Tax withholding and reporting for sale of "primary" property as non resident in Georgia

[TaxWander]

We lived in our house in GA for 8+ years until 2021 (filed resident tax returns until 2020 and partial resident for 2021 and non resident for 2022 and 2023). Then we moved to VA and put the property for rent until 2024 when we sold the property.

If I'm reading this correctly, the IRS allows exclusion of upto 500K in capital gains if the property was the primary residence in 2 out of the last 5 years and my understanding is that Georgia also follows the same guidelines.

So my question is:

1. Do we owe any capital gains taxes for the sale of the property? What should we tell the closing attorney

2. Do we need to fill out the IT-AFF2 form for non residents, even if we don't own any taxes from the exclusion ? If so what do I fill in to show that we don't owe any taxes?

3. We are already filing non resident returns for GA (from the rental income for the past 3 years), do need to include anything related to the sale of this property?

[Mike9241]

can't answer all your questions but for federal assuming you lived and owned it for any 2 out of 5 years before sale the $500K exclusion only comes into play after section 1250 depreciation recapture for depreciation allowed or allowable while it was a rental. so you will at least owe tax on the depreciation which can be as high as 29% if you are subject to the net income investment tax.

[NCperson · Accepted solution]

1) It appears you indeed meet the "2 of the last 5 years" exclusion requirements, so the first $500,000 (assuming you are married) of gains are tax free.  I can't state whether there are any capital gains taxes because you never stated what you gain would be.  

2) It appears that completing form IT-AFF3 is the appropriate form to complete, assuming the gain is less than $500,000.  Note the first reason is that the you are exempt from reporting the gain on federal tax returns. 

https://dor.georgia.gov/it-aff3-sellers-certificate-exemption.

3) Otherwise, it appears that if the gain is more than $500,000, then IT-AFF2 would need to be completed so that the closing statement only withholds 3% of the gain, instead of 3% of the purchase price. 

What GA appears to be attempting to do is collect the income tax at the closing table as it's problematic for them to go after out-of-state residents should the seller not submit a state income tax return. 

@TaxWander 

[TaxWander]

Very helpful. So for calculation of taxable gain (if it’s more than 500k), is this correct?

Capital gains = Sale price - purchase price - improvement - realtor fees - closing costs + depreciation recapture

Is the depreciation recapture required for calculating the capital gains or is that done separately at the state and federal level?

So the Capital Gains is what I need to check (assuming my formula above is correct), if it’s under 500k then it’s form IT-AFF2 or is there no form to be filled out? If it’s more than 500k when which form would it be?

[NCperson]

capital gains does not include the depreciation recapture and it's not "purchase price", it's "cost basis" which would reflect the reduction in cost basis due to depreciation.

Capital gains = (Sale price - closing costs) - (cost basis including improvements) 

that cost basis including the improvements would have been depreciated during the time period you rented the property. 

re-read my post above as I explained which forms appear to be required at above or below $500,000

[TaxWander]

Yes,  your last post was clear on which form, thanks. 

So if understand this correctly the costs basis I use in your formula above is the cost basis that was used on the IRS returns starting the year I used the property for rental purposes (eg 300k)? If so can I to add any capital improvement expenses (eg 40k remodel) made prior to the starting of the rent, or does that cost basis number reported to the IRS (300k) at the start of the rent assume to include any improvements made (40k) to the property prior to the start of the rental?

[NCperson]

no, the 'cost basis' is the $300k + $40k LESS the depreciation that occurred during the time it was rented. 

if you did not depreciate it for tax purposes, RUN to a professional tax preparer to straighten this out!

[TaxWander]

Oh! I did consult a CPA when I started. He reported the cost basis when we started renting based on the house value (I think) from our mortgage statement. Ever since, each year there has been depreciation taken (about ~5k each year) but I don’t think the improvements (40k) were added or depreciated. 

When I try to calculate the costs basis today can I add the improvements (40k) and then deduct the depreciation against that 40k or am I stuck with the $300k (less depreciation ~15k) that’s been reported to the IRS?

[NCperson]

@TaxWander - Go back to the professional.  That $40k needed to be depreciated as well. 

[TaxWander]

I’m curious about one thing though. If I bought the residential property for say 400k in 2015 and the CPA used 300k as the cost basis in 2021 when I started renting it, my guess is that he deduced the land value (100k) in calculating it. 

Now when I sell it and I have to use the 300k as the starting cost basis - where do I factor in that land value to calculate my adjusted cost basis? Does that disappear because I started renting it in 2021 vs if I have never rented it?