Property Sale Taxes

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ianferrel
Posts: 192
Joined: Thu May 29, 2008 5:27 pm

Property Sale Taxes

Post by ianferrel » Fri Nov 01, 2019 6:25 pm

I'm trying to help my mom think through several scenarios involving selling her house and I'm not sure I understand the taxation issues involved, so I'm going to try to provide the necessary info and then ask some questions.

The house is in California, and was originally purchased for ~$100k in the 1980s. It's been a rental property for the past decade or so, and a year ago she put ~$80k into repairs and upgrades. Current market value is ~$600k. She has an accountant who does her taxes for the rental income, so I assume the property's been depreciated, but I don't know by how much, so the basis is a little unclear to me. For now, I'm going to assume it's $100k for the sake of having a number to work with. I'm also going to assume she makes $60k in other income (again, to have something to work with).

She bought the house with my dad, then acquired full ownership after they divorced. She thinks that this has relevance to taxes but I can't figure out how and she's fuzzy on exactly what the relevance is. She also thinks that there's some kind of 1-time elderly person property sale capital gains exemption, but the only thing I can find like that went away in the 1990s when the current $250k homeowner cap gain exemption started.

She's considering three scenarios.

1. Move back into the house for 2 years, then sell it. The goal is to qualify for the Homeowner's Capital Gain exemption.
2. Sell it without moving back into it.
3. Sell it, then buy another rental property with the proceeds. The goal is to defer capital gains taxes entirely.

Questions:
1. Is there anything to the "acquired in a divorce in CA in the 1980s" that's relevant here?
2. Is there any other exemption like the elderly-person one she's thinking of?
3. Am I correct that the Feds will tax (most of) the capital gains at 15% and the amount that puts her over $434k in income at 20%, and that California will tax it at their normal income tax rates?
4. Will CA tax it the same regardless of whether she's a resident of CA at the time of the sale?
5. Is there something else she should be considering that I don't even know I should be asking about?

Thanks.

fabdog
Posts: 893
Joined: Wed Jan 16, 2013 1:59 pm
Location: Williamsburg VA

Re: Property Sale Taxes

Post by fabdog » Fri Nov 01, 2019 6:34 pm

Questions:
1. Is there anything to the "acquired in a divorce in CA in the 1980s" that's relevant here?
Not likely. If she traded something of more value to her ex for his half of the house, maybe could add that to basis. But most likely scenario is they split assets and she got the house. No change in basis
2. Is there any other exemption like the elderly-person one she's thinking of?
Not that I am aware of. Many places have exemptions or reductions in annual property taxes for seniors.. but not for capital gains
3. Am I correct that the Feds will tax (most of) the capital gains at 15% and the amount that puts her over $434k in income at 20%, and that California will tax it at their normal income tax rates?
In general although some may land in the zero bracket depending on her other income/deductions
4. Will CA tax it the same regardless of whether she's a resident of CA at the time of the sale?
Yes
5. Is there something else she should be considering that I don't even know I should be asking about?
the depreciation recapture on the rental. Whether her accountant has been taking the depreciation or not, the depreciation will need to be recaptured, taxed at 25%. This will be the case even if she moves back in for 2 years to avoid the capital gains hit, depreciation capture will still take place
Her accountant should be able to walk you through all of this

Mike

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