How do you figure Capitol Gain on a $300,000 lake house home?

Question

This is a second home. I have owned the land for 20 years. My husband and I literally built this house ourselves. I am thinking of selling but not if I have to pay the IRS $125,000 of my blood, sweat, and tears. So what I want to know is what is the tax percentage on $300,000.
And also is there any sneeky way to get out of Capitol Gain.

Answer 1

First off, there's no way out of paying any taxes. Well, that's not completely true; I'll get to that in a minute.

The gain on sale is fairly simple. Subtract the purchase cost from the sales price. The difference is the gain. And it's the GAIN that the tax would be based on, not the total selling price.

Since you built the place yourself, figuring your cost may be a bit tricky. The land is pretty easy -- whatever you paid for it. If you acquired it via inheritance the fair market value on the date that the bequestor died is your cost. For the house itself, add in the cost of the materials and any labor that you paid for -- carpenters, plumbers, electricians, etc -- but NOT the value of your own labor. Any improvements over the years are fair game as well, but not repairs. Hopefully you kept good records of all of the expenditures over the years.

Once you have the cost basis, you're almost home. Assuming that you sell it for $300,000.00 net after selling expenses (realtor's commission, certain closing costs, etc.) just subtract your cost from that and you have your gain.

Just for an example, here's some numbers.

1. Land cost: $20,000
2. Building materials: $35,000
3. Plumber: $8,000
4. Electrician: $5,000
5. Appliances: $12,000
6. Heating & AC Contractor: $12,000

Total Cost: $92,000
Net Sales Proceeds: $300,000

Gain: $208,000

Now, you have some deciding to do. If you sell this as a second home, the gain is fully taxable. There is good news there though, since you owned it for more than 1 year it's a long-term capital gain and is taxed at the lower rate of 10%. Your total tax bite would be $20,800.

There's a way to beat the tax man out of that $20,800, though. If you "switch" principal residences and make the lake home your principal residence for 2 FULL years you can sell it and exclude ALL of the gain from taxes. And you'll have 3 years to sell it to boot as you have to live in it for 2 of the 5 years immediately prior to the sale to get the exclusion.

Feel any better now?

BTW, in the worst case scenario where you can't prove what you paid for ANY of the acquisition cost and had to use a basis of zero, your gain would be the full $300,000 BUT it's still a long-term capital gain. Your worst case scenario sets the tax man's share at $30,000 -- a DARN sight less than $125,000!

Feel better NOW?

Answer 2

There are a few sneeky and legal ways to get out of the tax situation. If it is you personal residence for two of the last five years then (as a married couple) up to $500,000 is exempt. Since you built if from the ground up, they materials and repairs had to cost something. This is good at forming "basis" in the property. So you could move there for two years and then sell it tax free or you could take the gain on it. It would be taxed at the capital gains rate, which is capped at 15% for the highest bracket. There is a chance that you could also 1031 exchange the property taxfree but this would be used not to "cash" out on the property, just to move it to another like-kind property. If you have any questions, find a trusty accountant to talk with. We are starting to get really busy now with tax season but after the deadline (April 17th) is over, track us down to talk some different ways to help lower your tax liability.

Good luck.

Answer 3

The gain is what you made vs what you spent.

You bought property, built a house, added improvements (not including maintenance like painting), added landscaping. All those are costs of the house. Perhaps the costs were $50,000, perhaps they were $200,000 over all those years.

ALso, you can add costs for that which you spent in the last year to sell, plus the selling costs.
The difference between sell and cost is the capital gain. Sorry, it is fair that government gets their cut, usually about 30% of the gain or whatever. So, if you sold for $300,000 and costs totaled $200,000, then the gain is $100,000 and your tax is likely around $30,000. Then again, you have a check for $300,000 to pay the $30,000 since there is no mortgage or such.

Also, if you put the money into a new house, it is not a gain.

I blieve there is one time exemption for selling a house also. Use it now or when you retire for anotehr.

Answer 4

Investment property (i.e. your second home) is treated as a capital asset and subject to capital gains tax which is currently 15% for long-term assets.

You're calculation is really off: $125k/$300k = 42% tax???

Not going to help with any suggestions re: sneaky way of capital gain.

Consider this... the long-term capital gain rate is actually very fair and low at this time.

You should seek some advice from your local professional!

Answer 5

bostonian's answer is on point, and provides an excellent example. the only thing is that the long term capital gain rate is 15%, not 10%