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What Will My Capital Gains Tax Be When I Sell My Home?

  • September 10th, 2014
Q
I am planning on selling my house and buying a smaller and cheaper one. I am married and have been in my home for 40 years. Its sale price will be close to $2.5 million. I paid $358,000 and I have made approximately $250,000 in improvements. My new purchase will be about $1 million. What capital gains taxes will I be paying on the sale of my primary residence. (I live in California.)
A

For a definite answer, you will need to consult your accountant or attorney. Also, since I practice in Massachusetts, I don’t know the California tax on capital gains. But here’s how the federal tax works: Your basis in the property is approximately $600,000, assuming you can document the improvements ($358,000 plus $250,000). Your capital gain is the difference between your sales price and your basis, or approximately $1.9 million ($2.5 million less $600,000). You and your wife together can exclude $500,000 of gain, bringing the taxable gain down to $1.4 million. In addition, if you have to pay a realtor to sell the property, his or her fee is deductible. Assuming that’s $100,000, this brings your taxable gain down to $1.3 million. Then, we have to determine your capital gains tax rate. If your taxable income is less than $432,000, it is 15 percent, resulting in a tax of $195,000. If it is greater than this threshold, the tax rate is 20 percent, resulting in a tax of $260,000. You will have to check with a California attorney or accountant to determine your state tax.

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Last Modified: 09/10/2014

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