Capital Gain Taxes

[Bryant Harvey]

We are looking to sell a couple single family homes in Indiana. We have held them for 8-10 years. Is it better to sell them in different years to save on the capital gain tax? I've heard that if you sell them both in the same year that you pay 3.5% for your first house then your second house jumps up to 10%. I tried to look it up and it also seems that the capital gain tax percentage is also based upon your personal tax bracket. 

[Natalie Kolodij]

@Daniel Dietz is correct. 

So your income bracket determines the amount of the gains paid....but the gains bump up your income and then the amounts over the bracket are taxed at the next higher bracket. 

Selling in different years won't necessarily save you on tax- it will however spread out the tax burden. 

Couple questions....

Did you live in either during the past 5 years? 

Do you plan to purchase other real estate (houses, multi family, storage buildings, land) with the proceeds? 

Did you pay for any major improvements or repairs to the properties over the years? 

-----------------------------------------------------------------------------------------------------------

If you've lived in a home for 2 of the last 5 years you my qualify for a $500k gain exclusion on it as MFJ filing, but you'd still have the 1250 depreciation recapture gain at 25%

If you plan to use the proceeds to purchase other real estate...a 1031 exchange may be a really good option for you- it defers the gains and rolls them into the next property basically. 

To calculate the gains...your basis is determined by what you paid for the house + any major costs put into the house over the years...example:

You paid $100k

You spent $25k on a renovation 

Your basis is now $125k

You sell for $200k ...your basic gain is $75k 

If you also claimed $25,000 in depreciation as a deduction over those 10 years it has to be recaptured and will be a 1250 gain...

so now ...gain of $75k - tax rate dependent upon your tax bracket ...and $25k 1250 recapture gain taxed at 25% either way.