Mr. X is a student with $0 income buying a house today for $500K and selling it in the future for $600K (dates are the variable). I created a TT account to test how IRS topic 409 (https://www.irs.gov/taxtopics/tc409#:~:text=A%20capital%20gains%20rate%20of,%2463%2C000%20for%20head...) works in practice - it says a capital gains rate of 0% applies if your taxable income is less than or equal to $47,025.
On TT, when I set the dates of ownership below 1 year, the tax owed was $17,532 - makes sense, because it's a short term capital gain (STCG) that's taxed as income. When I set the dates of ownership to over 2 years, the tax dropped to $0, which again makes sense because of the $250K exemption. But when I set the dates of ownership to 13 months (so no longer a STCG, but also not long enough to get the $250K exemption), the tax was $8102, not zero as I expected given the language in IRS 409.
Is this because the $100K gain is ITSELF income which exceeds the $47,025 threshold, and thereby taxable?
This would seem to be the logical answer, but I thought the whole point of calling something a 'capital gain' was to differentiate it from income, and that saying 'if your income is under $47K, you don't pay tax on a capital gain' meant something different then the TT result. Does the TT result in fact make sense? This is improtant in determining how long to hold the property, and at least knowing the implications of selling it before the 2 year milestone. Thanks!
