Tax Shock!

Retirement Retired Fools
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Thought I’d share a tax story that actually happened last month.

We have a second home on the N. Oregon Coast and like so many other residential communities, have seen property values blow up thru the roof. We have no interest in selling, but our neighbor also has a second home not far from ours, with easy access to the beach and hiking trails. A couple of months ago, she (a widower) decided to sell her 1,100 sq ft 2 BR 1 BA house she’s owned when she and her husband (deceased 1998) bought it for $35,000 in 1982. She will be moving into a CCRC with a large admission fee that she can only raise by selling this second home.

She thought the house might sell for $250K - $300K, based on her memory of historic prices. She was flabbergasted when the listing agent told her to put the house on the market for $600K as a ‘starting point’. Huh? Well, she did and within 10 days she had multiple bidders with the final ‘winning bid’ of $750K!! So the second week of January, escrow closed and they transferred $710K to her savings account. She was incredulous! She always lived a modest life and never dreamed of actually having that much money!

This amount not only easily funded her CCRC fee, but provided enough extra to fund a list of things she mentioned, including travel cruises she had only dreamed of, season tickets to the symphony, a new Cadillac (or equivalent) and so on. But ever being the scrooge, I politely asked…‘have you considered taxes’? What…taxes? she asked. She hadn’t. So she asked if I could help her estimate what those might be.

Here are my estimates.

Taxable capital gain: $632,000 (Adjusted selling price minus adjusted basis)


Federal tax on gain:.........$117,400
OR state tax on gain:.........$60,300
Net Inv Income Tax:...........$19,100
IRMAA Part B and D increase....$5,833 (2024)

Total tax…$202,633 (~29% of proceeds)

She was shocked. There’s still plenty to cover the CCRC one-time cost, but she’ll have to curtail several of the other pleasures she had hoped for.

Unfortunately, this lady has 3 strikes going against her. She’s filing single, this is not a principal residence and this is happening in Oregon (a high tax state). Just for a comparison for my curiosity (I haven’t shown her), I recalculated using the same dollar values, but assuming this happened in no income tax WA state (where we live), she’s married and it was a principal residence. Under those conditions, the total tax bill would drop to about $15,455!

Now, I told her mine is only an estimate and she needs to visit a CPA (I recommended a couple I know) to get the accurate numbers and to plan for how the taxes will be paid.

Just a tax story some may find interesting and perhaps helpful to them

BruceM

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Taxable capital gain: $632,000 (Adjusted selling price minus adjusted basis)

Federal tax on gain:…$117,400
OR state tax on gain:…$60,300
Net Inv Income Tax:…$19,100
IRMAA Part B and D increase…$5,833 (2024)

Total tax…$202,633 (~29% of proceeds)

I really didn’t look at your calculations, but since this property was jointly owned with her now deceased spouse, she may be able to get a half-step up in basis based on when her husband died. Since he died in '98, even that won’t help much.

IP

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Excellent point, IP.
I didn’t go into that level of detail in how I arrived at adjusted basis, but I took 1/2 step up at his death into account, as well as capital improvements, for which they have little, and reductions in basis due to the depreciation they will have to take for the several years in the early 2000s when she rented it. I was surprised at how little the house had appreciated in value from 82 to 98. But this is why such a calculation really needs to go to a tax pro, as any legit means of adjusting basis up will reduce tax by 20% of the adjustment for Fed tax plus a reduction in AGI for state.

Thanks

BruceM

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…this is not a principal residence…

I’m sorry, I think she was quite naïve to not realize her gains would be fully taxed.

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Not any different from the people I heard at the doctor’s office say they thought they wouldn’t have to pay for anything since Obama care act was passed……all people hear is Free Health Care and not the details of it all.

Details are important. :slight_smile:

I imagine the woman is going to be covered, what else is she going to do? Just pay the taxes and move on. It only hurts when you write the checks.

