Capital Gains

[Lisas275]

We sold our home in WA (owned for 1 year 9 months), payed cash for a truck and 5th wheel and are now living full time in our rv. We have also become SD residents. I would like to know what we can deduct, if anything, to lower the amount of capital gains tax that will be owed? I was also told by someone that we have 2 years to pay the captial gains tax owed. Is that true? And lastly how do I calculate accurately what will be owed?

[NateTheGrEAt]

Hi Lisas275,

Congrats on the big move!

At this point, having already sold the house, there is nothing you can do to affect the amount of capital gains tax owed. Capital gains tax would be based on your amount of capital gain, above the exemption. 

If you owned and lived in your house for at least two of the five years immediately preceding the sale, then you can exclude up to $250,000 of capital gain. If you're married filing jointly, you could each exclude $250,000 for a total exclusion of $500,000. 

Your gain is calculated as your sales price, minus sales expenses (things like title costs, real estate commissions, etc.), minus your basis. Your basis is what you originally paid for the house, plus costs incurred over the years of ownership for improvements, and some of your original closing costs. 

So, for example. Let's say you bought the house 20 years ago for $100,000 and paid $1,500 of closing costs. While you owned the house you spent $33,000 building an addition and remodeling the kitchen. Your basis would be $134,500. If you sold the house for $750,000, your capital gain would be $750,000 - $134,500 = $615,500. If you were married filing jointly, you could exclude $500,000 of that gain, so your taxable gain would be $115,500.

Any capital gains tax is due by the time you file your next tax return. If you sold your home in 2021, then you would file your tax return in early 2022. If you have a large capital gain, you should plan to make an estimated tax payment soon so you don't have a huge balance due on the return (and a possible underpayment penalty). 

Your capital gains tax depends on your total amount of capital gain and total amount of other income. The gain would be taxed at either 0%, 15% or 20% depending on the amounts. 

[Lisas275]

Thank you for your response. One last question. I have read that if you purchase another home within the year that you could offset some of the tax. Is that true? 

[NateTheGrEAt]

Lisa,

Not anymore. That was the law prior to 1997. However, it is no longer the case.

There is a provision in the IRC for what is called a 1031 exchange, where you can defer gains by purchasing a replacement property, but that only applies to property used in a trade or business (such as rental property). It is not applicable to a personal residence. In addition, to perform a 1031 exchange there are strict guidelines and timelines on the use of the funds and you cannot apply them after the fact. 

There is also a new provision in law regarding Opportunity Zones where you can defer capital gains tax by investing the proceeds in an Qualified Opportunity Fund. However, you only have 180 days from the date of sale to do this. Also, be aware that this form (8997) is presently not supported in TurboTax. Here is some IRS information on Opportunity Zones: https://www.irs.gov/credits-deductions/opportunity-zones-frequently-asked-questions