Personal home sale tax free gains

[brucethebroker]

Most readers here know this, but I have met two retirees recently who were not aware of the tax free proceeds available from selling your personal residence. Both thought the pre-1997 rules (must buy a new, more expensive home to "roll over" the capital gains), was still in effect.

You no longer have to buy a replacement home for tax free benefits.

The current "rules" (in a nutshell) are that the home must have been your personal residence for 2 of the last 5 years, and the tax free gains are capped at $250k for singles and $500k for married couples. The following link is a concise explanation, and also covers some little known exceptions.

www.nolo.com/legal-encyclopedia/avoid-capital-gains-tax-selling-home-29901.html

 

[pb4uski]

Yup. A lot of people out there that aren't paying attention.

 

[HadEnuff]

I just closed on a house last June, and we were well under that 500K cap. In fact, if you are under the cap, it doesn't even get reported to the IRS, no 1099...I specifically asked because I wondered if it would be one of those items that doesn't raise your tax bill, but does get reported where it becomes a consideration for the ACA MAGI number, but it does not.
According to the lawyer who did my closing.

 

[RunningBum]

I just closed on a house last June, and we were well under that 500K cap. In fact, if you are under the cap, it doesn't even get reported to the IRS, no 1099...I specifically asked because I wondered if it would be one of those items that doesn't raise your tax bill, but does get reported where it becomes a consideration for the ACA MAGI number, but it does not.
According to the lawyer who did my closing.

Do they ask your basis so that they know whether you are under or over the cap? It seems to me like they would either always report the sale number, or never, and let you figure out your actual profit and decide whether to report it or not.

 

[pb4uski]

No, because it the proceeds from the sale are under the cap then the gain on sale has to be under the cap assuming a basis of zero.

If the sales proceeds are over the cap then it gets reported.

 

[RunningBum]

OK, so any house that sells over $500K ($250K if sold by a single) is reported?

 

[pb4uski]

That is my understanding/experience.

 

[EarlyBirdly]

Yup. A lot of people out there that aren't paying attention.

NO way!??! ( Hang on, Tongue stuck in cheek.)



It's kind of sad isn't it?

 

[EarlyBirdly]

OK, so any house that sells over $500K ($250K if sold by a single) is reported?

No.


Any gains ( Hence, "Capital Gains" ) over $250/500k are reported and taxed.


It's been that way for 20+ years now...

 

[pb4uski]

NO way!??! ( Hang on, Tongue stuck in cheek.)



It's kind of sad isn't it?

Very sad... and many of them are the first to complain that they can't "get ahead".

 

[Taxman59]

A few years ago, I had a CPA client who argued with me about the new rules. He did the research and sent me the old rules and said I needed to update the advice I was giving. I sent him back the new regs and articles that referenced the old rules and how they were updated to the $250/500k rules. He was shocked and never questioned meagain!

 

[Dtail]

No, because it the proceeds from the sale are under the cap then the gain on sale has to be under the cap assuming a basis of zero.

If the sales proceeds are over the cap then it gets reported.

I knew about the 500k cap gain rule, but didn't know that effectively sales under 500k are not reported.
My parents just sold their house for 380k, so no reporting at all. They do have their own CPA for taxes.

 

[ERD50]

NO way!??! ( Hang on, Tongue stuck in cheek.)



It's kind of sad isn't it?

Originally Posted by RunningBum View Post
OK, so any house that sells over $500K ($250K if sold by a single) is reported?

No.


Any gains ( Hence, "Capital Gains" ) over $250/500k are reported and taxed.


It's been that way for 20+ years now...

Now maybe I have this wrong, but I don't think so. And if I'm right, it' strikes me as sad/ironic that you are claiming it is sad that people don't know this, when you yourself are spreading incorrect information!

The post you responded to makes sense to me - the IRS does not know the basis until you report it. And according to the IRS document, sales are reported on form 1099-S.

https://www.irs.gov/pub/irs-pdf/f1099s.pdf

Instructions for Transferor -- For sales or exchanges of certain real estate, the person responsible for closing a real estate transaction must report the real estate proceeds to the IRS and must furnish this statement to you

https://www.irs.gov/pub/irs-pdf/i1040sd.pdf

If you had a gain and can exclude part or all of it, enter “H” in column (f) of Form 8949. Enter the exclusion as a negative number (in parentheses) in column (g) of Form 8949. See the instructions for Form 8949, columns (f), (g), and (h). Complete all columns.

