capital gains

Discussion in 'Homesteading Questions' started by Ohiosteve, Oct 29, 2004.

  1. Ohiosteve

    Ohiosteve Well-Known Member

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    Can someone explain to me how capital gains tax will affect me on the sale of my place. I inheirited my families' homestead and just sold my 10 acre farm to a young Amish couple. I sold it for $110,000 and still owed 61,000 on it. Will I be taxed on my equity or the difference between what I paid and what I sold it for?
    This whole idea of paying a tax on something that I sweat blood for really makes me ill! I have heard that there is a once in a lifetime exemption on this tax. Is this an option? I want to find out how much of my equity will go up in smoke before I start pouring money into my "new" 162 year old house. I figure
    a few of you folks have been in this spot and can lend some advice. TIA
     
  2. Mike in Ohio

    Mike in Ohio Well-Known Member

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    How long did you own the homestead you sold? If you met the requirements you shouldn't have to pay any capital gains tax on it if it is your primary residence.

    Mike
     

  3. Ozarkquilter46

    Ozarkquilter46 Well-Known Member

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    The same thing happened to us with our 9 acres in Missouri. We were told if we lived on it for three years we wouldn't have to pay any taxes on it unless we made over 250,000 profit. We only made about 8,000 profit and hadn't lived on it at all so we had to pay the taxes. She also said if we even lived ther for a few months but had to move for a job or somthing like that there are ways of not paying but we didn't even live on it for a day. It was only 5 miles from our house so we just used it to play on and it gave our son a safe place to camp out with his friends when he was a teen ager. If you call you Cen.21 tax office in town they will usual tell you for free what the law is in your area.
     
  4. boxwoods

    boxwoods Well-Known Member

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    Unless the law has changed, if you are over 55 , you get to sell one time only your home and not pay a tax on the profit up to $250,000 I think.

    As far as the sale of your home, even though you might not have had to pay anything for it. You do get to add up the cost of repair through the years you owned it and deduct that from the sale price.

    There are also some other options, regarding re-investing the gains within 2 years.
    You need to check on this also. have fun
     
  5. deberosa

    deberosa SW Virginia Gourd Farmer!

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    I've sold two places in the last 5 years since the laws changed. As long as you have lived in your place 2 years, you get up to $250,000 "free" of capital gains. This can happen over and over as long as you have been there 2 years. I am not sure if you have to live there or just own it that long since I lived in both places. One of those places I lived in 2 years and one day - and didn't even know the law existed!
     
  6. boxwoods

    boxwoods Well-Known Member

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  7. amelia

    amelia Well-Known Member

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    Under current law, a principal residence is not subject to capital gains tax at the level of gain you're talking about. Whether your 10-acre farm qualifies for treatment as a principal residence under the Internal Revenue Code is something you'll have to look into. If you're a senior, there is another special exemption to which you may be entitled.

    In the event that for some reason you do not qualify for an exemption from capital gains tax, your capital gain would be the difference between the amount you recover on the sale and your "basis" in the property. The calculation of your "basis" can be a complicated thing if you have taken (or were entitled to) a depreciation deduction on the property in years past. But putting all complications aside, and assuming the most simple situation, your "basis" is the amount you paid for the property plus all of your "capital costs" over the years.
    The definition of "capital costs" is kind of squirrelly, but speaking very generally, they are those costs which you have paid for permanent improvements to the property, which add to its value, as opposed to mere maintenance expenses. Examples of typical capital costs are the building of a fence, the erection of an outbuilding, the remodel of a kitchen, the addition of a major appliance, or the installation of a new roof. The IRS publications (now available on the internet) do a very good job of explaining what is, and is not, a capital cost.

    As I indicated, the tax law contains quite a few twists and turns when it comes to the calculation of basis. For example, the property is owned by a husband and wife, and one of the spouses dies, the surviving spouse may be entitled to what's called a "step up." Simply stated, the surviving spouse's basis in the property is "stepped up" to its fair market value at the time of the death, thus reducing, sometimes substantially, the amount of capital gain. Another common twist occurs where the property has been used in part for business purposes and a depreciation deduction has been taken (or could have been taken). In that case, total amount deducted over the years adds to your basis in the property.

    You indicate that you have put substantial "sweat equity" into the property. Regrettably, the value of your own labor does not qualify as a "capital cost," but no doubt you have incurred expenses in connection with the improvements you have made.

