Capital Gains Tax on the Sale of a House?

Question

We are starting to get ready to put our house up for sale. We have lived in the house for 7 months. We bought the house for $81,000, did $10,000 in remodeling work and want to sell it for $130,000. I need to know what I will be looking at as far as the capital gains tax. The house is in Georgia.

1. Is it 30% of the profit if sold within the first year?

2. Can I deduct the cost of the remodeling we did?

3. Does it go down to 15% after the 1st year?

4. Do I have to pay it at closing or can I pay it at the end of the year when I file my income taxes?

Answer 1

If you were to live in the home for at least 2 years you could exempt up to $250k if single, up to $500k if married.

Otherwise, if you are not moving for work related reasons, you are looking at paying capital gains on your profit figured like this:

$130k sales price
- $81k purchase price
- $10k improvements added
- selling costs

= profits

Capital gains rates are dependent on your income. Short term gains (less than 1 year) are taxed at your ordinary marginal income rate, so the tax could be as high as 35%. Long term gains (more than 1 year) are generally either 10% or 15%, again depending on your income.

If you wait to sell until 2008, you could take advantage of the capital gains rate being capped at 10% in that year.

As far as when you need to pay it, that is dependent on your tax situation - you could end up owing penalties if you don't pre-pay enough taxes in other ways to meet one of the 'safe harbor' tax requirements. You should probably consult a tax advisor to determine what is best for your situation. Depending on their assessment of the situation, you could have money withheld at closing, pay quarterly estimates, or pay by April 15 of the following year.

Answer 2

Since you only lived there for 7 months, you'll pay federal capital gains tax on the gain unless you're moving because of a job transfer or health reasons - then you could probably exclude some of the gains from federal income tax.

The tax will be either 5% or 15% depending on your total taxable income for the year, if you don't close on the sale until you've owned the house for a year and a day. If you sell and close before that, tax will be at whatever your tax rate is, based on all of your income - the gain would be ordinary income and you wouldn't get the long term capital gains rate tax break.

The gain would be the difference between the selling price minus selling expenses like realtor's commission, minus the original cost and also the cost of remodeling.

You actually have to pay when you file your return at the end of the year, but if you don't pay it earlier as a quarterly estimated payment, you could be subject to a penalty for underwithholding - if your total withholding for the year is at least as much as your previous year's total tax, or if you owe less than $1000 with your return, then there's no penalty.

Answer 3

The profit is Sale Price - Basis

Basis is Cost + additions - depreciation.

The profit is added to your other income during the year in which you receive it, and is taxed as regular income, and would be payable April 15.

If the profit is a "capital gain" which means you held it for more than one year, the tax rate on the profit is capped at 15%.

As you get closer to that 1 year mark, it will become increasingly worthwhile to delay the final Closing on the sale until that has passed. You can enter a contract today, but the duration of ownership is determined by the date title is transferred.

* To qualify for the total exclusion from capital gains mentioned above, you have to occupy the place as a primary residence for two years out of the five prior to sale. Renting won't qualify.

Answer 4

In Wisconsin you have to live in the house for two years to defer the capitol gains.You can deduct the cost of remodeling.You can deduct the cost of any help you hired.You can not deduct your time and labor.You can pay at the end of the year. If you dont want to live there yourself you can rent it out for the next 1 1/2 years then sell.There is a different tax base when renting.But your home and work may be destroyed in a year and a half.

Answer 5

Look up 1031 exchange. Its a tax loop hole. If you role the equity into another property then you take 100% (How do you think Mr.Trump gets away with it.)

or

Take out a home equity loan for "remodeling" , as long as you can prove that you did the remodeling then you wont get taxed on money you took a lone out for. Then when you sell the house you're paying off two mortgages instead of cashing out. (remember that you already cashed out in the equity loan)