So it sure looks like you need to enter it, just like any other asset sale, and then enter cost basis to determine the gain/loss, and any exclusion is documented here.

If I'm right, will we get a mea culpa?

-ERD50

 

[ERD50]

And this document:

https://www.irs.gov/instructions/i1099s

Does cover the exception that the sale does not have to be reported if the sale (not the gain) is under $250,000/$500,000 and it is clear that the seller is entitled to the $250,000/$500,000 exemption.

-ERD50

 

[cathy63]

I just closed on a house last June, and we were well under that 500K cap. In fact, if you are under the cap, it doesn't even get reported to the IRS, no 1099...I specifically asked because I wondered if it would be one of those items that doesn't raise your tax bill, but does get reported where it becomes a consideration for the ACA MAGI number, but it does not.
According to the lawyer who did my closing.

I'm confused (not the first time). Why wouldn't all sales be reported on 1099-S? The lawyer, real-estate agent, or whoever files this form doesn't actually know whether you're entitled to an exemption or not. You could be selling a place that's only been your primary residence for 18 months, in which case you owe cap gains tax even if the profit is less than $250K. It seems to me that they should always file the form and then you should handle it or not handle it when you file your taxes.

edit: Oh, I see from ERD50's link that you have to file 1099-S unless the sellers provide an "acceptable written assurance" that they are entitled to the exemption. I suppose that there are probably forms to sign at closing that provide this assurance.

 

[ERD50]

.... Both thought the pre-1997 rules (must buy a new, more expensive home to "roll over" the capital gains), was still in effect.

You no longer have to buy a replacement home for tax free benefits.
...

And I always felt that old rule was misunderstood by many at the time. I think people took it as a "gate" - that if you didn't buy a more expensive home, you'd have lots of taxes due, and if you bought a more expensive home, no taxes due.

As I understand it, it would only be the difference that was subject to cap gains. As a pre-1997 example, sell a $400,000 home, buy a $390,000 home, you may owe cap gains on the $10,000 that was not carried forward.

But I think it was in the Real Estate industries best interest to use the shorthand version of this, to encourage buyers to move up in price.

-ERD50

 

[EarlyBirdly]

From Turbotax/Intuit :

" Profit on home sale usually tax-free

Most home sellers don’t even have to report the transaction to the IRS. But if you’re one of the exceptions, knowing the rules will help you hold down your tax bill.

Do I have to pay taxes on the profit I made selling my home?

"Single...If you owned and lived in the place for two of the five years before the sale, then up to $250,000 of profit is tax-free.

If you are married and file a joint return, the tax-free amount doubles to $500,000. The law lets you "exclude" this much otherwise taxable profit from your taxable income. "


When I sold my last property I entered the sale and let TurboTax do the rest...No Capital Gains were taxed as they were well below $250k.


Of course, if wrong I would surely extend a Mea Culpa (!)





BirdMan

 

[ERD50]

From Turbotax/Intuit :

" Profit on home sale usually tax-free

Most home sellers don’t even have to report the transaction to the IRS. But if you’re one of the exceptions, knowing the rules will help you hold down your tax bill.

Do I have to pay taxes on the profit I made selling my home?

"Single...If you owned and lived in the place for two of the five years before the sale, then up to $250,000 of profit is tax-free.

If you are married and file a joint return, the tax-free amount doubles to $500,000. The law lets you "exclude" this much otherwise taxable profit from your taxable income. "


When I sold my last property I entered the sale and let TurboTax do the rest...No Capital Gains were taxed as they were well below $250k.


Of course, if wrong I would surely extend a Mea Culpa (!)





BirdMan

The above is not wrong, but your earlier reply was. That's the mea culpa I asked about. You are changing the subject.

Originally Posted by EarlyBirdly

Quote:
Originally Posted by RunningBum View Post
OK, so any house that sells over $500K ($250K if sold by a single) is reported?

