Capital Gain Tax

[street]

If my son sold his house that he has lived in for 8 years would there be any capital gain tax for him if sold for more then what he paid for it originally? Or any tax requirements if he bought a house right away to live in?

At one time you had 2 years to buy another home before you were required to pay capital gains when selling a home.

Can someone help clarify what the law states for selling a home that you lived in to buy another home that you would live in also??

 

[Montecfo]

Does he have a deferred gain from prior sale?

Gain is not generally taxable unless it exceeds $250k for a single taxpayer. You can do this once every two years.

There is no requirement to subsequently purchase a new home to get this treatment.

 

[statsman]

If my son sold his house that he has lived in for 8 years would there be any capital gain tax for him if sold for more then what he paid for it originally? Or any tax requirements if he bought a house right away to live in?

At one time you had 2 years to buy another home before you were required to pay capital gains when selling a home.

Can someone help clarify what the law states for selling a home that you lived in to buy another home that you would live in also??

Much of the latter changed in May 1995. There might be exceptions for investment property and re-investment.

But for a house lived in for at least two years in the five year period leading up to the sale, the first $250k of capital gains ($500k for joint married) is excluded from being taxed.

 

[VanWinkle]

Much of the latter changed in May 1995. There might be exceptions for investment property and re-investment.

But for a house lived in for at least two years in the five year period leading up to the sale, the first $250k of capital gains ($500k for joint married) is excluded from being taxed.

^^^^ This!!

 

[street]

The house he is selling he had built and paid about 240K for it. He figures he could sell it for ~325K now.
So, if I understand what you are telling me, he wouldn't have to pay any capital gains on this scenario because the gains would only be 85K.

 

[brewer12345]

The house he is selling he had built and paid about 240K for it. He figures he could sell it for ~325K now.
So, if I understand what you are telling me, he wouldn't have to pay any capital gains on this scenario because the gains would only be 85K.

Correct.

 

[Onward]

If he's lived in the house for two out of the last five years, he avoids income tax on all his gain up to $250k.

There is a twist if the house was rented out for part of the last five years.

 

[street]

Thanks so much once again.

 

[SecondCor521]

Correct.

Correct as long as he has lived in it for two of the past five years and as long as he has owned it for two of the past five years, both of which are probably true.

https://www.irs.gov/taxtopics/tc701

 

[ProspectiveBum]

Just to piggy-back on OP’s question: we’ve lived in our current home for over 20 years, and at current market prices, will be bumping up against that $500K limit if we were to sell (no plans to move in the foreseeable future). Two questions:

Are the gains calculated after deducting costs of the sale (realtor fees, etc.)?

Do home improvements raise your cost basis for this calculation, and what kind of documentation is required? We’ve extensively remodeled our backyard and kitchen in the last 10-15 years, but it’s not clear how much of those costs can be used to increase our cost basis.

 

[statsman]

Are the gains calculated after deducting costs of the sale (realtor fees, etc.)?

Yes. Publication 523 describes which closing costs can be considered.

Do home improvements raise your cost basis for this calculation, and what kind of documentation is required? We’ve extensively remodeled our backyard and kitchen in the last 10-15 years, but it’s not clear how much of those costs can be used to increase our cost basis.

Check the IRS documentation, but usually anything permanent (modernizing a kitchen) and not just general maintenance (i.e. interior or exterior painting) adds to the basis of the house sale. Check Publication 523 for examples of a basis adjustment.

We kept purchase and work order receipts. There were a couple of smaller projects we didn't have or lost the receipts to and had no way to obtain a new receipt. In our case, we opted to ignore those in the basis calculations.

Do note if you replaced/improved something more than once, only the last such upgrade is considered for the change in basis.

 

[ProspectiveBum]

Thanks, statsman!

 

[TKDenver]

Also to piggy-back on the OP's question, consider this situation:


Person A owns and has lived in a townhouse for 7 years. In May 2020 she sells that townhouse with a gain of about $140,000 and moves in with Person B. Person B owns and has lived in his house for over 20 years. Were he to sell it today he would have gains of over $250,000 (but less than $500,000). In June 2020 Persons A and B get married (yea!!). For 2020 they will file a joint tax return.



Does it matter that Person A's transaction was before the marriage and that Person B was not on the deed of the townhouse at the time of sale? Either way the gain on that transaction is less than $250,000 and also less than $500,000 so I know there will be no capital gains tax due on that sale. But I am wondering what are the implications are if Person B decides to sell his house (Person A is not yet on the deed). Is Person B's $250,000 exemption still in play if he would want to sell now (or next year)? Or does filing jointly make all of that moot and now we would have to wait 2 years from the date of the townhouse sale to claim the full $500,000 exemption for the sale of Person B's house?

 

[cathy63]

Also to piggy-back on the OP's question, consider this situation:


Person A owns and has lived in a townhouse for 7 years. In May 2020 she sells that townhouse with a gain of about $140,000 and moves in with Person B. Person B owns and has lived in his house for over 20 years. Were he to sell it today he would have gains of over $250,000 (but less than $500,000). In June 2020 Persons A and B get married (yea!!). For 2020 they will file a joint tax return.



Does it matter that Person A's transaction was before the marriage and that Person B was not on the deed of the townhouse at the time of sale? Either way the gain on that transaction is less than $250,000 and also less than $500,000 so I know there will be no capital gains tax due on that sale. But I am wondering what are the implications are if Person B decides to sell his house (Person A is not yet on the deed). Is Person B's $250,000 exemption still in play if he would want to sell now (or next year)? Or does filing jointly make all of that moot and now we would have to wait 2 years from the date of the townhouse sale to claim the full $500,000 exemption for the sale of Person B's house?

For the 2020 tax year, Person A can exclude the $140K gain on the townhouse she sold in May. It doesn't matter whether B is on the deed or not, or whether the sale is before or after the wedding. If Person B sells his house in 2020 he also gets a $250K exclusion. If the gain on B's house is greater than $250K, then that's a taxable long term cap gain.

In order to get the full $500K exclusion on B's house, A does not have to be on the deed (only one spouse needs to meet the ownership test), but she does have to live there for 2 years (both spouses have to meet the residence test) and cannot have sold another house and taken the exclusion on it during the 2 years prior to the sale date (lookback test). So if A & B live in the house together until June 2022, they would qualify for the full $500K exclusion as long as there's no change in the law between now and then.