Used non-qualified withdrawal for home down payment

[lb666smith]

We withdrew $50k from an investment account as down-payment money for our new home. When the existing home sold, we recognized a $60k profit. Question is, do we need to pay an estimated tax on the $50k, as I understand up to $500k of real estate profit is non taxable when filing married/joint. Or - does the re-investment of the $50k in real estate level the tax playing field? 

[rjs]

You said you withdrew $50,000 from an "investment account." Did you mean that you withdrew it from a retirement account, such as an IRA or a 401(k)? Precisely what type of account did you withdraw the money from?

What do you mean by a "non-qualified" withdrawal?

[lb666smith]

The funds were from a TOD account inherited by my wife upon the passing of her mother. They were not IRA nor 401k. It was a stock investment account. The account is labeled in our brokerage as non-qualified, as it is strictly a brokerage account.  Sorry for the confusion, but I assumed that the use of the term non-qualified indicated that the funds were not from a qualified account. Research I've done (painstakingly) at the IRS website indicate a need to determiner the basis for the various instruments sold in order to truly determine the capital gains. I get that. My real concern is the whether there is a need to file an estimated tax payment on the capital gains, or is the use of the funds going to "wash" when filing for 2019 because the money was used for real estate.If I were to guess, the IRS cares little how the funds were used, more about the fact that the distribution is considered current income. Looking forward to your thoughts.

[rjs · Accepted solution]

Your guess is correct. The IRS doesn't care what you did with the money from the brokerage account. The gain on the sales in the account is income and has to be reported.

The possibility that you might be able to exclude the gain from selling your home has no effect on the income from the brokerage account.

Note:

(1) Since your wife inherited the account, her basis for each investment in the account is the market value on the date of her mother's death.

(2) Sales of inherited assets are always treated as long term, regardless of how long your wife actually held them, or how long her mother held them before she passed.

Whether you need to make an estimated tax payment depends on your total income and total tax, not any one specific transaction. It depends on the amounts and types of your other income, how much tax you have withheld during the year, and other factors. There are several ways that you can do an approximation of your 2019 tax to see where you stand.

• Use the 2019 estimated tax section in 2018 TurboTax.
• If you have the CD/Download TurboTax software for 2018, use the What-If Worksheet.
• Use TaxCaster. (This is still set up for 2018, but it will be close enough).

[lb666smith]

Excellent! I fired up 2018 TT today, and loaded the latest updates. Will do the "what if" tomorrow and other methods you suggested as well. Many thanks for the reply. As of this point we have vastly reduced incomes. I draw Social Security, and my wife retired from a part time job with her pay ending in August. Our $3k/mo draw from other accounts had us in an effective tax rate of 3.2% in 2018.  I'll do some homework in TT and drop you a quick note as to the outcome. Again, thanks!

[Carl]

"We withdrew $50k from an investment account as down-payment money for our new home."

In a nutshell:

If the investment account contributions were not taxable in the year of the contribution, then they are taxable in the year you withdraw them. It just doesn't matter what you used the funds for. Be it a family vacation, buying a home or paying medical expenses. The destructibility of what you used the money for stands on it's own merits.

If the withdrawal was from a non-tax deferred account where the earnings are not taxed until the year you make the withdrawal, then generally (with rare exception) a portion of the withdrawal is considered to be earnings and the earnings will be taxed in the year of the withdrawal. Of course, this assumes you actually have a gain on the investment and not a loss.

The sale of a primary residence has nothing to do with where any original down payment came from. If the house was your primary residence for at least 2 of the last 5 years you owned it, then you can exempt the first $250K of gain on the sale from taxation. If filing joint and you both meet the "2 of last 5" rule, then the first $500K of gain is tax exempt.