Reducing or Eliminating Capital Gains Exposure on Sale of Personal Residence
If you are reading this page, your home, it is likely that your home has appreciated in value! That’s great news but it comes with tax on capital gains, especially for an aging America and all homeowners who have owned their properties for many years. Some of that value increase is likely taxable as a Long Term Capital Gain if not otherwise exempt under the Internal Revenue Code.
Calculate your estimated tax on Capital Gains
Use this calculator to estimate the capital gains taxes that would be due as a result of the sale of an asset (investment property or primary residence) held for more than one year. Federal (and Medicare) and CA State CAP GAINS tax rates are set forth at the bottom of this page. Although this overly simplified calculator will provide some insight, it is an approximation only. Note that this calculator assumes worse case / highest tax rates without application of any applicable §121 exemption; your results may differ. Do not rely on the results without the added / needed advice and guidance of a tax or legal professional. A complete analysis required substantially more details and nuance that contribute to a full financial, tax, estate planning, and legal analysis.
All or a portion of the profit on home sale may be tax-free
Most home sellers don’t have to report the transaction to the IRS because the profit does not exceed $250,000 for single taxpayers or $500,000 for married taxpayers (§ 121 Exemption). However, if you’re one of the exceptions, knowing the rules will help you hold down your tax bill. TurboTax addresses some of the most common topics, concerns, pivot points, & solutions:
- Do I have to pay taxes on the profit I made selling my home?
- How do I qualify for this tax break?
- How do I qualify for a reduced exclusion?
- Deciding whether to take the exclusion
- Do I have to report the home sale on my return?
- Figuring the gain on the sale of a home
- What is the original cost of my home?
- What is the adjusted basis of my home?
- Postponed gains under the old “rollover” rules
- Converting a second home to a primary home
But what if your NET sales proceeds exceed your §121 Exemption – Deciding whether or when to sell includes these basic options:
- DON’T SELL. You might choose to retain ownership regardless of whether you have outgrown your home’s size & needs and you have sufficient funds to pay maintenance and other costs. Beneficiaries will receive stepped up basis (FMV of property) on date of death.
- SELL. You might choose to sell your home for any number of reasons in which case you may be required to pay the full tax on Capital Gains in the year of sale. To mitigate your exposure, you would try to increase / adjust the cost basis with added, provable capital improvements; or
- DEFER or ELIMINATE. With carefully customized legal & tax documentation, there are ways to facilitate tax deferral (not avoidance) or eliminate the tax on Capital Gains portion of NET sales proceeds.
As an example of deferral, IRC § 453 can be used to sell your home on an installment basis that defers capital gains taxes either on an incremental basis or to a future balloon payment. The positive impacts of spreading tax on some of the NET sales proceeds into future years cannot be overstated. Invoking this solution can materially affect your cash flow, and what health & government programs you might qualify for.
As an example of elimination, a charitable trust charitable trust is an irrevocable trust that may be set up during life or at death if you wish to leave all or some portion of your estate to charity. These trusts are used for philanthropic reasons as well as to obtain certain tax advantages. There are two specific types of charitable trusts: a charitable remainder trust and a charitable lead trust, often known as a “split interest” trust. may be an ideal tax-savings option for those that wish to make a substantial gift to charity. It can also operate as a remainder trust—set up to provide an income stream to a trust beneficiary (often you or your spouse) during the term of the trust, which is typically a fixed period, or the life of the named beneficiary. At the end of the trust term, the trust terminates, and the remainder of the trust value passes to specific chosen charities.
Is there a viable option?
Given these options, the smart move is to capitalize on the current market, maximize NET sales proceeds, and invest / grow the amount of money you would otherwise pay in taxes by deferring or eliminating the CAP GAINS tax. Ours are viable strategies that are customized to your specific needs and cash flow requirements. It absolutely makes good sense to discuss these matters.
