Thanks LSUFan, that is pretty much my scenario. I'll throw in actual #'s. Insanely inflated figures since in Hawaii and I was able to buy on VA Loan and afford it via renting to friends.

Bought for $740k
Closing of $16k
Added in $20k of capital improvements along the way
Took ~$101k of depreciation
Net cost basis should be $675k (?)

Sold for $1,499k
Expenses of $142k (commissions, deductible repairs, etc)
Net proceeds minus expenses: $1,357k

Gain: $1,357k - $675k = $682k (?)

Ordinary gain - $101k
LTCG - $682k - $101k = $581k (?)

Actually looks like it makes sense now. My error was not knowing that capital gains impact Modified Adjusted Gross Income. That is why I was thinking the entire gain was being treated as ordinary income. Kind of dumb that capital gains prevent you from deducting from childcare and preschool expenses since it's not like I'll be able to replicate this annually, this was a one time benefit I got super lucky on

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Posted by Lightning

Texas

Member since May 2014

2302 posts

Posted on 3/15/23 at 2:05 pm to Browncd81

Eh, you made over half a mil in capital gains last year so the $6k dependent care credit shouldn't make too big a difference. Like you said, it was a one time thing, so the credit will be back next year too.

Congrats on the sale of your Hawaii property - you made out great on that!

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Posted by LSUFanHouston

NOLA

Member since Jul 2009

37196 posts

Posted on 3/15/23 at 7:24 pm to Browncd81

quote:
Actually looks like it makes sense now. My error was not knowing that capital gains impact Modified Adjusted Gross Income. That is why I was thinking the entire gain was being treated as ordinary income

Yeah, it does. Soemtimes I wish the 1040 would show ordinary tax vs capital gains tax right on the face, instead of in the worksheets. So many times clients have asked me... "but how do I know what the tax was on capital gains vs ordinary income", and I have to send them to the worksheets.

quote:
Kind of dumb that capital gains prevent you from deducting from childcare and preschool expenses since it's not like I'll be able to replicate this annually, this was a one time benefit I got super lucky on

Yes, but the idea is that yuu don't need those benefits THIS YEAR. But you can get the back next year if your income drops back to a level that qualifies.

Now, imagine this. After many years of successful stock picking, you decide you no longer want to manage your investments and you move all your money over to a money manager and give them trade authority. They believe that your portfolio is way out of whack in terms of asset allocation, and so they start selling and buying like crazy. When they are done, they have realized 300K in capital gains.

Issue 1: Client now owes cap gains on 300K although they didn't take any money out of the market.

Issue 2: Clients are Medicare age. A lot of people might not realize this, but Medicare premiums are means tested... the more you earn... the higher the premium you pay. It's a two year trail... your 2022 income impacts your 2024 premiums. It resets every year.

So not only did this couple have to pay tax on $300K in capital gains on their 2022 taxes, they will have to pay several thousand dollars more of additional Medicare premium in 2024. All without withdrawing a single dollar from their investment account.

On Monday, I consulted with a client that had this exact situation.

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