Help me understand Capital Gains

Ok, I’m thinking about moving before the two years thing on this house. I like the house itself, but the location is not as good as I hoped. There’s a lot of noise, the kinds of noise you can’t know about until after you move in.

So how exactly does the Gains tax work? I only get taxed on any money I make above the original value of the house, right? But how exactly is that figured? Is it straight from the offer made by the other person on the house? What about fees? For example, if I agree to pay closing costs, to help sell the house, do those get taken out of the gains? Is there any way to reduce the tax? If I am selling fairly quickly after buying (say 8 or 9 months), the price is likely to be about the same as I paid for it. In that case, would there be no gains at all, most likely, so I won’t have to worry about the tax?

I know I could google a lot of this, but I figure someone has gone through this before and could simplify it all for me.

Plow any gains into a new house (by buying a more expensive one), and you won’t be taxed. It’s the simplest approach to dodging this issue.

That applies even under the 2 year rule? I didn’t realize that. That helps a lot, actually.

They’ve made some changes to the rule regarding realization of taxes from home sales, so I’m not sure that Dave is right. As in I’m really not certain, I think you used to be able to avoid tax if you bought a more expensive home; now I think there may be an amount you are not taxed on, but only if you owned the home for a couple of years. I don’t know if the old “buy a new home of greater value, don’t pay tax” rule still exists.

However, with the proviso that I am not an accountant, so listen to me at your own risk, I believe that the costs of the realtors’s commission and other closing costs are generally not deductable, but they are added to the basis in the home. In other words, you would not be able to deduct the closing costs for the purchase of your new home, but the closing costs you paid for your old home will be added to what you paid to determine your basis for being taxed (and of course, the closing costs you pay for the new home will be added to your basis for that home should you ever sell it and realize a taxable event).

I think you can deduct points (where you buy down the interest rate), but I’ve generally heard that is usually a losing proposition (to buy the points, not to take the deduction).

I think it does, as long as you can prove the home in question is your primary residence and not some investment property you’re flipping. Ask your agent/attorney/cpa/whatever what the laws in your state are, but it worked for me and my wife in somewhat similar circumstances this year in California.

Here’s a quote from Bankrate.com you might find useful, Robert:

When you sell your primary residence, you can make up to $250,000 in profit if you’re a single owner, twice that if you’re married, and not owe any capital gains taxes.

“Most people are not going to have a tax obligation unless their gain is huge,” says Bob Trinz, a senior tax analyst at RIA, which provides tax information and software to tax professionals.

Some sellers are surprised by this break, especially if they’ve been in their homes for a while. That’s because before May 7, 1997, the only way you could avoid paying taxes on your home-sale profit was to use the money to buy another, more-expensive house within two years. Sellers age 55 or older had one other option. They could take a once-in-a-lifetime tax exemption of up to $125,000 in profits. And in all instances, there was tax paperwork (Form 2119) to fill out to show that you followed the rules.

But when the Taxpayer Relief Act of 1997 became law, the home-sale tax burden eased for millions of residential taxpayers. The rollover or once-in-a-lifetime options were replaced with the current per-sale exclusion amounts.

Looks like the two-year thing is meaningless now.

Gotta keep reading:

“Generally, if you owned and used the home as your main home for periods totaling at least two years within five years ending on the date of these sale, you’re eligible for the exclusion,” says RIA’s Trinz.

Yup, didn’t get that far. I read too much into the “buy another home within two years” part. Thanks Mr. Frog.

Ah, so now the “I need a noise machine that is basically a jet engine except louder and without all the wind” thread comes a little more clear.

I’m a CPA, and thought I’d try to get you pointed in a direction on this. But here’s a caveat: I haven’t been in public practice for almost five years, so my 1040 fu is a bit rusty.

Anyway, as I read it, the qualifying test is not whether you’ve owned the home for two years. It’s whether you’ve taken this exclusion in the past two years. Might be a distinction without much difference in your case, I don’t know. So if you’re a first-time homeowner, or lived in a rental for a while before buying the current place, you should be okay. But here’s the thing I’m fuzzy on: the pubs describe a “two-year period ending on the date of the sale” - but when you exclude income or gains, you do it when filing a return. So it’s unclear to me if the real test would be two calendar years before the sale, or two 1040 filing dates prior. Could be a pretty significant difference. Most likely academic, though, since you describe a very short holding period (9 months).

If you have made the election recently, then you’re outta luck. But unless you’re in an area where real estate is going crazy, it shouldn’t be too bad. The price probably won’t have run up that awful much.

