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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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I HAVE MY HOME LISTED FOR SALE $700,000 I LIVE HERE IN FRESH

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I HAVE MY HOME LISTED FOR SALE $700,000 I LIVE HERE IN FRESH MEADOWS NY 11366. I HAVE OWNED THE HOUSE FOR 30 YEARS THE COST WHEN I BOUGHT IT WAS $70,000 REAL ESTATE AGENT JUST INFORMED ME ABOUT CAPITAL GAINS TAX YESTERDAY. BUT SAYS HE DOES NOT KNOW ANYTHING ABOUT IT? I HAVE A PERMANENT DISABILITY AND GET A SMALL AMOUNT FROM WORKMANS COMPENSATION. I WAS UNJUSTLY FIRED FROM MY JOB IN 2005, HAVE BEEN UNEMPLOYED SINCE THEN. I AM SINGLE I READ THESE ISSUES MAY EFFECT CAPITAL GAINS. CAN YOU CLARIFY MY CAPITAL GAINS OBLIGATIONS IF ANY?
THANKS
GENE

Lev :

Hi and welcome to Just Answer!

Lev :

The good news is that the taxable gain will not be treated as earned income - thus your eligibility for disability benefits and workman's compensation would not be affected.
As a single person you may exclude up to $250,000 of the capital gain when you are selling your primary home.

Lev :

Several issues...
How the gain is determined? The gain is equal to (sale price) MINUS (adjusted basis) MINUS (sale expenses)
Is it possible to exclude the gain from taxable income? Yes if the property was owned and used as a primary residence at least two years during last five years before the sale.
The main source of information is IRS publication 523 - www.irs.gov/pub/irs-pdf/p523.pdf
Specifically for your question - please take a look on page 10 - Excluding the Gain.
Please pay attention that it doesn't matter if the property is located in the US or abroad.
You can exclude up to $250,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if all of the following are true.
--You meet the ownership test.
--You meet the use test.
--During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home.
...
To claim the exclusion, you must meet the ownership and use tests. This means that during the 5-year period ending on the date of the sale, you must have:
--Owned the home for at least 2 years (the ownership test), and
--Lived in the home as your main home for at least 2 years (the use test).

Lev :

As you purchased the property long ago - you need to adjust the basis for all improvement expenses paid over the time you owned the property.
So - your basis for calculating the gain will be $70,000(original purchase price) PLUS (purchase expenses) PLUS (improvement expenses) PLUS (selling expenses).

Lev :




Examples of Improvements That Increase Basis





<table border="0">


Additions
Bedroom
Bathroom
Deck
Garage
Porch
Patio
Heating & Air Conditioning
Heating system
Central air conditioning
Furnace
Duct work
Central humidifier
Filtration system


Lawn & Grounds
Landscaping
Driveway
Walkway
Fence
Retaining wall
Sprinkler system
Swimming pool

Miscellaneous
Storm windows, doors
New roof
Central vacuum
Wiring upgrades
Satellite dish
Security system

Plumbing
Septic system
Water heater
Soft water system
Filtration system

Interior
Improvements
Built-in appliances
Kitchen modernization
Flooring
Wall-to-wall carpeting

Insulation
Attic
Walls
Floors
Pipes and duct work





 


Lev :

Assuming your adjusted basis is $300,000 (including the original purchase price and all improvements - your gain would be $700,000 - $300,000 = $400,000.
From that - you will be able to exclude $250,000 as that was your primary home - and will be taxed on remaining $150,000.
That would be a long term capital gain taxable at reduced rate.

Lev :

Please let me know if any clarification needed or if you need any help with reporting your sale transaction.

Customer:

Canyou tell me what the tax rate would be on the remaining 150,000. I am retired and on social security my incom is about $40,000 a year total. Also I thought i saw someplace that that there is a exemption is you are disabled ot lost your job. I have a permanent disability and was terminated from my job when I went back to work in 2006

Lev :

Considering that example - a part of the capital gain which otherwise would be taxed at 15% or below will get zero rate. The rest will be taxed at 15%.

Customer:

Hello Are you there?

Lev :

You may take a look at tax rate schedule on the last page of this publication - http://www.irs.gov/pub/irs-pdf/i1040tt.pdf
As you are single - 15% tax bracket is limited by taxable income $35,350 - it will be a little higher in 2013.

Lev :

Do you see my replies - or want me to re-post?

Customer:

I saw your replies but I asked if you know about a disability or loss of job exemption?

Lev :

Your social security benefits will be partly taxable - specifically - 85% of your social security benefits will be included into taxable income.
I asked if you know about a disability or loss of job exemption.
There is NO disability or loss of job exemption above $250,000 exclusion as provided in section 121.
If you have different information - please provide references and I will specifically verify.

Customer:

I thought I saw the information in my searches but unfortunately do not know exactly where I may have seen it.. I would like to read the publication you sent me clicked on it but was not able to access it. Can you tell me how?

Lev :

If the link doesn't work for you - just copy teh following line and paste into the address bar of your browser.
www.irs.gov/pub/irs-pdf/p523.pdf

Customer:

I got it now.

Lev :

You may do the same every time there are issues with links.

Lev :

You may also order this publication from the IRS - and they will sent it by mail.
When you will review the publication - please pay attention that the law set the maximum exclusion - which is $250,000 for singles and $500,000 for married couples living together.
There are some exemptions if the ownership and use tests are not met - in this case the maximum exclusion is reduced. But as long as tests are met - you may use the full maximum exclusion - and do not need any exemptions.

Lev and other Tax Specialists are ready to help you