Is Money From Real Property Sale Taxable Income

Is money from house sale taxable

Dear Liz: I sold a rental property this year and will have a long-term capital gain of about $100,000. My normal income usually puts me in the 10% tax bracket and my Social Security is not taxed because my total income is under $25,000. I pay $104 per month for Medicare. Will the sale of the rental property count as income and make my Social Security benefits taxable? Will I suddenly be deemed “rich” enough to pay more in Medicare payments? If so, will the Medicare payments go back to normal because I will have total earnings under $25,000 after 2014? I am 66, single and by no means rich.

Cash Inheritances. You won't owe income tax if your beloved uncle dies and leaves you money he kept in a savings account. If he leaves you $300,000, it's yours free and clear – your uncle already paid taxes on it once when he earned it. The IRS places no limits on how much you can inherit. If you take the cash and place it in a coffee can in.

Therefore, David will pay 15% of $100,000, or $15,000 on the gain. David is a US citizen, the property is located in the United States, and David has lived his entire life in the United States. David is just thrilled he doesn’t have to pay 33% (his progressive tax rate) on the sale. May 21, 2020 If you sell real estate, you have to report the gain or loss on the sale to the IRS. You must report the gain on Form 8949 and also on Schedule D of your Form 1040. Gains from the sale of real estate property are capital gains and are subject to gains tax rules for long- and short-term gains.

Answer: This windfall will affect your Social Security taxes and your Medicare premiums, but the changes aren’t permanent.

The capital gain will be included in the calculation that determines whether and how much of your Social Security checks will be taxed, said Mark Luscombe, principal analyst for CCH Tax & Accounting North America. That will likely cause up to 85% of your Social Security benefit in 2014 to be taxable.

Your Medicare premiums are also likely to rise based on your higher modified adjusted gross income, said Jay Nawrocki, senior healthcare law analyst for Wolters Kluwer Law & Business. The income used to determine Medicare premiums is the modified adjusted gross income from two years earlier, so your premiums shouldn’t increase until 2016. If your income reverts to normal in 2015, your premiums should also revert to normal in 2017, Nawrocki said.

The exact amount you’ll pay can’t be predicted, but people with modified adjusted gross incomes under $85,000 paid $104.90 per month in 2014. Those with MAGI of $85,000 to $107,000 paid $146.90, while those with MAGI of $107,000 to $160,000 paid $209.80. If your income for 2014 puts you in that last group, you should count on your premiums roughly doubling in 2016.
There is some good news. You’ll qualify for the 0% capital gains rate on the portion of the gain that makes up the difference between your income and the top of the 15% tax bracket (which is $36,900 in 2014 for a single person). If your income is $24,000, for example, then $12,900 of your capital gain wouldn’t be taxed by the federal government. The remaining $87,100 would be subject to the 15% federal capital gains rate. You may owe state and local taxes as well, so consult a tax pro.

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By Michael D. Koppel, CPA, Gray, Gray & Gray LLP, Westwood, Mass.

Gross Income

The question of whether a sale of real property produces capital gain or ordinary income is a matter of tax law interpretation. The taxpayer’s intentions and actions in each situation need to be examined to determine if the taxpayer is in the business of selling real property to customers, which would cause the transactions to be subject to ordinary income taxes as opposed to the more favorable capital gains rates.

Personal property

Real Property Search Maryland

The recent case of Flood, T.C. Memo. 2012-243, illustrates this issue. There are other issues in this case, but this item focuses on the classification of income from the sale of real property.

The facts of the case are straightforward. During the time in question, Donald Flood was a day trader in the stock market. He and his wife also were active in real estate activities that consisted of purchasing and reselling vacant lots. In general, the Floods did not make any improvements to the land they purchased. Between 2001 and 2008, the Floods purchased approximately 250 lots. They sold 2 lots in 2004 and 40 lots in 2005. In 2005, they donated 11 lots to the Sawyer Road Baptist Church. In 2004 and 2005, the Floods had profits, which they reported on Schedule D as capital gain. The IRS reclassified the gain as business income that should have been reported on Schedule C and taxed at ordinary income rates. The IRS also determined that the Floods were subject to self-employment tax on the income.

In determining whether the income should be classified as ordinary income or capital gain, the court evaluated nine criteria: (1) the taxpayer’s purpose in acquiring the property; (2) the purpose for which the property was subsequently held; (3) the taxpayer’s everyday business and the relationship of the income from the property to the taxpayer’s total income; (4) the frequency, continuity, and substantiality of sales of property; (5) the extent of developing and improving the property to increase sales revenue; (6) the extent to which the taxpayer used advertising, promotion, or other activities to increase sales; (7) the use of a business office for the sale of property; (8) the character and degree of supervision or control the taxpayer exercised over any representative selling the property; and (9) the time and effort the taxpayer habitually devoted to sales of property. It is important to note that, under Sec. 1221(a)(1), property is not a capital asset if it is “stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer . . . or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.”

During the trial, Mr. Flood argued that the lots were purchased for investment purposes and therefore the profits should be taxed as capital gains. However, the court found that even though the Floods did not develop the lots or use a business office, they put considerable effort into the real estate. The Floods examined public records to determine which property owners to contact to purchase the lots, mailed letters to the property owners to facilitate their purchase of the lots, prepared agreements for execution, prepared deeds, paid legal fees to clear title to properties they purchased, paid legal fees to ensure the closing of the properties, paid legal fees to enforce specific performance of purchase-and-sale agreements, conducted research, made phone calls, and used a real estate agent to sell lots. Additionally, Mr. Flood created a website designed to sell the lots and place advertisements in public places. The court also considered that the income the Floods derived from other sources was modest compared with the sale of the lots.

Real Property Definition

The court concluded that the “preponderance of credible evidence supports a conclusion that the Floods’ real-estate transactions were conducted in the ordinary course of a trade or business and not for investment purposes.”

Determining whether a real estate sale produces ordinary income or capital gain is difficult and is potentially an issue that can cause a taxpayer to be liable for significantly higher taxes. Unfortunately, as this case demonstrates, there is no bright-line test. Further, while the Tax Court identified the specific tests, it is still unclear how many of those tests have to be passed for a transaction to be treated as capital.

EditorNotes

Michael Koppel is with Gray, Gray & Gray LLP in Westwood, Mass.

Is Money From Real Property Sale Taxable Income 2017

For additional information about these items, contact Mr. Koppel at 781-407-0300 or [email protected].

Unless otherwise noted, contributors are members of or associated with CPAmerica International.