0% LTCG on home sale possible? What am I missing?

Submitted by pyrocat t3_z7jrde in personalfinance

I was talking to a family friend about how they're thinking of selling their very nice house and they claimed they wouldn't pay any tax. I was skeptical, but they broke it down for me, and it seems to check out. Let me know if I missed anything. I rounded some numbers for convenient math.

900k (hypothetical) home sale

-200k initial cost basis

-100k mortgage

-50k closing costs

= 550k profit

single, primary residence means 250k of that is tax-free

That leaves 300k remaining that should be hitting long term capital gains. However this guy is on social security and makes way under the 44k tax bracket that would equal 0% LTCG. So he would owe 0% tax on the remaining 300k, for a total profit of 550k tax-free.

Am I missing something? The home sale wouldn't increase his income bracket for that year, would it?

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Mysunsai t1_iy6y4c1 wrote

A mortgage is not part of your cost basis.

And the capital gains brackets are progressive brackets just like the regular income brackets. The capital gains brackets sit on top of the other income brackets.

If he has $10k in other taxable income for example, then the first $34k of capital gains (up to the $44k bracket) would be taxed at 0%. The rest would be in the 15% bracket.

10

night28 t1_iy6xvpg wrote

The 300k counts as income for tax purposes. It's just subject to capital gains tax instead of income tax.

Edit: /u/Mysunsai's answer is more complete than mine. tldr answer is no though.

7

pyrocat OP t1_iy6y2rb wrote

so the 300k would be taxed at 15%?

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night28 t1_iy6y9ta wrote

I'm seeing 15% if total taxable income is less than ~460k for the year if single ~517k for married.

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pyrocat OP t1_iy6z760 wrote

got it. I figured we were missing something, I'll let him know. Thanks!

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Default87 t1_iy6y093 wrote

Capital gains stack on top of ordinary income, so the vast majority of this would be taxed above 0%.

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Jmb3930 t1_iy6xxcx wrote

The amount of existing mortgage doesnt matter.

The capital gains stack on top of other income.

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nolesrule t1_iy8c25i wrote

What everyone else said is correct, and it gets "better" because the capital gains income over $200k AGI will also get taxed 3.8% for Net Investment Income Tax.

Additionally 85% of the Social Security will count as income (and add to the AGI and taxable income) due to the other income.

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nolesrule t1_iy8d6z8 wrote

Back of the envelope they'll pay somewhere in the neighborhood of $68k due to taxation of social security, LTCG at 15% and NIIT.

And that ignores things like bank interest and any kind of retirement or investment income.

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