How is the capital gain calculated for a primary residence if we are using gain to purchase the next primary residence.

[CaliforniaHouse]

We have lived in our current primary residence for 2.5 years. As per the new tax laws, we do not qualify for gains exclusion as we do not meet the 5 out of 8 year rule. Having said that I wanted to know how much would be the capital gain tax that we will need to pay. We live in California. Say we bought a house 1 million and are selling it for 1.3 million. We have an outstanding mortgage of 800k.
1. How is the capital gain calculated on this. We are married filing jointly.
2. Can I carry over the capital gain to the next house (1031)?
3. Is the capital gain pro-rated (2.5 out of 5 years leading to 50% gain).

4. Do we need to consider any depreciation cost when calculating the capital gain?

[SweetieJean · Accepted solution]

1,  Using your example, your capital gain is $300,000 (less sales expenses). California taxes this at ordinary income  rates. The mortgage amount/payoff is irrelevant.

2. What you do with the money is irrelevant.  Section 1031 allows for tax deferral on the sale of a property used in a trade or business, or held for investment when exchanged for like-kind replacement property to be used in a trade or business or held for investment. A personal residence does not qualify,

3. The 5 out of 8 year rule has not yet been signed into law. Are you selling and moving due to a job change? 

4. There is no depreciation unless you rented out the property.

[TaxGuyBill]

For some weird reason, even though both the House and Senate had it in their bill, I don't think the 5/8 year rule was in the Conference Agreement.  Page 632 of the PDF says there was "no provision" in the Conference Agreement, and I haven't found it in the legal gobbledygook in the first part of the PDF.