Capital Gains from Property Sold Out of State

[RaydeeohMan]

I sold real estate in another state in 2024 and thus have a capital gain to report. I understand that I won’t owe a capital gain tax if my adjusted gross income is less than $94,500. However, it appears my income will be slightly above that amount. How do I determine how much additional withholding I must do to avoid a penalty? I think I need to make a payment to my home state of California as well. The property was sold in Hawaii, and that state has already withheld 7.25% from the property sale.

[marctu]

Just to clarify the profits from the sale of an asset held for more than a year are subject to long-term capital gains tax.  The rates are 0%, 15% or 20%, depending on taxable income, and filing status.   So you need to focus on taxable income and not adjusted gross income.  These are the rates. 

Tax rate	Single	Married filing jointly	Married filing separately	Head of household
0%	$0 to $47,025	$0 to $94,050	$0 to $47,025	$0 to $63,000
15%	$47,026 to $518,900	$94,051 to $583,750	$47,026 to $291,850	$63,001 to $551,350
20%	$518,901 or more	$583,751 or more	$291,851 or more	$551,351 or more

Since you said you were going to be higher then the $94,050, I am not sure by how much, so net investment tax could apply as well.   The net investment income tax (NIIT) is a 3.8% tax that kicks in if you have investment income and your income exceeds $200,000 for single filers, $250,000 for those married filing jointly or $125,000 for those married filing separately.

Your resident state California, will offer a credit for the taxes paid to Hawaii, on the California tax return that you file, so you may not owe California for this sale.  The credit will not be the withholding tax on the sale, but the taxes you pay to Hawaii when you file both a California and Hawaii tax return in 2024.

I would suggest using Tax Caster to see what your tax position is with the sale of the house in Hawaii, prior to the last estimated tax payment for the year, which is January 15, 2025.   Also you can adjust your W-4s, though there are only a few pay periods left in the year.

Thank you for your question @RaydeeohMan 

All the best,

Marc T.

TurboTax Live Tax Expert

27 Years of Experience Helping Clients

[carolineb]

You are correct in assuming that you will not owe capital gains tax if you are married filing jointly with an AGI of $94050, but if your AGI is slightly higher than that amount you will owe 15% capital gains tax on the amount of gain on the sale on your federal return. Be sure to include the amount of gain when calculating your AGI, as this is a common mistake when determining your capital gains tax rate. 

Since the property was sold in Hawaii, and you have already withheld the required 7.25% capital gains rate for that state, you should be fine when reporting the sale on a non-resident HI return. However, since you are a resident of California, CA will want you to pay tax on the income as well. When preparing your resident CA return, be sure to take the Other State Tax Credit for the amount of taxes that you paid to HI on your CA return. This credit will ensure that you are not being taxed twice on the same amount of income. 

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[RaydeeohMan]

Thanks, Marc, that is good information. Here is a follow up question. The property was given to my wife by her father many years ago, and so our basis is zero. We sold it for $680,000. I know I can deduct the sales commission, etc, but I am wondering if we can deduct maintenance expenses for the property. It was vacant land that we had to clear of trees and brush. We made 2 trips to Hawaii in 2024 to maintain that land and are wondering if our travel expenses can be used to offset our capital gain.  Can we deduct the flight and hotel costs,  and costs for equipment to do that work? We also hired a company to help us clear the land and would like to write off that expense as well.

[marctu]

So correct me if I am wrong, but from everything I am read below this is clearly a personal property, and is also land only. 

So maintenance by definition doe not improve the property, it just maintains it.  The flights and hotels are also personal expenses.  You can also not include the value of your time and your labor.   That leaves the question of was the equipment that you may have rented plus the company that you paid to clear the land increase the basis. 

I would have probably advised you if you asked before hand to sell the vacant property as is, since just simply clearing land is not a depreciable improvement since it is not subject to wear and tear.   If there was a road or something else put in that was subject to wear and tear, a better argument could be made that this was an increase to basis.  

Not the most satisfying follow up response, but hopefully that is helpful @RaydeeohMan 

All the best,

Marc T.