To advance your thoughts, at no charge, we will confidentially gather key data in order to discuss your goals, timing, and property value that may lead to a consultation with our tax estate planning attorney (LL.M.) partners who will present you with several well-explained alternatives. They will then draft tax estate planning that serve your needs.
With the accepted tax estate plan, our TEAM lists your residence or I co-list it with your personal Realtor.
I stay personally involved as your real estate professional (listing Broker / Attorney) throughout all activities from start to finish and directly participate and facilitate maximizing NET sales proceeds while mitigating legal / tax liabilities. I coordinate the TEAM effort, maintaining open communications throughout.
My compensation comes from real estate commission and is contingent upon escrow closing.
Please call 888-529-6632 or email me @ Attorney@Stansen.com me to schedule an in-person meeting or conference call.
We’ll discuss property value, timing, the economy, trends, tax estate planning, cash flow, retirement aspirations, and implementation of strategies. Ours is a common sense, balanced, & communicative approach. With combined 100+ years expertise in real estate brokerage, law, estate planning, and tax, we will help you make informed and positive decisions to maximize your position!
For more information – call 888-529-6632 or Email
Everyone’s situation is different so call or email for a complimentary review. Our aim is provide you with baseline information and advice so you can make informed decisions.
To learn whether you have a gain or loss on the sale of your home, refer to:
For general information on the sale of your home, refer to:
- IRS Publication 523: Selling Your Home.
- Tax Topic 701: Sale of Your Home,
- IRS Publication 551 Cost / Adjusted / Other Basis.
- Topic No. 409 Capital Gains and Losses
- Application of 3.8% Net Investment Income Tax
Federal Tax rates on Capital Gains
The long-term Federal capital gains tax rate is either 0%, 15%, or 20% (assumed by calculator for worst case scenario) as of 2019, depending on this income schedule.
|Tax Rate:||Single Taxpayers||Married Filing Jointly||Heads of Household|
|0%||$0 – $39,375||$0 – $78,750||$0 – $52,570|
|15%||$39,376 – $434,550||$78,751 – $488,850||$52,571 – $461,700|
|20%||$434,551 or more||$488,851 or more||$461,701 or more|
Find out if the 3.8% Net Investment Income Tax applies to you
If an individual has income from investments, the individual may be subject to net investment income tax. Effective Jan. 1, 2013, individual taxpayers are liable for a 3.8 percent Net Investment Income Tax on the lesser of their net investment income, or the amount by which their modified adjusted gross income exceeds the statutory threshold amount based on their filing status.
The statutory threshold amounts are:
- Married filing jointly — $250,000,
- Married filing separately — $125,000,
- Single or head of household — $200,000, or
- Qualifying widow(er) with a child — $250,000.
In general, net investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, and non-qualified annuities.
Net investment income generally does not include wages, unemployment compensation, Social Security Benefits, alimony, and most self-employment income.
Additionally, net investment income does not include any gain on the sale of a personal residence that is excluded from gross income for regular income tax purposes. To the extent the gain is excluded from gross income for regular income tax purposes, it is not subject to the Net Investment Income Tax.
State Tax rates on Capital Gains
Because California does not give any tax breaks for capital gains, you could find yourself taxed at the highest marginal rate of 12.3% plus the 1% Mental Health Services tax (where income exceeds $1 MIL). This is maximum total of 13.3% in California state tax on your capital gains. It all depends on your tax bracket. Note that the calculator below is set at 12.3% and does not factor in the 1% Mental Health Services tax for those taxpayers annually earning more than $1,000,000.
Single or Married Filing Separately …
1.00 %: $0-$8,544
2.00 %: $8,545-$20,255
4.00 %: $20,256-$31,969
6.00 %: $31,970-$44,377
8.00 %: $44,378-$56,085
9.30 %: $56,086-$286,492
10.3 %: $286,493-$343,788
11.3 %: $343,789-$572,980
12.3 %: $572,981-$999,999
12.3 % + 1% Mental Health Services surtax where income is $1,000,000+