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Tax question on a home sale - ordinary income vs capital gains
Posted on 3/15/23 at 10:50 am
Posted on 3/15/23 at 10:50 am
Thanks in advance if anyone can answer this. But I'm trying to figure out why a home sale is being taxed as ordinary income and not capital gains. Not only is the former a higher rate, but it's making me ineligible for credits for my children.
In 2015 bought a house and was still single so rented out rooms. Moved in 2017 and kept renting out the house. Got married along the way (sorry, lost my camera in a boating accident) but never put her name on the house (which I doubt matters, but erring on the side of giving all the facts). I sold that house in 2022. No rental income in 2022 since my tenants were gone by the end of 2021 so I could get the house ready.
I understand I would not get the capital gains exclusion since we didn't live in it 2 out of the last 5 years. So this question isn't about that. It's about why are the net proceeds counted as ordinary income. What specifically is preventing it from being classified as capital gains.
Before I turned here, for the first time ever I did try the live tax professional help on Turbo Tax - but this guy knew less than me!
In 2015 bought a house and was still single so rented out rooms. Moved in 2017 and kept renting out the house. Got married along the way (sorry, lost my camera in a boating accident) but never put her name on the house (which I doubt matters, but erring on the side of giving all the facts). I sold that house in 2022. No rental income in 2022 since my tenants were gone by the end of 2021 so I could get the house ready.
I understand I would not get the capital gains exclusion since we didn't live in it 2 out of the last 5 years. So this question isn't about that. It's about why are the net proceeds counted as ordinary income. What specifically is preventing it from being classified as capital gains.
Before I turned here, for the first time ever I did try the live tax professional help on Turbo Tax - but this guy knew less than me!
Posted on 3/15/23 at 11:08 am to Browncd81
quote:
What specifically is preventing it from being classified as capital gains
I think you're asking about the tax exemption for primary residences, and to get that you need it to be your primary residence for like 2 or either 4 or 5 years or some shite. If you were renting it out, then it couldn't be your primary residence.
Posted on 3/15/23 at 11:28 am to Browncd81
Were you reporting the rental income on Schedule E of your 1040? Or just pocketing the rent?
Posted on 3/15/23 at 12:13 pm to Browncd81
Did you claim property depreciation on the rental home?
LINK
quote:
When you claim property depreciation on your tax return for your current investment property, it reduces your annual income that would be subject to taxes. Then, when you sell the property, the IRS wants that money back. Therefore, when the sale price of a property exceeds the tax basis or adjusted cost basis, the difference is “recaptured” by reporting it as income that’s then taxed using ordinary income tax rates.
LINK
Posted on 3/15/23 at 12:31 pm to Browncd81
quote:
But I'm trying to figure out why a home sale is being taxed as ordinary income and not capital gains.
Without looking at your tax return, I am assuming you are dealing with depreciation recapture, which is ordinary income.
Basically, if you took 30K in depreciation deductions over the rental years, then that deprececiation reduced your basis in the house. Then, the gain attributable to that reduced basis come back as ordinary income.
Any gain above that should be taxed as long term capital gains, given what you have stated.
Simple example: Buy house in 2015 for 200K, take 30K depreciation over the years, sell house in 2022 for 250K, pay $15K closing costs at sale (commission, cover buyer costs, whatever).
Basis of home at time of sale: 200K - 30K = $170K
Net proceeds - $250K - $15K - $235K
Gain: $235K - $170K - $65K
Ordinary gain: $30K
LTCG: $65K - $30K = $35K
Now, if the numbers worked out such that the amount of depreciation taken over the years exceeds your total gain, then all of it would be depreciation recapture, and no long term capital gain.
quote:
it's making me ineligible for credits for my children.
Nah. Those credits are based on total income, including cap gains, so this would only be an issue if you had other cap losses you were trying to offset against cap gains.
Posted on 3/15/23 at 7:56 pm to Browncd81
It's only important if you are audited...
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