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Question Headline: What is my capital gains tax liability if I sell two homes to buy one?
Question Body: My spouse and I plan to sell both our primary residence, which we’ve lived in for 19 years, and a second vacation home, that we’ve only owned for 10 months, to purchase one home that costs about the same as the existing two homes combined. What would our tax liability be with this type of transaction?
Answer: For a married couple selling primary residence, there is no capital gains taxes for up to $500,000 of profit. This has been the case since 1997 when the Taxpayer Relief Act (TRA) was passed. Example: Bill & Suzie buy a home as primary residence for $500,000, and 5 years later sell the home for $800,000. They have capital gains/profit of $300,000, but their gains are below the $500,000 threshold and therefore do not pay any capital gains taxes.
For a vacation home or second property the capital gains tax liability is different. Typically profit from such real estate sales will be subject to either short-term or long-term capital gains tax. One exception would be if the seller is a “house-flipper by trade”. In that scenario profits from a sale would be treated as ordinary income. Additionally, the length of time an owner has held a second property will factor into the percentage of capital gains tax owed.
– Wyatt Swartz
– Contributions by Bryant Goacher
– 6/1/2018
Not understanding the basics rules for inheriting an IRA can cost the beneficiary of an IRA money. The below information summarizes the key points of inheriting an IRA.
Inheriting Traditional IRA as Spouse
When a spouse inherits an IRA they first need to retitle the IRA into their own name. By doing this they are avoiding any tax consequences. Spouses with inherited Traditional IRAs can keep assets in the account until they reach the age of 70-1/2 when “Required Minimum Distributions” begin.
Inheriting Roth IRA as Spouse
When a spouse inherits a Roth IRA from the deceased spouse they are not required to ever take distributions from the inherited Roth IRA. If they choose to take distributions from the account, they have reached age 59 ½ those distributions are tax free.
Inheriting Traditional IRA for Individual other than Spouse
When an IRA is inherited by a non-spouse it cannot be rolled/combined with another of the beneficiary’s pre-existing IRAs. It remains separate and titled as an inherited IRA. An owner of an inherited IRA must make a minimum distribution based on their age and the distribution will be taxed. Required withdrawals continue every year until the IRA has a $0 balance. Minimum required distributions (RMDs) start December 31 of the year following the death of the original owner of the IRA.
Inheriting Roth IRA for Individual other than Spouse
The IRA must be retitled in the recipient’s name and cannot be combined with an existing Roth IRA account. If the Roth IRA was funded longer than 5 years prior to inheriting it, required distributions are tax free. Minimum required distributions (RMDs) start December 31 of the year following the death of the individual in which you inherited the IRA. The recipient of an inherited Roth IRA may take withdraw more than the minimum amount up to the entire account balance if they choose to do so within a 5-year period. All of the above-mentioned withdrawals are tax free.
– Wyatt Swartz
– Contributions by Bryant Goacher
– 5/30/2018
529 plans are saving accounts for children’s education that offer tax benefits. The growth of investments in the 529 plan is withdrawn tax-free for approved education/college expenses. The plan can be used for any accredited college or university. Under the new tax law, there have been multiple changes to 529 college savings plans.
A potential new downside is that an individual/household can no longer deduct 529 contributions on their federal tax returns. Contributions are still deductible on state tax returns in the majority of states. Savers are not limited to only contributing in a 529 account in their home state. It is possible to open accounts in multiple states that offer deductions for 529 contributions.
The biggest change in 529 plans from the Tax Cuts and Jobs Act is the ability for parents to use money from the account for K-12 private education. Before this change, parents could only withdraw money for college education expenses, but under the new plan, you can withdraw up to $10,000 per year for private elementary and secondary education. Withdrawals for college expenses are not capped.
Another change that will affect 529 plans, is the new limit on gifts without triggering the gift tax. This is set at $15,000 for 2018. Meaning any family member can donate $15,000 to all children with a 529 plan without paying a gift tax. Contributors can avoid the gift tax by front-loading a 529 plan by making up to five years’ worth of contributions at once, $75,000 to each child. The contributor won’t be able to make any new contributions for 5 years, but the account has more years to benefit from compound returns on the savings and grow the investment faster.
There are still tax penalties involved with making non-education withdrawals from 529 plans. Withdrawals for any other purpose are subject to federal income tax, and a 10% early withdrawal penalty.