How much capital gains would I pay?

Question

I just purchased my first home. I bought a pre construction home. I bought it for 200k and put about 2k into it. I believe its worth about 260-280 already. I know about the housing slump but thats what it comps out at. Anyway, if I flipped it how much would I pay in taxes? Is it like earned income or a certain percentage. Also, can I roll it into anything besides real estate without paying taxes.

thanks

Answer 1

There are no taxes at all on the sale of your primary home but ONLY if you lived in it the last 2 years (or in some situations 2 or 3 of the last 5 years). If you just bought the home, you will not qualify for this exemption and it will be taxable.

If you have owned the home for 1 year or more then, you will probably qualify for long term captial gains treatment which is a 15% tax rate on your gain (if you paid $200K and put in $2K and sell it for $220K, then your gain is $18K and 15% of $18K is $2.7K) .

If you really "just" bought the house then your will be taxed at your ordinary income rate on the gain. Your rate depends on your tax bracket which could be as low as 15% but for most people is 28% or 31% or more. Also, you might have to pain state taxes too.

And, don't believe the "comps" its reasonably unlikely you're going to make a big profit flipping a house in this market--particurarily with pre-fab houses which are always on sale new from the manufacturer.

Answer 2

From what you are saying the home is your primary residence. There is an exclusion on capital gains for the sale of your primary residence if you have lived in it for 2 out of the last 5 years. The exclusion is up to $250,000 if single, and up to $500,000 if married. If you haven't owned it for the two year period you could shelter part of the gain if you are selling it for certain reasons (forced to move for job, etc.) If you have owned it for less than 1 year and sold it, you have short term gain, which would be taxed at your tax bracket. If you owned it at least 1 year and sold it, you have long-term gain, which is taxed at a lower tax rate. I've attached a link to an irs article about selling your primary residence.

Answer 3

The capital gain would be the sale proceed of your home minus the adjusted basis of your home.

The adjusted basis can be found
http://www.irs.gov/publications/p530/ar02.html#d0e1511

Most likely, your gain is the sale price minus the buy price minus the fix-up. Do not include your equity into the equation! That has nothing to do with the gain of your home.

If you have a gain from the sale or exchange of your main home, you may be able to exclude from income all or part of the gain.

This exclusion, up to $250,000 for individuals and $500,000 for married taxpayers filing joint returns, is allowed each time that you sell your main home, but generally no more frequently than once every two years.

To qualify for this exclusion of gain, you must meet ownership and use tests.

Ownership Test: During the 5-year period ending on the date of the sale, you must have owned the home for at least 2 years.
Use Test: During the 5-year period ending on the date of the sale, you must have lived in the home as your main home at least 2 years.
If you and your spouse file a joint return for the year of the sale, you can exclude the gain if either of you qualify for the exclusion. But both of you would have to meet the use test to claim the $500,000 maximum amount.

If you do not meet the ownership and use tests, you may be allowed to exclude a reduced maximum amount of the gain realized on the sale of your home if you sold your home because of health reasons, a change in place of employment, or certain unforeseen circumstances. Unforeseen circumstances include, for example, divorce or legal separation, natural or man-made disasters resulting in a casualty to your home, or an involuntary conversion of your home.

Thereby, you may need to pay capital gain tax on the $60K to $80K. Capital gains and losses are classified as long-term or short-term, depending on how long you hold the property before you sell it. If you hold it more than one year, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term.
Your tax rates that apply to net capital gain are generally lower than the tax rates that apply to other income and are called the maximum capital gains rates. For 2006, the maximum long-term capital gains rates are 5% or 15%. However, the short term is your marginal tax rate.
http://www.irs.gov/pub/irs-pdf/i1040sd.pdf
(page 10)

So. If you own and live in there for more than two years, you most likely would not need to pay capital gain tax.

If you own and live in there for more than one year and less than two, you will pay about $10,000 to $9,000.

If you own and live in there less than one year, it would be about $20,000 to $30,000 depend on your taxable income.

By the way, I had to make two other assumptions. First, you did not rent out or use it as home-office. Second, your tax return would not be effected by Alternative Minimum Tax. Otherwise your captial gain rate would be AMT rate of 26% or 28%.