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Christopher Phelps
Christopher Phelps, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2710
Experience:  CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member
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Do seniors 55 or older have to pay capital gains tax ...

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Do seniors 55 or older have to pay capital gains tax on their sold rental property and their primary residence?

Principal Residence Rules


The old rollover rules under IRC Sec. 1034 and the one-time,over 55 $125K exclusion were eliminated in 1997 and replaced with a new, larger once every two-year exclusion for gains on the sale of a principal residence.


Under IRC Sec. 121 if as of the date of sale you have owned and used a property as your principal residence for 24 out of the last 60 months, then you can exclude up to $250,000 of gain ($500,000 if married filing joint) if filing a single or MFS return.


If you have owned or used your property as your principal residence for less then 24 months you may not use the Sec. 121 exclusion (i.e. $250K/$500K exclusion) unless you meet a qualified exception. You may use a pro-rata exclusion if the reason you are selling is related to a job change, for medical reasons or for some other unforeseen circumstance (i.e. death, disability, divorce, job loss, financial hardship, etc.).

The pro-rata portion of the exclusion is calculated by dividing the number of days you both owned and occupied the property as your principal residence by 730 days (i.e. two years). Multiply the resulting percentage by $250K if single or $500K if MFJ.


If you do not meet one of the exceptions, then the gain is taxable. Also, if your gain is in excess of the available exclusion amount, then the excess gain is taxable. If you own the property for more then one year, then the gain will be treated as a long-term capital gain taxed up to a maximum capital gain rate of 15% (5% if the gain would otherwise be taxable in the 10% and 15% brackets). Otherwise the gain is treated as a short-term capital gain and to the extent not offset by other capital losses will be considered as ordinary income the same as wages and interest subject to whatever your marginal tax rate is.


Most states have conformed to the Federal law described above. Accordingly, the manner in which your gain on the sale of your principal residence is treated for Federal purposes will also likely be the same for your resident state tax purposes as well. If you indicate what your resident state is I can confirm this for you.


Rental Property


Unfortunately, there is no exemption from paying tax on the sale of a rental property (assuming you have never used it as a principal residence within five years of sale). Your best bet is to make sure you have properly determined your gain by correctly calculated net sales proceeds and cost basis.



The difference between your net sales price and your cost basis (adjusted for improvements and depreciation) is your capital gain.


Your net sales price is the contract selling price less any selling costs (i.e. broker commissions and other transaction costs as well as fix-up expenses if real property is involved).


Your cost basis is determined by taking your original purchase price (plus any non-recurring closing costs) and adding the cost of any improvements made during ownership and then subtracting any allowable depreciation (whether claimed or not). If you inherited the property you would claim as your acquisition cost the value for the asset claimed in the decedents estate tax return. If no estate tax return was filed then you use the fair market value of the asset (supported by an appraisal if not readily determinable) as of the date of death.


If you own the property for more then one year, then the gain will be treated as a long-term gain and will be taxed up to a maximum capital gain rate of 15% (5% if the gain would otherwise be taxable in the 10% and 15% brackets). Otherwise the gain is treated as a short-term capital gain and to the extent not offset by other capital losses will be considered as ordinary income the same as wages and interest subject to whatever your marginal tax rate is. Don't forget state taxes.



Because it is impossible for me to identify and consider ALL the relevant facts, this advice is not intended or written to be used for the purpose of avoiding penalties, and cannot be used for that purpose.



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