    Before going to the trouble of running all the numbers, you really should sit down with a CPA for an hour and determine whether you are going to be liable for capital gains at all. Hope that helps.
     
  8. Jack in VA

    Jack in VA Well-Known Member

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    It's actually 2 out of the last 5 years. It can overlap, if you live on 2 properties during those 5 years. It can be done over and over. I believe it's called "progressive homesteading" , where you keep moving up.
     
  9. EricInIdaho

    EricInIdaho Member

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    Hi--
    I can give you the technical answer to this. I won't get into policy. First of all when you sell any property you need to know it's basis in order to figure the gain. When you inherit property it's basis to you is the fair market value on either the date of death of the person you're inheriting from, or the FMV on the date 6 months after the date of death. If you didn't elect this 6 month option when you got the inheretence then it's the FMV on the date of death.

    You realize a gain on the property if the sale price is greater then it's basis. You can exclude up to 250,000 (500,000 if married) of gain if you have held the property for 2 of the past 5 years of ownership. Under certain conditions you can exclude a fraction of the 250/500 if you are selling for "qualified" reasons (moving for a job, etc).

    Long story short. Find out what your basis is. Take you selling price and subtract that basis. Then apply the principle residence exclusion. Any gain above that exclusion will have to recognized and will be taxed at capital rates.

    Hope that helps. Feel free to PM if you want some help working the number.

    Eric, the tax accountant.
     
  10. Ohiosteve

    Ohiosteve Well-Known Member

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    Thanks folks! Wow what a releif!! We have lived there for 18 years and it's value is well below $250,000 So it appears that we are safe. We will sure have no problem spending that $50,000 of equity on our "new" place.
     
  11. gobug

    gobug Well-Known Member Supporter

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    It may not be relevant in this case, but the gain is equal to the price you paid plus improvements subtracted from the sale price. Improvements don't include regular maintenance and repairs. Keep all your receipts. While the tax change, you never know when you will need these documents and how will help.
     
  12. Bob in WI

    Bob in WI Well-Known Member

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    From the IRS website:

    Selling Your Home

    Tax Tip 2004-56, March 22, 2004

    If you sold your main home, you may be able to exclude up to $250,000 of gain ($500,000 for married taxpayers filing jointly) from your federal tax return. This exclusion is allowed each time that you sell your main home, but generally no more frequently than once every two years.

    To be eligible for this exclusion, your home must have been owned by you and used as your main home for a period of at least two out of the five years prior to its sale. The two years may consist of 24 full months or 730 days. Short absences, such as for a summer vacation, count as periods of use. Longer breaks, such as a one-year sabbatical, do not. You also must not have excluded gain on another home sold during the two years before the current sale. Special rules apply to members of the armed, uniformed and foreign services and their families in calculating the 5-year period.

    If you and your spouse file a joint return for the year of the sale, you can exclude the gain if either of you qualify for the exclusion. But both of you would have to meet the use test to claim the $500,000 maximum amount.

    If you do not meet the ownership and use tests, you may be allowed to use a reduced maximum exclusion amount if you sold your home due to health, a change in place of employment or unforeseen circumstances. Unforeseen circumstances can include divorce or a natural disaster resulting in a casualty to your home, for example.

    If you can exclude all the gain from the sale of your home, you do not report any of that gain on your federal tax return. If you cannot exclude all the gain from the sale of your home, or you choose not to, use Form 1040's Schedule D, Capital Gains or Losses, to report the total gain and claim the exclusion you qualify for.

    For more details and information, get a copy of IRS Publication 523, Selling Your Home, by calling toll free 1-800-TAX-FORM (1-800-829-3676) or by downloading it from this Web site. For rules applying to members of the military, see Publication 3, Armed Forces Tax Guide.

    Related Items:

    Publication 523, Selling Your Home (PDF 194K)
    Schedule D, Capital Gains and Losses (PDF 136K)
    Tax Topic 701 — Sale of Your Home
    Publication 3, Armed Forces Tax Guide (PDF 206K)
    Highlights: Military Family Tax Relief Act
    Subscribe to Tax Tips!


    http://www.irs.gov/newsroom/article/0,,id=106951,00.html
     
  13. deberosa

    deberosa SW Virginia Gourd Farmer!

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    There was an article on this this morning on my AOL news the link is below. Law changed in 1997 to give you $250,000. I didn't know the exact amount since I never owned anything worth that much! I hope the link works for non-members...

    Debbie


    http://pf.channel.aol.com/realestate/equity/