Capital Gains taxes

[sturisa]

I have a question on Capital Gains taxes:

I rent a condo in NJ and I own a condo in Jupiter, FL that was deeded to me a couple of years ago.

I currently have the condo in Florida up for sale. My question is when I sell the condo in Florida, what are the rules regarding capital gains taxes and is there a way to avoid paying capital gains taxes? What is the capital gains tax rate?

[JandKit]

Hi Sturiser,

Thank you for the questions that you offer.

When you sell your condo in Florida, you'll need to consider federal capital gains taxes. Here are the key points:

Capital Gains Tax Rules:

1. Short-Term vs. Long-Term: If you sell the property within a year of purchasing it, the profit is considered a short-term capital gain and is taxed at your ordinary income tax rate. If you've owned the property for more than a year, it's considered a long-term capital gain, which typically has lower tax rates.

2. Exclusions for Primary Residence: If the property was your primary residence for at least two of the five years before the sale, you can exclude up to $250,000 of the gain if you're single, or up to $500,000 if you're married and filing jointly.

You can avoid or reduce capital gains if you utilize:

1. 1031 Exchange: This allows you to defer paying capital gains taxes by reinvesting the proceeds from the sale into a similar type of property.

2. Holding the Property for Longer: Holding the property for more than a year qualifies you for the lower long-term capital gains tax rate.

3. Offsetting Gains with Losses: You can use losses from other investments to offset your capital gains.

Current Capital Gains Tax Rates:

• Long-Term Capital Gains Tax Rates: These range from 0% to 20%, depending on your income level. For example, if you're a single filer earning up to $40,000, you may qualify for a 0% rate.

• Short-Term Capital Gains Tax Rates: These are taxed at your ordinary income tax rate, which can be as high as 37%.

Goodluck to you!

[sturisa]

Ok, thanks for the answer, that helps but I have additional questions.

The condo is 40 years old, but I've only owned it for just under 3 years and since it was deeded to me there was no purchase price. I know from my income level that I'm in the 15% capital gains tax bracket. How then are the taxes determined, does it go back to the original purchase price 40 years ago or is it based on what the condo was approximately worth when I took possession of it in February of 2022? 

Also, I know that the cost basis or capital improvements helps to offset the capital gains tax, if I don't have accurate records or all the records from those improvements, can those be approximated? 

Thanks,

Sal S.

[BettieG]

To determine the capital gain on the sale of the condo, you will need to determine the cost basis of the property.  This depends upon how you acquired the condo.  I appreciate that you note that it was deeded to you, but was it gifted to you?  Was it inherited by you?  Did you purchase it?  Did you acquire it some other way?

How you came to own the condo dictates how you determine the cost basis of it, which is a necessary part of computing any gain on the sale of the condo.  For example, it you inherited the condo, your cost basis is the fair market value of the property on the date of the decedent’s death, though an alternate valuation date may be used if elected by the estate.

If you acquired the condo as a gift, determining the cost basis can become a bit complicated, but is generally the donor’s adjusted cost basis at the time of the gift (unless the fair market value was less than the donor’s basis at the time of the gift).  Further, if the donor paid gift tax in connection with gifting you the condo, that amount may increase your cost basis.

The starting point for calculating any capital gain is your cost basis, which may then be adjusted.  Any capital improvements may become relevant to your adjusted cost basis, but only those capital improvements that you made to the condo during your period of ownership.

I hope this necessarily general answer is helpful.  As you can see, the outcome depends upon how you acquired the property that was “deeded” to you.

[SusanR2]

Hi there!

You said the property was deeded to you but didn't explain the circumstances and that makes a big difference.  If for example, the property was deeded to you as a result of you inheriting it from someone who passed away and left it to you, you get the benefit of a stepped up basis meaning your basis is the fair market value of the property on the date of death.

If, for another example, you were deeded the property by a friend or relative as a gift, you are in the shoes of the giver.  Your basis is the giver's basis.  (Cost of property 40 years ago plus improvements, less insurance payouts, etc.).  You would need to get the info from the person who gave you the property.

In terms of "approximating", you need to be prepared to justify your figures in case of an audit remembering that IRS may have info on the property from the prior owner's tax returns.  You need to have some justification, back-up or evidence for the figures you will use on your return.  

If it was a gift and the giver filed a Gift Tax Return ask that person for a copy as it will have the information that was submitted to the IRS as to basis.

If you don't have the necessary information and cannot obtain it from the prior owner or their family, you can try checking public records in the county to see if you can at least determine the original cost and date of purchase by prior owner.  Then you'd need to know if it was used as their main home or as a rental.  If it was a rental for any part of the time the prior owner owned it, you need to figure depreciation and any improvements that were depreciated, etc.   If it was always the main home, you need to know about capital improvements.  

The good news is you have some time before you have to file your 2024 return so you can do some research on these issues.  Good luck!

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