20 percent for California. I live in California and the top rate used to be 9.3 percent, but I believe it was raised a couple of years ago.


What's confusing is how the federal tax rate on capital gains is computed. For example, if you are in the 15 percent federal tax bracket, your capital gain tax rate is zero, unless the gain pushes you out of the 15 percent bracket (income plus gain exceeds the 15 percent bracket limit). My question is if the gain pushes you into the top bracket, does the federal tax on the capital gain go to 20 percent, and does the Medicare surtax kick in?

It works the same way....if the CG pushes you into the top bracket, the CG above the bottom of that bracket is taxed at 20%; the CG between that and the top of the 15% bracket are taxed at 15%; and CG below the top of the 15% bracket are taxed at 0%. For this purpose the CG is stacked on top of the ordinary income; deductions /exemptions are taken from the bottom of the stack......that is out of ordinary income first.

The Medicare surtax......do you mean the NIIT on investment income? or IRMAA, the increased premium for Medicare insurance. Both NIIT and IRMAA key on AGI
(IRMAA also adds in tax exempt income) so that the part of the home sale that is being taxed also contributes to the NIIT and IRMAA tax liability and this can happen before you reach the top bracket http://www.irs.gov/uac/Newsroom/Net-Investment-Income-Tax-FAQs.

 

[Another Reader]

The surtax on income. Doesn't the income used include wages and salaries, pensions, social security and the like as well as just investment income?


So if someone has a large gain after the $250k exclusion, the federal tax could conceivably be at the 20 percent federal rate plus the 3.8 percent surcharge, correct? And in California, you might have to pay the top rate on most of the non-excluded gain if you have other taxable income, correct?

 

[pixelville]

I'm not looking at 20 percent for California. I live in California and the top rate used to be 9.3 percent, but I believe it was raised a couple of years ago.


What's confusing is how the federal tax rate on capital gains is computed. For example, if you are in the 15 percent federal tax bracket, your capital gain tax rate is zero, unless the gain pushes you out of the 15 percent bracket (income plus gain exceeds the 15 percent bracket limit). My question is if the gain pushes you into the top bracket, does the federal tax on the capital gain go to 20 percent, and does the Medicare surtax kick in?

Another Reader, All capital gains show up on Line 13 of Form 1040. And tax is calculated on Line 44 based on your taxable income. So if that takes you in the top bracket, you will pay the 20%. And likely the 3.8% on Medicare surtax.
This is the Qualified Dividend and Capital Gains tax worksheet that walks you through how the final tax is calculated.
http://www.irs.gov/pub/irs-pdf/i1040gi.pdf#page43
You might find it easier to use TaxCaster or some free online tax software/calculator to play with the scenarios and see how tax changes. Do note, you are not paying the higher medicare surtax on the entire gain (not a cliff) but only on the amounts exceeding the 250K of MAGI. Same with capital gains tax rate. If you put 200K gain (no other income) vs say 300K gain vs 400K gain, you will see the increase in taxes using TaxCaster.

Sorry Kaneohe...this time you beat me to it

 

[RunningBum]

Yes, but like kaneohe says, not all of it is taxed at 20%, just the part over the top.

 

[Brat]

As you can see selling a house in your situation needs a plan to take advantage of property tax exemptions and accurately calculate your basis. IMHO you should visit an accountant who does individual tax returns in your community. Plan on two visits at a minimum, one to find out what information you will need and how to get it, another once you have the data to put together a spreadsheet. You need to determine where you want to live once you sell your home and see if you can preserve your property tax exemption status.

Next invite a couple Realtors to look at your house and ask each to prepare sales plans. Ask each to provide a list of homes comparable to yours that have sold for what $ in the last year, not only price but condition. Visit those addresses to see what the new owners have done with the property (in my DD's SV neighborhood many are torn down, others essentially a major remodel). Visit homes for sale in your neighborhood to compare them to your own. Ask for a list of homes that have been on the market more than 60 days and ask each Realtor why.

Frankly I think you should list with a discount realtor such as RedFin. In the SV no buyer is going to be turned off by a discount listing. Ask about their experience handling bidding wars.

When DD purchased her house the seller had the results of a professionally prepared inspection. It was a no contingency offering. Essentially buy as-is or don't waste my time.

The home she sold was offered that way as well, it would have been a starter home when I was married in the late 60s.. one of those split levels with the bedrooms over the garage in Sunnyvale.

Personally I wouldn't put a dime into a SV house without testing the as-is market first.

 

[Another Reader]

+1 for Brat's comments. My neighborhood was built in the late 80's/early 90's. There have been two recent sales in the subdivision at $1.2 and $1.3MM, both from the original phases. Both houses are being gutted and completely renovated.


At $700k, I'm thinking older neighborhood and small house. If your schools are desirable, someone will come in and redo the house. The only caveat is the market has slowed somewhat because of the turmoil in the Chinese stock market.


I would not do anything until I had talked to a knowledgeable accountant and walked through the scenarios, as Brat suggests. If you want to stay in California and buy down in price, there are eight counties that will accept base year value transfers from other counties under Prop 90. You could stay in your home county and transfer your base year value if you can find anything less expensive that you like here. Preserving your low property taxes may give you better choices of places to live.


Get a couple of the top listing agents in your area to do what Brat suggests. The market is very different than even a few years ago and it's important to understand how the market works today.

 

[Accidental Retiree]

+1 for Brat's comments.

If you want to stay in California and buy down in price, there are eight counties that will accept base year value transfers from other counties under Prop 90. You could stay in your home county and transfer your base year value if you can find anything less expensive that you like here. Preserving your low property taxes may give you better choices of places to live.


.

+2

As of Nov. 2014, there were 10 counties. Check out Prop 90 on
boe.ca.gov.

Riverside County rejoined the group, and San Bernardino has been added to the list.


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[Another Reader]

I'm behind the times! That's what happens when you retire. Since it's generally considered to be a loss of revenue for the counties, I'm surprised. It never occurred to me to check for new additions.

 

[Brat]

Tax wise there is an advantage in 'remodeling' a house in these counties. I won't bore all of you with the details but when DD purchased her home in SV DH made a renovation plan that kept the SQ Ft marginally the same as the existing residence (which included a caregiver residence) and retained the STRUCTURE of a substantial portion of the original residence EXCEPT FOR THAT WHICH NEEDED REPLACEMENT TO MEET EARTHQUAKE CODES. When SIL looked at their property tax basis after all that was done he about fell off his chair. There is an art to meeting DD's to- do-list, building codes, and taxing authorities.

None of their new neighbors had a skilled Architect father so they cleared the property and hoped for the best. Odds are the OP's buyer will do the same.

 

[Another Reader]

Yep. What constitutes assessable new construction is a gray area when the square footage, building footprint and envelope don't change. Meeting some codes is exempt new construction and the "substantial equivalent of new" test is difficult to meet. Most assessors prefer to call remodels repair and replacement for that reason.

 

[Accidental Retiree]

I'm behind the times! That's what happens when you retire. Since it's generally considered to be a loss of revenue for the counties, I'm surprised. It never occurred to me to check for new additions.

San Bernardino has been added within the past year or so.

With respect to San B and Riverside counties, I wonder whether they were hit so hard with the downturn that retirees' prop tax transfers are better than nothing?


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[Accidental Retiree]

Deleted duplicate post.