Second home

[Maia1964]

hi we bought a home 5 years ago for $134,000. We did a lot of repairs and remodeling. Our daughter has lived their rent free but now she wants to buy the house and we told her we would sell it for $160,000. What part will we have to count as income on our taxes? We are retired and live on social security and get a medical tax credit for our medical insurance premiums and do not want to go over our income amount. We live in Washington State. Can we count our remodeling repairs towards the difference in what we bought the house for and what we're selling it for and will we have to pay capital gains?

[TomD8 · Accepted solution]

Since you never lived in the home, you will owe capital gains tax.

Your capital gain is your net selling proceeds minus your original cost plus the cost of any improvements (but not repairs) that you've made to the property.

This website gives a good explanation of the difference between improvements and repairs:

https://www.thebalancesmb.com/improvements-vs-repairs-2125241

[Carl]

Your cost basis is $134,000 plus the cost of any qualified property improvements you made.

Subtract that cost basis from your selling price, and that will give you a rough idea of what your taxable gain will be. Just using the numbers you provided shows a capital gain of $26,000, but it will probably be less once you add your property improvement costs to your cost basis.

Yes, it will increase your AGI.

Yes, i will reduce (or possibly eliminate) your health insurance tax credits.

[Critter-3]

Purchase price + cost to buy + improvements + cost to sell = basis

Selling price - basis = cap gain and since you owned it for more than 1 year it is considered long term and it gets a better/lower tax rate than your ordinary income.  

Since your only other income is SS benefits then unless the profit is more than $80K you will owe no taxes however it does count as income for the ACA credit. 

Now for the Marketplace insurance ...  if your estimated income is different from your actual income then you need to let the ACA know right away so the advance credit can be adjusted.   It is possible this will force you to pay back some of the advance credit you got this year.   Now if you wait to close until 2021 then you will be able to tell the ACA more precisely what your 2021 estimated income will be so the advance credit is calculated correctly.  

[Opus 17]

Additionally, if the house's fair market value is more than $160,000, then you are also giving your daughter a gift of equity.  If that gift is more than $15,000 per person, you need to file a gift tax return to report the gift.  (No tax will be owed unless your lifetime total of gifts and estate is more than $11 million.)

You and your spouse can each give up to $15,000 to your daughter without triggering the requirement to file a gift tax return, so you will only need to file a gift tax return if the fair market value of the house is more than $190,000.