Selling real estate

My 78 yo sister and I(81) are planning to move to a continuing care community. We’ve picked out the unit. Contract signing coming up soon. Now we need to sell our properties and clear out. We have one buyer for both houses, and a lawyer to conduct the sale.
Currently we own a two family house, bought from our parents for $50,000 in 1986 ). It is now valued between $750,000 - $800,000 with a $119,000 mortgage, originated in 2007. Sister and I shared one of the apartments there for almost 40yrs.
On an adjacent property we own a two bedroom ranch built in 1958. After Mom died in 2014, we renovated the ranch and moved into it. It’s currently assessed between $540,000-580,000. Dad bought these properties from a single owner in 1967 for $45,800 along with 2 lots marked “possibly buildable” Since then, one of these lots has been attached by the city to each of the houses for .80 acreage altogether. 
I’m looking for an estimate of what we may have to pay in taxes when we sell them. Sister and I are co-owners of both. The ranch came to us through our mothers trust and we paid about 125,000 in renovations before moving into it.

Hi Jane,

Part of your message got cut off. You might want to repost it for the rest of the story. I think you were asking about income taxes on your gains. If you live in both units for two of the last five years you should get a $250K exemption on capital gains, $500K if you are married. If you rented one side it gets more complicated. And you may have state income taxes too.

Probably best to post your question on the Tax board. There you will find some knowledgeable experts.

Thanks for looking, Paula. It’s been so long since I’ve been in discussions here, I had trouble getting message to post, even though I tried more than once. I think it’s because I formatted my post elsewhere and first time it wasn’t formatted for the site and then it wasn’t printed in it’s entirety. Thanks for referral. I’ll try again tomorrow and dictate the question

The original post was readable by scrolling sideways. I did, and copied it below.

My 78 yo sister and I(81) are planning to move to a continuing care community. We’ve picked out the unit. Contract signing coming up soon. Now we need to sell our properties and clear out. We have one buyer for both houses, and a lawyer to conduct the sale.
Currently we own a two family house, bought from our parents for $50,000 in 1986 ). It is now valued between $750,000 - $800,000 with a $119,000 mortgage, originated in 2007. Sister and I shared one of the apartments there for almost 40yrs.
On an adjacent property we own a two bedroom ranch built in 1958. After Mom died in 2014, we renovated the ranch and moved into it. It’s currently assessed between $540,000-580,000. Dad bought these properties from a single owner in 1967 for $45,800 along with 2 lots marked “possibly buildable” Since then, one of these lots has been attached by the city to each of the houses for .80 acreage altogether.
I’m looking for an estimate of what we may have to pay in taxes when we sell them. Sister and I are co-owners of both. The ranch came to us through our mothers trust and we paid about 125,000 in renovations before moving into it.

3 Likes

Thanks, @RHinCT for reformatting the original post.

@Jane207

You give estimates for what you say the properties are worth, but what’s important is how much each building is actually being sold for.

Well, there’s a lot that you don’t mention here, so I’m going to have to make a LOT of assumptions. Since you are using an attorney, I’m assuming you won’t be paying real estate commissions. So I’m going assume that your selling costs will be 3% of the sale price. So if this building is being sold for $800k, that means that you will have $24k in selling costs.

You didn’t mention any other improvements you made to the two family house, so if you did make improvements that add to your basis and depreciation, that could change things substantially.

With the assumption that the apartments are each about 50% of the building and that the apartment you weren’t living in was a rental, you should have fully depreciated half of your original purchase price, or $25k. Assuming you moved out of that apartment and into the ranch in 2014 or 2015, the other $25k should be around 1/3 depreciated, so we’ll say $9k. That’s $34k in depreciation that will be recaptured. (As already mentioned, if you made other improvements that should have been depreciated, that would add to the amount that will need to be recaptured.)

So, for this building:

Capital gain = $800k (selling price) - $50k (original basis) - $24k (selling costs) = $726k

Of that $726k, $34k will be depreciation recapture, which is taxed at ordinary income rates, and the other $692k will be taxed at capital gains rates.

You and your sister will split this, so you will each have $17k taxed at ordinary income rates and $346k taxed at capital gains rates.

