A vacation home (or second home), like your primary residence, is a personal use property. Unlike your primary residence, the tax rules do not give you any capital gains exclusions on the sale of your vacation home.
The maximum capital gains tax rate of 15% would apply in your case.
The capital gains tax rate is keyed to your marginal tax bracket. The 15% rate applies to taxpayers in the 25% tax bracket or higher. If you happen to be in the 15% bracket or lower, your capital gains tax rate is 5% for the amount of capital gains that keeps you in the 15% bracket.
As far as cap gains tax, does the rate increase if you sell your property in a short amount of time (say, if you are flipping a property in 6 months, would the rate be higher)? Do you need to hold onto your second home for a minimum amount of time (say, 1 year) to get into that 15% bracket?
Quote:Well, I am grateful for the info, I guess any capital improvements materials are not subtractable from the capital gain??gary611,
Capital improvements are adjustments to basis, which do eventually reduce your taxable profit. If you do the work yourself, your own time and labor is a non-deductible contribution to the effort, while the cost of materials would be capitalized.
What sort of things are you doing yourself that you are calling capital improvements?
Docks, sidewalks, etc., which are permanent and defined as real property once constructed would be considered to be a capital improvement and an increase to your adjusted cost basis.
[addsig]
If the house was their primary residence at least two years of the five years prior to sale, they should take the first $500K of their sale profit from the land and lots tax free.
If the house was an investment property, or a second home, then the sale of the house and lots is a taxable event. Profit is the difference between selling price and purchase price. The mortgage balance is irrelevant to the taxable profit calculations.
Provided the property was used for an investment purpose, your inlaw could take advantage of a 1031 tax -deferred exchange to postpone the capital gains tax. Note, I said postpone, not escape.
Taking back the financing and/or selling on contract for deed are still taxable events in the year of the sale. Installment sale tax treatment would apply. This spreads out capital gains tax over time, but does not let them escape.
Actually, they are still in the process of splitting off the two lots. It looks like they will be able to though. So yes it was all one property at first, so maybe that might work. Thanks for the Idea!
Your inlaws are asking $650K for the house and lots. How much did they originally pay for the house and lots.
It is their profit that is subject to capital gains tax, not their sale price. If what they paid for the house and lots, plus their capital improvements over the years is equal to or greater than $150K, your inlaws will have a tax free sale at $650K because the seem to qualify for the maximum ($500K) capital gains exclusion on their sale profit.
A vacation home (or second home), like your primary residence, is a personal use property. Unlike your primary residence, the tax rules do not give you any capital gains exclusions on the sale of your vacation home.
The maximum capital gains tax rate of 15% would apply in your case.
The capital gains tax rate is keyed to your marginal tax bracket. The 15% rate applies to taxpayers in the 25% tax bracket or higher. If you happen to be in the 15% bracket or lower, your capital gains tax rate is 5% for the amount of capital gains that keeps you in the 15% bracket.
Well, I am grateful for the info, I guess any capital improvements materials are not subtractable from the capital gain??
As far as cap gains tax, does the rate increase if you sell your property in a short amount of time (say, if you are flipping a property in 6 months, would the rate be higher)? Do you need to hold onto your second home for a minimum amount of time (say, 1 year) to get into that 15% bracket?
Thanks.
Quote:Well, I am grateful for the info, I guess any capital improvements materials are not subtractable from the capital gain??gary611,
Capital improvements are adjustments to basis, which do eventually reduce your taxable profit. If you do the work yourself, your own time and labor is a non-deductible contribution to the effort, while the cost of materials would be capitalized.
What sort of things are you doing yourself that you are calling capital improvements?
What sort of things are you doing yourself that you are calling capital improvements?
I put in a dock, sidewalks and a deck.
Docks, sidewalks, etc., which are permanent and defined as real property once constructed would be considered to be a capital improvement and an increase to your adjusted cost basis.
[addsig]
If the house was their primary residence at least two years of the five years prior to sale, they should take the first $500K of their sale profit from the land and lots tax free.
If the house was an investment property, or a second home, then the sale of the house and lots is a taxable event. Profit is the difference between selling price and purchase price. The mortgage balance is irrelevant to the taxable profit calculations.
Provided the property was used for an investment purpose, your inlaw could take advantage of a 1031 tax -deferred exchange to postpone the capital gains tax. Note, I said postpone, not escape.
Taking back the financing and/or selling on contract for deed are still taxable events in the year of the sale. Installment sale tax treatment would apply. This spreads out capital gains tax over time, but does not let them escape.
Actually, they are still in the process of splitting off the two lots. It looks like they will be able to though. So yes it was all one property at first, so maybe that might work. Thanks for the Idea!
Your inlaws are asking $650K for the house and lots. How much did they originally pay for the house and lots.
It is their profit that is subject to capital gains tax, not their sale price. If what they paid for the house and lots, plus their capital improvements over the years is equal to or greater than $150K, your inlaws will have a tax free sale at $650K because the seem to qualify for the maximum ($500K) capital gains exclusion on their sale profit.