Pay 0% capital gains on sale of house?

Question

Hi everyone,

I am trying to figure out my best option for a house that was gifted to me while my parent was still alive.   It was mentioned to me in a previous thread that I could pay 0% capital gains if my income the year I sell the house is in the bottom two tax brackets.  Is this correct?  Wouldn't the gain on the house be considered in my income, therefore pushing me into a much higher bracket?

The original thread is here:

http://www.biggerpockets.com/forums/12/topics/128749-calculating-capital-gains-on-sale-of-gifted-house.

I'm trying to understand when the 0% scenario is applicable and have been having trouble finding additional information.

Thank you!

Steven Hamilton II · Answer

Elizabeth,

She was gifted the home before they passed away. She did not inherit it.

One question however is: Was it in one or both parents names?  And did one pass before it was gifted to you?

If that was the case then you would have to adjust half of the house basis to the date of death.

Donald M. · Answer

How do I do the @person? As Steve Hamilton II pointed out, you cannot actually get a 0% capital gains rate, as you would only get this rate for the difference between your ordinary income and the next higher tax bracket, then pay a higher capital gains tax on that amount, and so on.

Some links that answer your question:

http://fairmark.com/general-taxation/your-tax-bracket/

https://ttlc.intuit.com/questions/1898605-long-term-capital-gains-added-to-agi

There is also $5.25 million lifetime gift tax/estate tax exclusion, but I think this is a new law that only began in 2013, but if something similar existed before that it would be worth investigating.

Sean Leone · Answer

@Dina Harleth that link doesn't work. Sorry I can't speak to tax law intricacies such you are pointing out. Since that exception seems to be quite specific I would definitely want a CPA that fully understands your specific situation. Good luck.

Tom V. · Answer

My understanding is that since you received it as a gift while your parent was alive, that low cost basis carried over to you.  If you had inherited it, the cost basis would have stepped up so you would not have had capital gains.

I think you get the first $250K of profits tax free through a homeowner's exclusion, but you would pay tax on the rest of the profit.  I believe since it was a property you used personally you are ineligible for a 1031 exchange.

Wayne Brooks · Answer

You'll likely need to give more details...value when it was gifted, value today, how long have you owned it, has it been your primary residence.

@Steven Hamilton II ??

Steven Hamilton II · Answer

@Dina Harleth ,

That won't matter that is was only in one parents name It was marital property.

Dina Harleth · Answer

It was only in one parent's name.  Thanks for your thoroughness!

Dina Harleth · Answer

@Donald M.  To get the @ symbol to appear, type "@" and begin typing the person's name (without a space in between).  Their name should pop up at the bottom of the field and then you'll be able to click on it.

Thank you so much for those links!  They really clarified things for me.  And @Steven Hamilton II, thank you also for your explanation.  So the maximum amount any person could avoid paying any gains on would be 36,900, right, assuming 0 taxable income?   In that scenario the additional gains over 36,900 would be taxed at 15% up to 400k; i.e. the next ~365k would be taxed at 15%.   And then anything above 400k would be taxed at 20%.  Is that correct?

Thank you again!

Edited to add: I am still confused about this comment made on my original question:

With the correct planning and timing, you may be able to avoid  capital gains entirely if your annual income is low enough to put you in  the two lowest brackets.

You won't owe capital gains if you're in the bottom two tax brackets the  year you sell. Pretty simple to understand, but lots of details and  technical to pull off.

Post can be found here:

http://www.biggerpockets.com/forums/12/topics/128749-calculating-capital-gains-on-sale-of-gifted-house

It seems to me this would be impossible given the huge amount of gain I'll be liable above the at most ~37k that would taxed at 0%.

Elizabeth Colegrove · Answer

@Steven Hamilton II

Wouldn't the basis for the house be at what she inherited. Than she would get $250k off the difference. Capital gains would only be at the difference between the Basis (house value at time of parents death)+ 250k- current market value. This equals the amount you would need to pay capital games on.

Pay 0% capital gains on sale of house?

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