If we assumed the maximum 25% rate on recapture, the maximum taxes on that would be $4,250 for each of you. On the other hand, if you have no other income, then $16,550 of the $17k would be covered by your standard deduction, so you would owe 10% on $450, or $45

The capital gains tax is harder to figure because it depends even more on what your other income is, but if we assume the worst case that the entire capital gain is taxed at 20% capital gain plus 3.8% NIIT tax, the capital gains tax would be $93.3k owed by each of you.

On the other hand, if you have no income other than the sale of these buildings, then $41,675 - $450 (left over ordinary income from recapture above) = $41,225 would be taxed at 0%, $158,325 would be taxed at 15% and $146,450 would be taxed at 18.8% (15% capital gain + 3.8% NIIT), for a total of $51.3k in Federal taxes owed by each of you.

So the total in Federal taxes for each of you for the sale of this building, assuming all of the very rough assumptions I made were correct, would range between $51.3k and $97.6k (Note - this is a rate between 12.4% and 24.4%)

The real answer is probably somewhere in between, and this does not include any estimate for income taxes for your state.

I will note that the mortgage doesn’t really matter when calculating capital gains, unless there were some costs from the mortgage that added to the basis.

It’s very hard to figure out what your basis in this house is without understanding what type of trust your mother had, what the worth of the house was when your mother died, what the worth of the house was when your father died and whether or not the property is in a community property state. But even if we assume that there is no basis in the house other than the $125k in renovations that you did, if the house is selling for $580k with $18k in closing costs, your capital gain would be:

$580k - $125k (renovations) - $18k (selling costs) = $437k

Since you and your sister are each 50/50 owners, this would mean you would each have a capital gain of $218.5k It appears that you both meet the residency and ownership tests for a primary home, so you can each exclude up to $250k in capital gains when you sell your primary home. $218.5k is less than $250k, so you would owe no Federal capital gains taxes on the sale of this building.

Again, this does not account for any taxes you might owe your state.

I will also note that if either of these buildings is selling for more than the highest estimate you provided, that will increase the potential taxes due.

AJ

4 Likes

AJ, thanks for all you’ve put into this. I’m away from home right now, so don’t have receipts available, but we have put quite a bit of money into the two family over time.
I’m feeling better having an idea of what’s to come. Appreciate your input so much.
MJ

That will increase both your basis and your recaptured depreciation. Increasing your basis will decrease your total capital gain, so the amount taxed at 18.8% (or 23.8%) will decrease. However, increasing your depreciation recapture will increase the amount that’s taxed at ordinary income rates, which are up to 25% So it may actually increase the tax bill some, again - depending on your other income. That said, the range for taxes I came up with was pretty wide, and I think the bill will probably still fall in that range if the other assumptions are close - although it may tend to the higher end.

As an example, if there was $200k of recaptured depreciation taxed at 25%, that would be a total of $50k, or $25k each. However, the amount taxed at capital gains rates would be:

$800k - $50k (original basis) - $24k (selling cost) - $200k (recaptured depreciation) = $526k, or $263k each

As long as you don’t have significant other income, you should stay below the 20% capital gains bracket, so your capital gains will be taxed at 18.8% (capital gains rate of 15% plus NIIT of 3.8%), which would be $49.5k each

Total for each would be: $25k + $49.5k = $74.5k

If you have enough other income to be bumped into the 20% bracket for some/all of your capital gains, your bill could increase by as much as $13.2k each

If you can defer other income from this year to another year, it would probably be a good idea to do so.

I will also note that for 2026, you will likely be bumped into one of the higher IRMAA premium brackets for Medicare. For 2027, the premiums should go back down, assuming that your income also goes back down in 2025.

AJ

3 Likes

AJ, Thank you again for sharing your wisdom. It’ll take a while but I’ll let you know how it all works out. My additional income is a public school teacher’s pension, 23 yrs after retirement, and a $400,000 IRA (as of this month).
After retiring I joined the Fool and opened a stock account that recently sprang to life. I haven’t yet taken any withdrawals from that account. A thousand thanks to David and Tom and folks like you who have helped me come this far.
MJ

4 Likes