Taxes on selling a house that has been held for a long time in Austin (West: sale, rental)

[teasipmom]

So if we've had a house for a long time (i.e., 1973 - it is my mom's homestead) and we sell it, do we have to roll it into another house? I understand that this is the only way to avoid paying a lot in taxes? I realize this is probably a question for an accountant, but thought I'd ask those knowledgeable realtors out there.

[Austin-HomeGirl]

I believe you are referring to Capital Gains tax.
I'm not a tax professional but this is my understanding. Please do consult a tax professional to double check me.

The tax code will allow your mom to exclude some or all gain from capital gains tax, if she meets the following conditions:

She owned the home for a total of at least two years in the five-year period before the sale.

She used the home as her primary residence for a total of at least two years in that same five-year period.

She hasn't already excluded the gain from another home sale in the two-year period before the sale.

If you meet these conditions, she can exclude up to $250,000 of the gain if filing single, $500,000 if filing jointly.

[TexasHorseLady]

That's pretty much correct. She'll want to consult a CPA to make sure of any impact on her taxes.

[FalconheadWest]

When owning a home that long, you need to understand that the taxes are not just the sale price minus the purchase price minus $250,000 for your taxable amount. You need to take into account any repairs and updates that have been done to the property in all those years. You would take the sale price minus the adjustable base, and anything over the $250k is taxable as an actual gain.

[fminogue]

Originally Posted by FalconheadWest

When owning a home that long, you need to understand that the taxes are not just the sale price minus the purchase price minus $250,000 for your taxable amount. You need to take into account any repairs and updates that have been done to the property in all those years. You would take the sale price minus the adjustable base, and anything over the $250k is taxable as an actual gain.

Only capital improvements can be used to add to the basis of the home. Not repairs. So be careful. A repair could be a capital improvement, such as a new roof, or a new improved air conditioning unit. But replacing a faucet is not a capital improvement, but is a repair, and cannot be added to the purchase price to adjust the basis of the home for calculating the new basis on sale of the home by the mother.

[Trainwreck20]

Originally Posted by fminogue

Only capital improvements can be used to add to the basis of the home. Not repairs. So be careful. A repair could be a capital improvement, such as a new roof, or a new improved air conditioning unit. But replacing a faucet is not a capital improvement, but is a repair, and cannot be added to the purchase price to adjust the basis of the home for calculating the new basis on sale of the home by the mother.

Just out of curiosity, if the total cost of a new roof deducted, or just the deductible portion if paid for by insurance?

[Listener2307]

Wouldn't we have to understand who "we" is when ownership of the house is discussed?
And how and when did "we" acquire the house? Mom bought it in '73. But that tells us very little.

[DashRiprock]

Much of this has been mentioned, but basically, the seller can exclude up to $250,000 (single) or $500,000 (married) in capital gain on the sale of a residence. Anything above that is taxable as a capital gain (generally 15%, but could be 20% depending on your income bracket). There are rules as to what qualifies as a residence, and you can add capital improvements to the basis.

I'm going to assume that when you referred to "roll[ing] it into another house", you are talking about a 1031 exchange. That only applies to investment property. I don't know any similar option for residental property.

When you say "we've had the house a long time" and that it was your mom's homestead, are you saying that you inherited it at some point, or is it still your mother's house? If you inherited it, you get to "step up" your basis in the property to its market value on the date of inheritence, which would presumably increase your basis and reduce potential taxes. If your mother still owns it and is selling, she'll unfortunately have 45-ish years of appreciation to account for, which on an Austin house is going to be quite steep. Essentially no way around that that I'm aware of other than the capital gain exlcusion, which she'll likely exceed.

If the house was ever used as a rental property, most of this is not going to apply and you're probably better off seeing a CPA.

[IC_deLight]

Originally Posted by DashRiprock

Much of this has been mentioned, but basically, the seller can exclude up to $250,000 (single) or $500,000 (married) in capital gain on the sale of a residence. Anything above that is taxable as a capital gain (generally 15%, but could be 20% depending on your income bracket). There are rules as to what qualifies as a residence, and you can add capital improvements to the basis.

I'm going to assume that when you referred to "roll[ing] it into another house", you are talking about a 1031 exchange. That only applies to investment property. I don't know any similar option for residental property.

Well older folks remember the older law. Until the Taxpayer Relief Act of 1997, a homeowner had to reinvest all profits into another primary residence to avoid capital gains taxes when selling their homes (if you were over 55 you did get a $125K one-time exemption ). The law changed 20 years ago and now you can exclude $250K/$500K profit from sale of your principal residence without having to reinvest it in another property.

[fminogue]

Originally Posted by Trainwreck20

Just out of curiosity, if the total cost of a new roof deducted, or just the deductible portion if paid for by insurance?

Excellent question, if you didn't pay for it out of pocket, it is not deductible. Only the amount you paid. Thanks for clarifying that!!