Income Tax extension/ Solo401k/ capital gains over 121 exclusion

[Rosalie Taran]

Hi BP community,

My husband and I will be selling our California home early next year and are expecting to have capital gains above and beyond the 121 Exclusion of $500K.

1. I have a home business and just opened a Solo 401k. My plan is to apply for an extension on our 2017 income taxes until we have received the proceeds from our home sale. Then contributing the max allowed contribution to the 401k for both my husband and I (using proceeds from sale) to off set our taxes owed for 2017. My assumption is that we would meet with a CPA and do a preliminary tax prep to discover the right amount to contribute to the 401K (instead of loosing the money to taxes)? 

2.Then when 2018 tax time rolls around and it is time to pay taxes on the capital gains above and beyond the 121 Exclusion we will again contribute to our 401k to off set our income to reduce the tax bracket we are in to possibly avoid capital gains all together or at least to the reduce the amount we will owe. From what I have read so far it sounds like the tax reform will allow those who are married with income below $77,200 to not have to pay capital gains. Are my interpretations correct?

3. Also, we will be moving to Idaho. When we do our 2017 taxes will we need to find a CPA in California for our 2017 taxes since the income was solely earned in California?

4. For 2018 taxes (moving prior to the end of June and home sale in May) with January through mid June income earned in California would we also, use a California based CPA?

Thank you in advance,

Rosalie Taran

[Dmitriy Fomichenko]

Rosalie,

you are looking at two separate issues here:

1) The capital gains from the sale of the property - this is passive income and you can't use it to contribute to the Solo 401k plan. The entire amount (over $500K threshold will be taxed). 

2) Contributions to the Solo 401k plan can be made from the earned income only. And if your business is sole-proprietorship then only you will be able to contribute to the 401k plan. If you wish to contribute for your husband also you may need to change your business structure and show self-employment income for your husband also.

I think what you might be trying to do so since you will have the proceeds from the sale which you can use for the living expenses can can contribute max allowed amount into the Solo 401k which you wouldn't be able to do otherwise because of the limited income?

So if you use this strategy you might be able to reduce your income tax but I don't think it will have any affect on your capital gain taxes. And yes, you are correct, having experienced CPA to guide you through this is a must.