Lucky Dog. Ow!

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I’m sorry, I think she was quite naïve to not realize her gains would be fully taxed.

When they bought the property, all they would have had to do is move in as a principal residence for two years and then they could have sold it without capital gains tax. That went away sometime around when we bought our vacation home, around 2011? We had planned on moving into it for at least 2 years in retirement and be able to sell without capital gains.

We on these boards are much more informed than the general public, particularly being able to depend on others to let us know what we don’t know. Sometimes it’s very much to your benefit to be dealing with anonymous people on the internet, as the anonymity makes it easier for them to tell you if you are being an idiot about something. Much harder to do in person.

IP

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When they bought the property, all they would have had to do is move in as a principal residence for two years and then they could have sold it without capital gains tax.

That’s assuming the capital gain is less than $500,000. In CA home prices are out of this world.

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mendomann
That’s assuming the capital gain is less than $500,000. In CA home prices are out of this world.

CA prices are absurd. When you look at the listings in Zillow or Redfin, what people are asking (and GETTING, evidently. for ‘crackerboxes with no yard’) makes you crazy.

But, evidently there are buyers who buy, lots of buyers, and the question becomes:
WHERE DO THEY GET THE MONEY?
WHAT KIND OF JOB DO THEY HAVE AND WHAT SALARY ARE THEY HAULING DOWN?

Many years ago (>60), my dad was of the same opinion, way back then. I remember him saying, “Well, that’s it. They can’t go any higher.”

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WHERE DO THEY GET THE MONEY?
WHAT KIND OF JOB DO THEY HAVE AND WHAT SALARY ARE THEY HAULING DOWN?

Speaking casually with the local RE agent, many of these second home buys are cash. He cites two reasons…baby-boomer parents dying and leaving homes and savings to their 50-something children and selling homes in CA and relocating. The reason for bidding up prices locally he thinks, is quality of life. High dual income households, he said, usually finance these high 6/low 7-figured buys.

BruceM

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When they bought the property, all they would have had to do is move in as a principal residence for two years and then they could have sold it without capital gains tax. That went away sometime around when we bought our vacation home, around 2011? We had planned on moving into it for at least 2 years in retirement and be able to sell without capital gains.

I’m not sure when the capital gains exclusion on a primary residence changed or if it did. The rules that I recall from selling my home in 2019 were that you must have lived in the residence for 2 of the 5 years immediately preceding the sale and that the capital gains exclusion had to be claimed within 2 years of the sale.

My wife died in January 2019. To qualify for the full $500K capital gains exclusion, I had to sell the house in 2019 as 2019 was be the last year that I would be able to file MFJ tax returns. I sold the house “as is” to a real estate investment firm and put it on the market 6 months later for $200K more than he bought it. Some of the changes that they made were things that my wife and I talked about but never got around to doing. Others I thought were strange choices like making most of the backyard a concrete patio. At least he did plant grape vines on the back hill.

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I’m not sure when the capital gains exclusion on a primary residence changed or if it did.

It changed for vacation homes and rentals, that used to be able to be converted back to a primary with two years residency.

My wife died in January 2019. To qualify for the full $500K capital gains exclusion, I had to sell the house in 2019 as 2019 was be the last year that I would be able to file MFJ tax returns.

First and foremost, my belated condolences. I can’t even imagine. Happily this is theory for me.

It’s possible you could have done a half step up in basis at the time of DW’s death, giving you the time to sell and use your $250K capital gains exclusions on the gains post 2019. Can vary by state and am not a tax pro, but it’s something to look into if one finds themselves in a position I certainly never hope to be in.

Bottom line is you got to move on, and so what if someone else benefitted from your circumstances. Some things are darned well not worth the effort at the time that effort is required.

IP

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High dual income households, he said, usually finance these high 6/low 7-figured buys.

BruceM

We just sold our house. The buyer is a longshoreman. $1.4 mil.

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