Also, generally in tax, you calculate the gain on a sale of an asset by starting with the actual final sales price (not necessarily the offer) and subtract from that all costs of sale (realty fees, appraisals, inspections you paid for, etc) so you get to the cash you truly realized from the sale. Then, you subtract your adjusted basis in the asset from that to arrive at your gain. Your adjusted basis can be calculated by starting with your purchase price, adding all your filing fees, title insurance, other settlement and closing costs, and the cost of any improvements you made. I think ‘improvements’ is where you might have a little wiggle room - you wouldn’t believe what kind of homepwner expenses some peeps will try to shoehorn here - but I wouldn’t recommend being too aggressive without a tax-specializing CPA signing off on it. The fucking IRS are worse than mafioso when it comes to their interpretation of how much of your asset base they’re entitled to.

Anyway, there’s a good little table the IRS came up with to help with adjusted basis calculations, and then coming up with the gain in the IRS Pub on this deal. Actually, it’s full of pretty good general info on the whole topic, and is pretty understandable (in my opinion): Publication 523.

Hope it’s helpful. Feel free to ask any more questions if you have any, and I’ll do my best to answer.

Ah, so now the “I need a noise machine that is basically a jet engine except louder and without all the wind” thread comes a little more clear.

I’m a CPA, and thought I’d try to get you pointed in a direction on this. But here’s a caveat: I haven’t been in public practice for almost five years, so my 1040 fu is a bit rusty.

Anyway, as I read it, the qualifying test is not whether you’ve owned the home for two years. It’s whether you’ve taken this exclusion in the past two years. Might be a distinction without much difference in your case, I don’t know. So if you’re a first-time homeowner, or lived in a rental for a while before buying the current place, you should be okay. But here’s the thing I’m fuzzy on: the pubs describe a “two-year period ending on the date of the sale” - but when you exclude income or gains, you do it when filing a return. So it’s unclear to me if the real test would be two calendar years before the sale, or two 1040 filing dates prior. Could be a pretty significant difference. Most likely academic, though, since you describe a very short holding period (9 months).

If you have made the election recently, then you’re outta luck. But unless you’re in an area where real estate is going crazy, it shouldn’t be too bad. The price probably won’t have run up that awful much.

Also, generally in tax, you calculate the gain on a sale of an asset by starting with the actual final sales price (not necessarily the offer) and subtract from that all costs of sale (realty fees, appraisals, inspections you paid for, etc) so you get to the cash you truly realized from the sale. Then, you subtract your adjusted basis in the asset from that to arrive at your gain. Your adjusted basis can be calculated by starting with your purchase price, adding all your filing fees, title insurance, other settlement and closing costs, and the cost of any improvements you made. I think ‘improvements’ is where you might have a little wiggle room - you wouldn’t believe what kind of homepwner expenses some peeps will try to shoehorn here - but I wouldn’t recommend being too aggressive without a tax-specializing CPA signing off on it. The fucking IRS are worse than mafioso when it comes to their interpretation of how much of your asset base they’re entitled to.

Anyway, there’s a good little table the IRS came up with to help with adjusted basis calculations, and then coming up with the gain in the IRS Pub on this deal. Actually, it’s full of pretty good general info on the whole topic, and is pretty understandable (in my opinion): Publication 523.

Hope it’s helpful. Feel free to ask any more questions if you have any, and I’ll do my best to answer.

Oh, improvements might counter the gain…I never thought of that. We’ve made several, actually, most of which should count as expenses we’ve put into the house (like fixing garage doors, air conditioning issues, etc.). That’s nice to know.

And yeah, that was the white noise thing. Assholes actually drive by at 1am pumping bass so loudly that our windows rattle. Police won’t do shit about it, either.

Careful about this. I believe there’s a distinction between an actual improvement (something new, like a deck, fence, sunroom, etc), and routine maintenance (fixing a broken heater). I’m sure you can find more details on-line somewhere.

Squashed so soon, Phil? Oh well…you are probably right. Still, genuine maintenance that needed to be done to raise the value of the home should count, IMO. I’m not saying it does; only that it should. At the end of the day it keeps me from making a profit on the home.

If something raises the quality of the home above the purchase condition then it’s not maintenance it’s an improvement and comes into play when calculating cost basis for capital gains purposes. Something that just maintains the quality of the home is not an improvement and doesn’t factor into capital gains calculation.

So if the roof needed to be replaced, it’s an improvement if the house had a completely destroyed roof upon purchase but not an improvement if the house had a good roof when purchased. This can get confusing pretty fast, especially in cases where a project had an improvement aspect as well as a maintenance aspect, such as replacing a broken down tiny deck with a huge deluxe deck with built in hottub.

As always, don’t 100% trust internet advice and consult your tax professional for the real scoop.