Capitol Gains On The Sale of Your Home

Capitol Gains on the Sell of Your Home

While last year's overhaul didn't change tax rules on the sale of a residence, some clients still try to apply rules that have been out of date since the late ‘90s.                                              Contributor Investment News Tim Steffen

The most recent “Tax Cuts & Jobs Act” released in 2018, did not affect the rules on the sale of a personal residence. So with no changes to the rules this year, homeowners and their advisers should be up to speed on the tax treatment when a home is sold, right? Not exactly. While many taxpayers are aware of some of those “1997” rules, it’s not uncommon for home sellers to try and apply the pre-1997 rules as well.

Exclusion of Gain on Residence

In 1997, President Bill Clinton signed the Taxpayer Relief Act, a bill that’s mostly remembered as the origin of the Roth IRA. However, it also includes the law we have now that allows taxpayers to exclude the first $250,000 of gain on the sale of a primary residence from taxable income ($500,000 for married couples filing jointly).  If the gain on the sale is larger than the exclusion amount, the excess is a taxable capital gain. Losses, however, are not deductible. That’s it. No requirement to roll over the proceeds.  No bonus exclusion for older homeowners.  The only other requirement is that the home has to be owned and used as a primary residence for two of the last five years before the sale but homeowners can also claim this same exclusion once every two years, meaning gains on multiple homes can be sheltered over enough years.  So gains below the threshold are completely tax-exempt, but that means any gain above the threshold is then taxable. Fortunately, that gain is taxed like any other capital gain (meaning a top tax rate of 20%), and it can be offset by capital losses, such as those from the sale of stock or other investments.

Other Considerations

One of the issues home sellers run into is not meeting the two-year ownership and use requirements. In those cases, the taxpayer can qualify for a partial exclusion as long as the sale was the result of employment or health issues, or other “unforeseen circumstances.”  In those cases, a prorated portion of the exclusion is available, based on how much of the two-year requirement was met. Because this proration means that at least some exclusion is still available, the seller may still be able to exclude their entire gain.  In cases where a single homeowner marries, the joint exclusion of $500,000 is only available once both spouses have lived in the home for two years. The home only needs to be owned by one spouse, but both must have lived there or else the maximum exclusion is limited to the $250,000 amount for singles.  If a married couple meets the two-year requirement, but then one spouse dies, the survivor has two years to sell the home and still qualify for the full $500,000 exclusion. After that, the lower $250,000 exclusion applies.

When it comes to the basic tax rules for the sale of residence, they’re really pretty simple. It’s only when a home seller tries to combine rules they’ve heard about that it gets complicated, and that’s when an informed adviser can add a lot of value.

*This is for informational purposes only. We at TheJNLGroup Real Estate are not Tax Professionals. Encourage to talk to a licensed CPA for Tax Advice and Guidance

Alternative Minimum Tax Who Has to Pay?

the Balance KIMBERLY AMADEO

Investophia JULIA KAGAN

What Is Alternative Minimum Tax (AMT)?

The Alternative Minimum Tax is a mandatory alternative to the standard income tax that gets triggered when taxpayers make more than the exemption and use many common itemized deductions. The annoying part about the AMT is If you make more than the AMT exemption amount and use the deductions, your taxes twice are calculated twice. To add insult to injury, you've then got to pay whichever tax bill is higher. Over 4.5 million taxpayers were affected in 2012, by 2017 that number grew to 5.0 million.

Purpose of AMT

Congress enacted the AMT in 1969. It was designed to prevent taxpayers from escaping their fair share of tax liability through tax breaks. However, the structure was not indexed to inflation or tax cuts. This can cause bracket creep, a condition in which upper-middle-income taxpayers are subject to this tax instead of just the wealthy taxpayers for whom AMT was invented. In 2015, however, Congress passed a law indexing the AMT exemption amount to inflation.

How the Tax Cut and Jobs Act Changed the AMT for Tax Years 2018–2025

On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act. It kept the AMT but raised the exemption $ and phase-out $ levels for the tax years between 2018 and 2025. As a result, the middle class tax payer is less likely to be affected by the AMT. It is projected that approximately 200,000 tax filers per year will pay the AMT instead of the 5 million affected in the 2017 tax year. The bill includes an automatic cost of living adjustment. 

The AMT produces around $60 billion a year in federal taxes from the top 1 percent of taxpayers. Congress eliminated the AMT for corporations.

How the AMT Works

The AMT is different from the regular tax rate because it doesn't have the standard deductions, personal exemptions or allow the most popular itemized deductions. These include state and local income taxes, foreign tax credits, and employee business expenses. It doesn't allow the interest on home equity mortgages unless the loan was used to improve your home. Real estate and personal property taxes are not deductible. Medical expenses are only deductible if they exceed 7.5 percent of your adjusted gross income for the tax year 2018. The AMT also might include other income streams not counted by the regular income tax. For that reason, the AMT tax is higher than the regular tax. 

Tax Cut and Jobs Act 2017 compared to Tax Cut and Jobs Act 2018 - 2025

Single/Head of Household Tax Payer        

Past-2017   Exemption $54,300  Phase Out $120,700

2018-2025  Exemption $ 70,300  Phase Out $500,000

Married Filing Jointly Tax Payer

Past-2017 Exemption  $84,500  Phase Out $160,900       2018-2025 Exemption  $109,400  Phase Out $1 million

Married Filing Separate Tax Payer  

Past-2017  Exemption  $42,250   Phase Out  $80,450        2018-2025  Exemption  $54,700   Phase Out  $500,000

There are only two tax rates: 26 percent and 28 percent. The tax rate is 26 percent on income below the AMT threshold and 28 percent above it. The AMT exemption is much larger than the standard exemption. But it starts to disappear after you reach a certain income level, called the phaseout. Once your income hits the phaseout level, 25 cents of the exemption disappears for every dollar above the phaseout.

* We at TheJNLGroup are not Tax Professionals. For clarity of you specific circumstances, We highly encourage you to consult a CPA / Tax Pro.