Tax ???

Vestor profile photo

Facts,
Sold personal residence property 55000.00 with 30000.00 profit.

Qualifies for exempt tax sale on profit personal residence.
I want to sell to Buyer on seller carry, 10K down loan 45K at 6.0 % interest.

? How to structure sale to maintain tax exempt sale on 30K profits.
? I presume that the 6.0% interest is taxable on the ammount paid each year as personal income to seller.

Thanks
Vestor

Comments(20)

  • DaveT25th January, 2003

    Vestor,

    If you satisfy the requirements for the capital gains exclusion on the sale of your primary residence, then selling on an installment sale does not affect your exclusion. No need to do anything fancy in structuring your deal to preserve your capital gains exclusion.

    You are correct, interest payments received from your buyer are reported on Schedule B and taxable in the year they are received.

  • Vestor26th January, 2003

    Follow up ?

    The use of the term 'Capitol Gain' as related to taxes would refer to a reduced tax rate on the cap gain, if it qualified as such, and would then be taxed at the reduced cap gain rate.

    ? Is the sale described in this post exempt from Cap Gains only and subject to personal income tax rate.
    I am slightly off base understanding this. I presumed that the sale as described was exempt 100% from income tax.
    Thanks
    Vestor

  • DaveT26th January, 2003

    Vestor,

    Your income is only taxed once and the tax rate depends on the type of income.

    When real estate is sold for a profit, the profit is called a capital gain. When your holding period is less than one year, a short term capital gain tax rate applies. The short term capital gain tax rate is the same as your ordinary income tax rate.

    When the holding period is greater than one year, the profit on the sale of investment property is taxed at a long term capital gain rate. The maximum capital gain tax rate is currently 20%. Under certain conditions a lower applicable rate may be 8%, 10%, or 18%.

    When the real estate is your personal residence, the capital gains tax rates, in accordance with your holding period, apply to the profit on the sale. Homeowners who have owned AND occupied their primary residence for an aggregate of two of the five years prior to the sale are permitted to completely exclude the profit on the sale of their primary residence from capital gains taxes. The exclusion is optional. If the taxpayer elects the capital gains exclusion, the profit is tax free. [ Edited by DaveT on Date 01/26/2003 ]

  • Vestor26th January, 2003

    Thanks Dave T....

    I am very happy that I found this site, and appreciate your detailed reply to my tax question.

    Regards
    Vestor

  • drgnstr30th January, 2003

    DaveT,
    Why would someone not elect to use the exclusion? Is it a one time deal?
    Thanks,

    [addsig]

  • DaveT31st January, 2003

    Jane marries Dick on January 1, 2000. On May 15, 2001 they sell Dick's old home for a $25,000 gain. On January 15, 2002 they sell Jane's home for a $500,000 gain. It would be smarter for Dick to elect to make his $25,000 gain taxable so that Jane and Dick can file jointly and use their combined $500,000 exclusion. If Dick uses his exclusion against the $25,000 gain from his sale, he cannot use the exclusion again until after May 15, 2003, and Jane would be able to exclude only $250,000 from the sale of her home.

    By electing to pay capital gains tax on $25K Jane and Dick gain an exclusion on $250K. Hope this illustration isn't too farfetched, but it does simply describe an instance when a taxpayer would want to opt-out of the capital gains exclusion.

    The capital gains exclusion is not a one-time deal, but it can only be used once in a 24 month period. When filing a joint return, the full $500K exclusion is only available if neither spouse has used the exclusion in the prior 24 months.[ Edited by DaveT on Date 01/31/2003 ]

  • drgnstr31st January, 2003

    Very good, Thank you.
    [addsig]

  • Vestor2nd February, 2003

    Dave,
    Another Wrinkle to the prior post and a question.

    Man and Wife own property JTWROS, they have occupied for 35 years as sole residence.
    The man passes away. 8 years after the passing of the man the wife desires to sell.

    ? What is the status of her Cap Gain Exemption' for this sale.

    Regards
    Vestor

  • DaveT2nd February, 2003

    The surviving spouse can exclude from capital gains up to $250K of profit on the sale of the property. Any profit in excess of $250K is a taxable capital gain.

  • Vestor3rd February, 2003

    ? Does the 500K exemption for married end at passing of a spouse and reduce to the single 250K maxium.
    Or is there a time period that extends after passing of one spouse, in which jointly held property can be disposed of utilizinng the exemption of both, ie: 500K maxium.

