My family is looking into moving but the house we are looking to sell has been bought out from our parents and we have had owned it in our name for less than 1 year.
We have lived in this house for 12 years. I see there is a lot of different answers regarding capital gains and short gains.
I understand that we have to pay capital gains. What we gathered online, we would have to add the profit from the sale of the house to our income and get taxed at whatever rate that is. I believe it was like 34%.
We want to buy a new house but do not want to loose over 1/3 of our money to buy a new house. Especially if we have to add that to our income.
My question is, do we have to pay capital gains/short gains on the total profit of the house even if we buy a new house? Or can we buy a new house without paying capital gains/short gains.
Owning the home for less than one year will subject your gan to tax at your marginal tax rate. If you wait until you owned it for a year you would get the favorable long term tax rate. What you do with the profit doesn’t affect your tax situation.
@clcRichard -your post is a little confusing.
everything hinges on the house you sell: buying another house has no bearing on the situation (it did through 1997 when the laws changed)
the capital gains is calculated as:
1) selling price of the house LESS
2) the purchase price of the house LESS
3) improvments you made to the home while you owned it LESS
4) the cost to sell the house (the commision is normally the big one) EQUALS
5) the capital gain
if this number is a loss, it is not deductible on your tax return
if this number is a gain, you MAY have to pay capital gains tax - and this is where you post gets murky. (What do you mean it was bought out from your parents?)
If you owned the home for less than 2 years and you are moving just because you want to, then you will pay tax on the gain..
if you owned the home for less than 1 year, then the tax is a short term gain and simply follows the ordinary income tax rates for your income level.
if you owned for between 1-2 years the tax is considered a long term capital gain and will follow the long term income tax rates for your income level.
if you owned the home (and lived in it) for at least 2 years, then the first $500,000 of the gain (I assume you are married) is exempt from tax.
@NCperson - I appreciate the reply. We bought the house from my parents in April. They had their name on the house before we bought it from them.
So say my wife and I make $100,000 a year.
We bought the house for $82,000. And the house sells for $300,000. That is a $218,000 profit.
Do I add the profit from the sale ($218k) plus my annual income($100k) to determine my tax bracket?
So either I will be taxed at 22% (if we just go by our annual income) or I will be taxed at 32% (if we add our income plus the profit of the house).
I am not sure if we add the two (income + profit) or just determine the taxes that we solely make from our income.
Thank you again for the reply.
@clcRichard - this may get a little more complicated..... how is it that you "bought" the home from your parents for $82k and it is now worth $300K in under a year? I use the word "bought" in quotes as it was not an arms length transaction.
Was there an implied gift in the transaction with your parents? (which would be to your benefit if so)?
How was the $82k determined? was there an independent appraisal to determine the value at the time of transfer?
@NCperson - My parents bought the house for me and my wife as we did not have great credit. We paid them the monthly mortgage but their name was on the house. Once our credit got better, we purchased the rest of what they owed, for $82,000. The house was originally purchased for me. We paid for what was left on the original mortgage. The house is worth about $350,000 (from appraisers and realtors).
if you sell the house within a year of it being put in your name, you owe tax at the ordinary income rate; it is just like getting more wage income.
HOWEVER, you may want to get a local tax professional to review this situation. You may otherwise pay a lot more in tax without that advice. The price you paid for the house implies a gift as it was probably worth a lot more than $82k when the transfer from your parents occurred. The higher the value of home at the time of that transfer, the less tax you will need to pay upon sale.
On the other hand, if you sell (and live in it) after two years, it's probably not going to matter due to the exclusion available; there would be no tax.
@NCperson - So for clarification:
I make $100,000 a year.
I sell the house for a $218k profit.
So I will have to add my income and the profit together, $318k, and get taxed at that rate? Would I be put in a new tax bracket? So instead of 22% (based on my job income, marginal rate) I would get taxed at 32%?
Or just tax the $218k at the 22% for my marginal tax rate (from my job income).
@clcRichard - you have it right, but it's the 24% tax bracket.
but that is IF you stick with the value of the home being $82k and you sold before the one year anniversary of the transfer from your parents.
But I suspect the home was worth a lot more than $82k - and this is where the help of a local professional is suggested. if the house was really worth, let's say, $252,000 on the day of the transfer, meaning $170,000 was a gift and then the tax calculation is a lot, lot lower.
if you waited to close on the sale until after the 1 year anniversary of the purchase (but before the 2nd anniversary), the tax is only going to be 15% as it is a long term capital gain.
please see a local professional; they are going to save you more in taxes than what they are going to charge you.
I’m sorry for so many questions. I’m getting confused. You said I have it right but for which scenario? The taxing at 24% my marginal rate (based just on my job income) or adding the payout to my income making my tax bracket go to 34%?
there is only one scenario. you simply add the short term gain to your wages. You never stated whether you are single or married, but I will assume marreid
1) your wages are $100,000 and add to that the hypothical the $218,000 profit = $318,000 of adjusted gross income.
2) Then subtract the standard deducton of $25,900 leaves taxable income of $292,100.
3)if you look below, adding $218,000 means some of it is taxed at 12%, some at 22% and the rest at 24%
(Single) (Married Filing Jointly)
Up to $10,275
Up to $20,550
$10,276 to $41,775
$20,551 to $83,550
$41,776 to $89,075
$83,551 to $178,150
$89,076 to $170,050
$178,151 to $340,100
$170,051 to $215,950
$340,101 to $431,900
$215,951 to $539,900
$431,901 to $647,850