capital gains tax on home sale

[abdc]

Are there any ways of minimizing capital gains tax on a home sale when your gain exceeds the 500K exclusion?

Our home value is about $1.5 million, which represents a gain of about $700K after purchase price, renovations, and transaction costs.  So we already have a taxable gain of $200K (after the $500K exclusion), and that gain will likely continue to grow in the coming years unless we move and reset our basis. The house is in Washington DC, which has an 8.75% "state" tax.

If we sold today, I believe the 200K taxable gain would push us into the highest bracket ("normal" taxable income is in the 350K range).  As I understand it, that means our federal capital gains tax rate would be 20%. So the 200K taxable gain would be subject to a tax of 32.55% (20% federal + 3.8% Obamacare + 8.75% District of Columbia), or $65,100.  There may be other tax effects from the extra 200K in income but I haven't worked through those.

Is my understanding/math correct? Is there any way to avoid this?  Seems like we should have moved before the gain hit 500K.

[Zaphod]

Reduce the price of the house. Maybe a 1031?

Wonder if you could get a heloc for the amount over the limit and that charge back would eliminate the amount. Dont know at all, just shooting ideas from the hip.

[q-school]

This is what they call a good problem.
Not sure there is a solution to your problem however.

[Craigy]

Solution - move out of DC, wait for 3.8% obamacare tax to go away, make less money.

[StarTrekDoc]

hard to avoid this size appreciation.  DC and Uncle Trump want their share.

-use poor realtor friend and give high commission.

-dig deep on improvement receipts - consider renovation/updates prior to sale for quicker and higher dollars = balance on savings/cost of update/ease of sale.

 

[jfoxcpacfp]

abdc wrote:

Are there any ways of minimizing capital gains tax on a home sale when your gain exceeds the 500K exclusion?

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The best way to avoid in this case is to let your kids inherit it from you.

Zaphod wrote:

Reduce the price of the house. Maybe a 1031?

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Unfortunately, can't do a 1031 on a personal residence. Must be investment property.

I agree with q-school - a nice problem to have, but not worth reducing the price by $200k to save 32.55%. You're still way ahead of most. Just hope and pray the $500k exclusion stays in place until you sell it.

[hightower]

I was not aware of this rule.  Our house was only 140k when we bought it prior to all the renovations.  It's now worth around 600k (we think).  We have a balance of 295k on our mortgage.  So, as long as we sold it for less than 640k we would be excluded from owing any tax correct?

 

[Zaphod]

hightower wrote:

I was not aware of this rule.  Our house was only 140k when we bought it prior to all the renovations.  It’s now worth around 600k (we think).  We have a balance of 295k on our mortgage.  So, as long as we sold it for less than 640k we would be excluded from owing any tax correct?

 

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There is actually a lot of fine print in the rule that takes out all the costs, insurance, and transaction wise that give you a bit more breathing room.

[q-school]

And you have to live in it 2 of preceding five years as primary residence. And ps it's one of the benefits that is being looked at in latest tax proposal

[jfoxcpacfp]

hightower wrote:

I was not aware of this rule.  Our house was only 140k when we bought it prior to all the renovations.  It’s now worth around 600k (we think).  We have a balance of 295k on our mortgage.  So, as long as we sold it for less than 640k we would be excluded from owing any tax correct?

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Mortgage balance is irrelevant, which is often misconstrued as affecting the gain or loss. You will be able to include all additions and renovations in your basis (that are not ordinary expenses) so keep good records. You will also be able to reduce the gain by your fixing up costs and sales costs (commissions, for example). Often, people don't realize how much they have actually invested in the homes once purchased, so it wouldn't hurt to go back now and begin constructing a history trail of your expenditures.

[Rotish]

If you could get the buyers to cover your closing costs, you could afford to cut the price. May be a long shot to find that kind of buyer though...

[StarTrekDoc]

Rotish wrote:

If you could get the buyers to cover your closing costs, you could afford to cut the price. May be a long shot to find that kind of buyer though…

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That's actually a pretty good idea.  You don't offer this up at the initial asking price.  When an offer comes in and getting to the final negotiated price and details, you can counter with that -- ask them to pay all closing costs and lower the price accordingly.  That will lower the stated sales price and their property tax burden year-to-year.

It'll only work for those who aren't struggling with a minimal down payment.  It'll shave 1-2% YEARLY on their savings while 20%+ one time on yours.

[AR]

I'm also shooting from the hip here, so to speak.  I'm sure what I'm about to propose is probably not kosher, though I'm not exactly sure why (step doctrine, perhaps).  Maybe there is a more sophisticated way to do the same thing.

Let's say cost of property is 800K, and fair market value is 1.5M.  Sell the property to trustworthy sibling/friend/child/parent for 1.2M.  Because the market value is 1.5M, you've given a 300K gift.   Then buy the property back for 1.2M.  Again, that's below market value so you've received a 300K gift.

In both cases, just count the gifts towards the lifetime exemptions.  Now your basis is 1.2 million, you can sell to another party for 1.5 million and pay no tax on the sale.  There are probably some paperwork and transaction costs, but you're not going to involve any agents (maybe just an hourly real estate attorney) or anything like that so those costs should be less than tax paid.

A more advanced version of this is basically do it each time the market value of your house is about to reach 500K over cost basis. Then you do the sale and buy back, but there is no messy gift tax issue.  In other words, you buy for 800K, zillow says that the property is worth 1.2 million, so you sell and buy back at 1.2 million, making your new basis 1.2 million.  In a few years, the property has appreciated to 1.6 million, so you sell and buy back at 1.6 million increasing your basis again.  Then after a few more years, it has appreciated to 2 million.  At that point you sell for real and pay no tax on the 1.2 million appreciation.

In case it's not clear, I'm not seriously suggesting that anyone actually do this.

[AZdoc68]

To my knowledge, you are stuck paying the cap gains tax unless you can come up with enough "home improvement expenses" you paid over the years (which are added to your home's sale basis) to get under the $500k exclusion.  Again, a good problem to have even though none of us likes to pay taxes.

[jfoxcpacfp]

StarTrekDoc wrote:

That’s actually a pretty good idea.  You don’t offer this up at the initial asking price.  When an offer comes in and getting to the final negotiated price and details, you can counter with that — ask them to pay all closing costs and lower the price accordingly.  That will lower the stated sales price and their property tax burden year-to-year.

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It's a wash. The closing costs you would have paid reduce your gains.

SP $1.5K less $150k closing costs less $700k basis = $650k gain

SP $1.35k less $700k basis = $650k gain