Selling our primary residence with a gain of one million dollars total. How can I figure my tax liability?

Question

Total cost is 200,000. We are thinking of a sale price of 1.2 million. Live in Massachusetts. Husband is Sch C self-employed builder. We might buy land and build our next house so can we deduct the materials on the next house in this year too, giving a net loss?

Answer 1

Assuming the figures you gave, your gain is $1 million. You get a $500,000 exclusion if you lived in it as your principal residence for 2 of the 5 years prior to the sale. In that case, you'd have a taxable gain of $500,000. This would be treated as a long-term capital gain and would generally be taxed at 15%, though there are occasional exceptions to that.

The fact that you are buying or building a new home is a totally separate issue and has no impact on the tax on the gain on the sale of your residence. The cost of the land and construction materials would figure into the basis for the new home but have nothing to do with the sale of your current home what so ever.

The two respondents who mentioned rolling over the gain into your new home are 10 years out of date. Ignore them. The old Rollover Replacement Rule was replaced with the current exclusion in 1997 if memory serves correctly. It was only a deferral on the taxation of the gain. The current rule is a full-fledged exclusion from tax that you can exercise once every 2 years.

The other comment is from someone who doesn't realize that there are a fair number of us here who DO know what we're talking about. If you follow up what I've posted here with the IRS you'll discover that it's correct information. Specifically, get a copy of IRS Pub 523 http://www.irs.gov/pub/irs-pdf/p523.pdf and all will be revealed to you.

Answer 2

Donald C is referring to old rules that have been gone for many years, so his comments are not correct.

If you lived in your house as your primary residence for at least two of the five years immediately preceding the sale, and owned it for at least two of those same five years, you'll be able to exclude $500K of the gain if you file a joint return. You'll also be able to subtract the cost of any improvements you made, and selling costs like realtor's commissions. Whatever's left of the $1,000,000 will show as a taxable capital gain.

It doesn't matter what you do with the proceeds, so there's no deduction for any costs for the next house.

Answer 3

I'd jump on that wagon in a heart-beat. Most of my family is deceased, I only have a few close friends who would more than support the decision & be waiting for me patiently to finish, & I could certainly not only do the isolation, but I'd actually enjoy it. I learned at a very young age how to deal with being alone, how to occupy my mind, and how to maintain steady in the face of what might seem to be a terrible situation.

Answer 4

Bostonian is, as usual, correct. As long as both you and your husband lived in the house as your principal residence for a total of two of the last five years, you will both qualify for the "Section 121" exclusion. $250,000 for you and $250,000 for your husband for a total of a $500,000 exclusion. Therefore, for a total gain of $1,000,000, your total taxable gain will be $500,000.

Because Section 121 is an exclusion provision and not a postponement of gain provision, the basis for the new residence will be its cost.

While it is possible for you to handle the tax consequences of this yourself, with the amount of money involved I recommend you consult a competent tax specialist.

Good luck,

Answer 5

i would not risk such an issue on here with people who may not be very familiar with the laws in your state..instead contact your CPA and get the right answers the first time..better to be safe then sorry

Answer 6

Invest every bit back into next house and you have no tax liaibility.

Answer 7

If you roll the proceeds into a new home you can avoid the potential liability. Of course, check with your CPA.. Good problem to have, congrats.