No.

So as I said, your later statements are correct, but it is not correct to say that a sale greater than $250K/$500K is not reported if the gains are less than $250K/$500K.

The sale is reported so the cost basis and gains can be documented.

Right?

-ERD50

 

[EarlyBirdly]

See above ^^^

" Most home sellers don’t even have to report the transaction to the IRS."


I'm just quoting TurboTax...So, if they are wrong, I will STILL apologize.


How's that?

 

[Rianne]

We bought a house in Elmhurst 1996, $180K (small brick ranch, small lot, great neighborhood). Sold in 2003 $310K. No CG tax on $130K. Tax free appreciation. I'm pretty sure it has to be your personal residence. Can't do this on vacation homes or real estate investments.

 

[ERD50]

See above ^^^

" Most home sellers don’t even have to report the transaction to the IRS."


I'm just quoting TurboTax...So, if they are wrong, I will STILL apologize.


How's that?

You are still dancing around the comment in question, and diverting the subject.



" Most home sellers don’t even have to report the transaction to the IRS." is not the same as saying you don't have to report unless that gains are greater than $250,000/$500,000.

Most? Well:

https://www.zillow.com/home-values/

the median price of homes that sold is $229,800.

So the reason that " Most home sellers don’t even have to report the transaction to the IRS." is because most are under $250,000, which is below the exclusion, so cap gains could not be above $250,000, even with a basis of zero. And that is all spelled out in the references I provided.

Yes, you should just provide the mea culpa, you are a bad dancer!

-ERD50

 

[Amethyst]

Our CPA told us, several years ago, that the rules had changed such that all sheltered gains in a "chain" of home sales over the years must be accounted for.

IOW, if you sold a house in 2000 and had a gain, which you then sheltered by buying a more expensive house, that sheltered gain from 2000 has to be reported, along with any gain from selling the current house.

 

[EarlyBirdly]

Dancing ? ...I don't even hear the Music that's playing in your head!


Seriously, I'm pretty sure we are both saying the exact same thing but, apparently you like to pay more attention to detail in language than I do and are constructing meanings which were never intended.


Anyway, here's what it boils down too..


- This is Pepper > .


- This is Fly Sh!t > .


Can you tell the difference?


Because I can't.

 

[ERD50]

Dancing ? ...I don't even hear the Music that's playing in your head!


Seriously, I'm pretty sure we are both saying the exact same thing but, apparently you like to pay more attention to detail in language than I do and are constructing meanings which were never intended. ....

Language is all we have to communicate here. If we are saying the exact same thing, 'detail of language' would not matter.

To be clear (are you really missing it?), the difference is between reporting a sale of greater than 250/500 and reporting a gain of 250/500. Try telling the IRS that that is the exact same thing or some 'detail in language' - I'll watch.

As to the rest of your post, I suggest you read/re-read the Community Guidelines.

-ERD50

 

[ERD50]

Our CPA told us, several years ago, that the rules had changed such that all sheltered gains in a "chain" of home sales over the years must be accounted for.

IOW, if you sold a house in 2000 and had a gain, which you then sheltered by buying a more expensive house, that sheltered gain from 2000 has to be reported, along with any gain from selling the current house.

And I believe this extends to sale before 1997 when the law changed. But I've always had trouble finding a reference for that.

So if I (all primary residence):

Bought in 1978 @ $30,000
Sold in 1983 @ $45,000, and bought a home that year for $100,000
Sold that $100,000 home for $200,000 in 1993...

So far, no cap gains under pre-1997 rules as I moved up in cost. And it would seem to me, no need to keep records going back, as moving up was all that was required to avoid cap gains taxes, right?

But what happens if I sell in 2019, for more than $700,000? Is my cost basis $200,000 (plus capital improvements), or does it 'chain' back to 1978, and I'd have to add the gains on previous homes?

It seems unreasonable to expect records for pre 1997, if those records were not needed at the time?

But I guess this is what you are saying? You need to follow the "Chain" all the way back? But wait... a 2000 sale would not be 'sheltered' by buying a more $ house, that was pre-1997. I'm lost again.

-ERD50