    Vestor

  • DaveT3rd February, 2003

    Not exactly (I feel like a Hertz commercial). The $500K capital gains exclusion is linked to filing status. Each taxpayer is entitled to a $250K exclusion. Single taxpayers and married filing separately taxpayers are limited to a maximum $250K capital gains exclusion. Married taxpayers who file a joint return, can combine their exclusions to increase their maximum to $500K.

    The surviving spouse can still file a joint return with the deceased spouse for the year in which the deceased spouse passed away. If the surviving spouse also sold the primary residence during that same tax year, then the full $500K capital gains exclusion for married taxpayers filing a joint return still applies.

    After that year, unless the the surviving spouse remarries, the surviving spouse can only file as a single, and can only take a $250K capital gains exclusion on the sale of the primary residence.

  • Vestor5th February, 2003

    "Hertz Commercial".......?

    RE and Taxes are way more exciting than a Hertz Commercial.

    I am almost a tax GURU now...... !

    Regards
    Vestor

  • Erick16th November, 2003

    I'm planning on selling my principal residence and I've lived here long enough to fall under sec 121 capital gain exclusion.
    If I sell the house on a lease/option and then convert that buyer to a land contract (or if I find a subsequent buyer at that point to buy on a land contract using the installment sale method) can I still qualify for the capital gains exclusion?

    I guess my question is; Does it matter how you sell the property (installment sale, L/O) or how many tenants you might have or if the property has been used as an investment property just as long as you sell within the time period necessary to comply with the 2 of 5 year requirement?

  • DaveT16th November, 2003

    Quote:I guess my question is; Does it matter how you sell the property (installment sale, L/O) or how many tenants you might have or if the property has been used as an investment property just as long as you sell within the time period necessary to comply with the 2 of 5 year requirement?No.

    If the sale of your property would otherwise qualify for the capital gains exclusion on your principal residence, you are free to use a lease option or a land contract to facilitate the sale.

    Your eligibility for the capital gains exclusion expires three years after you vacate the property and convert it to rental use. Just be sure that the closing takes place within three years of vacating the property and you should be OK.

  • Erick21st November, 2003

    Thanks DaveT.
    So, do you mean that I would need to have completely sold the property within 3 yrs. In other words, I couldn't continue to finance a land contract, for example, for 30 years?
    For the people doing these....do you put a balloon into the land contract? If you lease the property do you sell it on a lease-purchase rather than a lease-option in order to better assure that the people will close when you need them to in order to still qualify fof the cap gains exclusion?

  • DaveT22nd November, 2003

    A sale on a land contract (contract for deed) is an installment sale. The property is considered sold on the date you and your buyer enter the contract even though you will not transfer title to the buyer until the contract terms have been satisfied.

  • ouiser2812th December, 2003

    Quote:
    On 2003-02-02 12:32, Vestor wrote:
    Dave,
    Another Wrinkle to the prior post and a question.

    Man and Wife own property JTWROS, they have occupied for 35 years as sole residence.
    The man passes away. 8 years after the passing of the man the wife desires to sell.

    ? What is the status of her Cap Gain Exemption' for this sale.

    Regards
    Vestor



    At the time of the spouse's date of death, doesn't the surviving spouse get a step-up in basis so that her new basis (right after the spouse's death) is the fair market value as of the date of death? Then, by the time 8 more years pass, the house would have presumably appreciated even more and the surviving spouse would be taxable on (sale price) - (FMV at spouse's date of death)?

  • DaveT13th December, 2003

    ouiser28,

    Quite true under the tax laws in effect today.

    However, the unremarried, surviving spouse is still limited to a maximum $250K capital gains exclusion on the sale of her primary residence.

  • benluby18th December, 2003

    Okay, how does it work in this situation. Paid $54,000 in 1994 for vacant land. Sell it this year for $180,000. Does this fall under the capital gains tax law for a net profit of $126,000, or is there other tax liabilities that must be considered? This is in Georgia.

  • DaveT18th December, 2003

    benluby,

    You appear to have a long term capital gain. The maximum federal long term capital gains tax rate is 15%. Add your state and local municipality taxes to get your total tax liability on your sale profits.

    Not sure what your question really is. If this did not answer your question, please start a new topic and ask a more specific question.

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