Tax on Sale of Primary Home

[Dog]

DH and I will be listing our primary home and relocating to our vacation home. We purchased the home back in 1986 for $85k. We refinanced a couple of times. Once to do a remodel of kitchen and most recently in 2011 to help build our vacation home. We currently owe $192k on mortgage and our Realtor thinks we can get $400k. I believe we can make a profit of $250k before paying federal taxes. Do we calculate off the original purchase price or the most recent refinanced amount?


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[GrayHare]

Profit = Sales Price - Basis. Your Basis is purchase price + capital improvements.

 

[aaronc879]

I believe it's $500,000 if you are married filing jointly so no worries for you.

 

[haha]

DH and I will be listing our primary home and relocating to our vacation home. We purchased the home back in 1986 for $85k. We refinanced a couple of times. Once to do a remodel of kitchen and most recently in 2011 to help build our vacation home. We currently owe $192k on mortgage and our Realtor thinks we can get $400k. I believe we can make a profit of $250k before paying federal taxes. Do we calculate off the original purchase price or the most recent refinanced amount? Sent from my iPhone using Early Retirement Forum

Neither the form or amount of financing has anything to do with it, Like the previous poster said, you start with the net proceeds which is usually quite a bit less than the price received. Excise taxes, escrow fees, agents commissions commonly come off the top.

Then the gain is that net sale proceeds less your original buy price and certain remodels etc which give a higher adjusted basis. Insurance proceeds can affect this too.

Ha

 

[RunningBum]

The refinance has absolutely nothing to do with the basis. It's your original cost, plus improvements. But assuming you file jointly, you get $500K of profit excluded so it seems you'll owe no income tax on the sale.

 

[Senator]

The refinance has absolutely nothing to do with the basis. It's your original cost, plus improvements. But assuming you file jointly, you get $500K of profit excluded so it seems you'll owe no income tax on the sale.

I believe any points paid are deducted over the life of the loan. This could then be added to the basis, I would think.

Since she has way less gain than what the law allows, I do not think all the details really matter.

 

[Dog]

Thanks for the responses.


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[gauss]

Make sure that neither you nor your spouse has sold a house and used the exclusion within the last two years.

Exclusion will be $500,000 if both of you have lived in the house for 2 of the last 5 years.

If the closing company includes a 1099-S in the closing packet, be sure to recognize the sale of the home on your Schedule D even if there is no taxable income with the exclusion.

-gauss

 

[Brat]

Don't overlook the fact that some 'low tax' states have a tax on the gross sale of a home.

 

[Dog]

We live in the Puget Sound area of Washington state. I believe there is close to a 2% excise tax that will be due upon the sale of our home. I think we can claim that on our 2016 tax filing.


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[Brat]

Been there, done that... it is an excise tax that is not deductible. We lived on BI and as I recall the excise tax was in excess of the % you quoted. [The tax is state + county + municipality as I recall]

Woof...

 

[Dog]

For Mukilteo in Snohomish County the 2016 real estate excise tax rate is 1.78%. You are correct - it appears we cannot deduct the excise tax when filing 2016 taxes. Rats!


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[donheff]

Has anyone here ever been audited after a house sale? The reason I ask is that I am selling a second home and have poorly documented capitol improvements. I am curious about how nasty IRS is on proving the exact costs. In some cases I have photos that show the changes but not detailed receipts for the work.

 

[gauss]

Has anyone here ever been audited after a house sale? The reason I ask is that I am selling a second home and have poorly documented capitol improvements. I am curious about how nasty IRS is on proving the exact costs. In some cases I have photos that show the changes but not detailed receipts for the work.

Assuming you don't have any bank records either? (ie banks or CC statements showing the payment amounts and dates)

Were city building permits pulled for all the improvement projects that you wish to claim?

Never been through it myself -- just thinking out loud here.

-gauss

 

[donheff]

Assuming you don't have any bank records either? (ie banks or CC statements showing the payment amounts and dates)

Were city building permits pulled for all the improvement projects that you wish to claim?

Never been through it myself -- just thinking out loud here.

-gauss

no records and the CC company was unable to help that far back. I figure I will make my claim and take my chances. Heck - they should be happy with the CGs they get. Most people would fake a residence change to get the exemption.

 

[MichaelB]

no records and the CC company was unable to help that far back. I figure I will make my claim and take my chances. Heck - they should be happy with the CGs they get. Most people would fake a residence change to get the exemption.

Unless you are showing a lot less gain than the average real estate increase over the same timeframe it shouldn't be a problem.

 

[akck]

At minimum though, I'd list out the improvements you've made, approximately when they were done and your estimate of the cost. Before and after photos would be nice too.

 

[marko]

Don't overlook the fact that some 'low tax' states have a tax on the gross sale of a home.

High tax states too.

IIRC Mass has a 20% tax on home sale profit over $500K for couples. Plus a stamp/deed tax without exclusions of about $5.70 per thousand.

 

[gauss]

no records and the CC company was unable to help that far back. I figure I will make my claim and take my chances. Heck - they should be happy with the CGs they get. Most people would fake a residence change to get the exemption.

Were building permits pulled at your local municipality by your contractor? I would think that they would be required for "capital improvements".

If so, perhaps the city has the records and can give you something documenting the project.

Even if you don't get copies now you could check into it and determine the cost and availability and how long they will be kept. That way if your audited hopefully you could quickly get the permit records.

-gauss

 

[donheff]

Were building permits pulled at your local municipality by your contractor? I would think that they would be required for "capital improvements".

-gauss

No permits on any of the work. It included adding hardwood floors in bedrooms, replacing all 40 windows in the house, and redoing rip-rap on the shoreline. Rip-rap normally requires several permits but not, apparently, fixing a shoreline that is already rip-rapped.

 

[Brat]

Those are big expenditures. Maybe you can find receipts in your old files.