TurboTax Live Tax Expert

27 Years of Experience Helping Clients

[RaydeeohMan]

Thanks, Marc. It sounds like we just have to bite the bullet and pay our taxes. The tax rate will be 20% (married filing jointly) if the net capital gain is $583,751 or more. Given that we sold it for $680,000 and have a zero basis we are $96,249 over the maximum amount for the 15% tax bracket. I added up all the fees related to this sale (brokers commission, title fees, conveyance fees, surveyor fee, etc) and that equals $41,309.56. So, our net gain appears to be $638,690. Thus our tax rate will be 20% unless there is something more I can do to lessen it.

One final question- The Tax Caster link you provided estimates taxes for 2023. Will Turbotax have a 2024 estimator out soon that we can use?

[marctu]

Thank you for the follow up.  Yes there will be a new one soon though the 2023 will get you in the ballpark.

All the best,

Marc T.

TurboTax Live Tax Expert

27 Years of Experience Helping Clients

[Sym1]

Hi! I have a similar question…I’m a California resident and sold a 2nd home in Hawaii with a profit about $300k. I also had stock losses of approximately $100k. Can this be used to offset the gain with the property in Hawaii? i filed on TurboTax using Hawaii state for 2nd state filing and it did take the loss to offset the gain but Hawaii is telling me I did not source the losses in Hawaii so I can’t use it. They are still holding my money from Harpta. So I now may need to amend it. I’m surprise if TurboTax would be wrong! 

[AmyC]

No. Your HI tax return is based on your HI income. When you are going through the program, you allocate which income belongs to HI. HI has figured out that your stock losses are not part of your HI income. You may not need to amend - if they correct the issue.

On the other hand, states compare returns. You may need to amend your CA return once HI is settled. A larger tax bill to HI could mean a CA refund for you. Your resident state of CA will allow a tax credit for the double taxed income from HI. The credit will be the lower of the state tax liabilities on the same taxable income. You may owe your resident state,  if they have a higher tax rate along with differences in how the taxable income is calculated.

[Sym1]

Thanks so much! I didn’t think about amending the CA taxes also which makes sense. I think I’ll need to have a tax person help me on this as TurboTax did not separate my capital losses when it filed my HI tax return. I expected it was going to be an easy filing since it always has been. Thanks again!

[RaydeeohMan]

As a California resident who sold real estate in Hawaii resulting in a capital gain, once I have completed my federal return should I file my California tax return first and then my Hawaii return, or vice-versa?  I obviously want to avoid having to pay taxes for the same capital gain in two states. 

[DawnC]

Prepare the nonresident HI return first.   That way, when you prepare your resident CA return, TurboTax can capture the taxes paid to HI to enter as a credit on your CA return - to avoid the double taxation.    Both CA and HI are going to tax you, but you will get credit for the tax paid to HI on the CA return.  

[karenkailua]

@DawnC  does that situation apply to all states?  I am a Hawaii resident, and I sold a rental property in Virginia. I'm using TT Premier (download) and I did my nonresident Virginia return first and was taxed on my capital gains from the rental property sale. Then when I did my resident Hawaii return, it showed my HI net capital gain as a number that was the sum of the cap gains from the rental property plus the cap gains I have from my investments. Why should Hawaii count the cap gains from the sale in Virginia? That affects the subsequent calculations... it causes my taxable income to be 201K higher, and I am being taxed 7.25% on that. So bottom line, I will pay tax to HI and tax to VA on the same cap gains from sale of the rental property in VA. That doesn't seem right?

[RobertB4444]

That is correct.  Although Hawaii will give you credit for the tax that you paid to Virginia on the return.  Virginia's tax rate is lower than Hawaii's so you'll end up paying the Hawaii tax rate on the Virginia sale.  It's just that you'll pay part of it to Virginia.

@karenkailua 

[karenkailua]

@RobertB4444  That is somewhat of a relief, better than paying both! But... I'm not seeing that anywhere in the forms. I'm studying the VA and HI returns in forms mode and can't see where I can confirm that is what has been done. Can you point me? 

Appreciate any help!