Crazy thing about Federal Capital Gains Tax

[Vincent Fong]

Hi,

Regarding federal cap gain taxes, let's say I have a house I'm selling for $1,000,000 and my adjusted cost basis is $100,000 net (I bought the house 10 years ago) My annual income is $5000.  Is it the case that:

(1) My income tax bracket should be 10% which means my long term capital gains should be 0%.  

or

(2) do you also count the gain of $900,000 as income, which means my annual income is $905,000, which means I'm in the top 39.6% income tax bracket and therefore my LTCG is 20%?