Frequently Asked Questions Concerning Taxation of Real Estate Sales
1. Is the sale of my home taxable? General Rule-NO. If you have owned and lived in your home for 2 of the last 5 years, gain on the sale of the home is exempt from capital gains or income taxes up do a gain of $250,000 for a single person and $500,000 for a married couple. There is no requirement to replace the home with another and the age of the taxpayer does not matter. If you have not owned and lived in the home for 2 of the last 5 years some or all of the gain may still be exempt, depending on the circumstances, such as illness, death of spouse, or loss of your job.
2. I recently inherited some farmland. If I sell it now, will it be taxable? General Rule-NO. The cost basis of inherited real estate is increased (stepped up) to fair market value for the person(s) inheriting it. Therefore, if the land is sold shortly after the inheritance, the cost basis will be the same or similar to the selling price, so there will be no tax.
3. I own land that cost me $500/acre years ago, and now will sell for $1,500/acre. How much tax will I have to pay? Currently, the maximum federal capital gains rate is 15% of the gain if your income is below $200,000 if single or $250,000 if married filing jointly. If your income is above these amounts, the capital gains rate is 20% of the gain plus a medicare tax of 3,8%. In this case the gain is $1,000/acre, so the maximum tax would be between$150 and $238 per acre, depending on your total income. There also would be a ND tax of about $20/acre.
4. What is a 1031 exchange, and how can I use it to delay or avoid the taxes in #3 above? As a general rule, trading one parcel of real estate for another is not taxable at the time of trade, the basis of each property transfers to the new property, and if the new property is later sold, the basis of the old property is used to calculate gain. If the person later dies, the real estate passes to the heirs with a stepped up basis, so it can be sold than with no tax. In effect, the gain on the original land has escaped taxation. This works well if there are two parties that want to trade land, but what if both parties want to sell and only one wants to end up with land? The first party could sell the land in #3 above, with the proceeds paid to a 1031 agent. The 1031 agent then buys the land from the second party with the funds. What has happened is the first party now owns the land previously owned by the second party, and the second party has sold its land for cash. The basis of the land for the first party is $500/acre.
5. Will the 3.8% tax on investment income include capital gains from real estate sales starting in 2013? Yes and No. The healthcare law contains a provision , starting in 2013, to impose a tax of 3.8% on investment income, such as interest, dividends, rents, capital gains etc. The tax only applies if your total income is over $200,000 for a single person or $250,000 for a married couple. In addition, the sale of your principle residence is excluded up to the amounts discussed in #1 above. For most people, it is unlikely the sale of the principle residence would trigger the tax, but sale of other real estate could. If you would like an estimate of how you would be affected, please contact us.
2. I recently inherited some farmland. If I sell it now, will it be taxable? General Rule-NO. The cost basis of inherited real estate is increased (stepped up) to fair market value for the person(s) inheriting it. Therefore, if the land is sold shortly after the inheritance, the cost basis will be the same or similar to the selling price, so there will be no tax.
3. I own land that cost me $500/acre years ago, and now will sell for $1,500/acre. How much tax will I have to pay? Currently, the maximum federal capital gains rate is 15% of the gain if your income is below $200,000 if single or $250,000 if married filing jointly. If your income is above these amounts, the capital gains rate is 20% of the gain plus a medicare tax of 3,8%. In this case the gain is $1,000/acre, so the maximum tax would be between$150 and $238 per acre, depending on your total income. There also would be a ND tax of about $20/acre.
4. What is a 1031 exchange, and how can I use it to delay or avoid the taxes in #3 above? As a general rule, trading one parcel of real estate for another is not taxable at the time of trade, the basis of each property transfers to the new property, and if the new property is later sold, the basis of the old property is used to calculate gain. If the person later dies, the real estate passes to the heirs with a stepped up basis, so it can be sold than with no tax. In effect, the gain on the original land has escaped taxation. This works well if there are two parties that want to trade land, but what if both parties want to sell and only one wants to end up with land? The first party could sell the land in #3 above, with the proceeds paid to a 1031 agent. The 1031 agent then buys the land from the second party with the funds. What has happened is the first party now owns the land previously owned by the second party, and the second party has sold its land for cash. The basis of the land for the first party is $500/acre.
5. Will the 3.8% tax on investment income include capital gains from real estate sales starting in 2013? Yes and No. The healthcare law contains a provision , starting in 2013, to impose a tax of 3.8% on investment income, such as interest, dividends, rents, capital gains etc. The tax only applies if your total income is over $200,000 for a single person or $250,000 for a married couple. In addition, the sale of your principle residence is excluded up to the amounts discussed in #1 above. For most people, it is unlikely the sale of the principle residence would trigger the tax, but sale of other real estate could. If you would like an estimate of how you would be affected, please contact us.
For questions regarding 1031 Exchanges, 721 Exchanges and Capital Gains Evaluations, contact Tom Nikolaisen, Attorney-At-Law at 701-968-4307, tom@bulielaw.com or Ken Bulie, Attorney-At-Law, CPA at 701-795-5062, ken@bulielaw.com.
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