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0% Capital gains tax rate

dgllies

I have a client (age 72, single) who makes less than $35,000 per year. He has 12-13 properties (most are rentals) that he bought in the 70s and 80s that he owns outright. He wants to start selling them off and has asked about the tax implications. I thought that his income was below the line and that he would be in the 0% bracket on capital gains tax. I've looked at the IRS rules and from what I can tell, he'd owe no capital gains. But when I set up a "dummy" return, where his capital gains are in the $350,000, he owes capital gains tax. Could you help me understand this?

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MeganC

Hi dgiesel,

It sounds like you’re encountering the interaction between income thresholds and capital gains tax rates. While it’s true that individuals with taxable income below certain thresholds may qualify for the 0% capital gains tax rate, the tax implications change significantly when a large amount of capital gains is added to their income.

Capital gains are taxed based on the total income, including the capital gain itself. When your client sells a property, the gain is added to their other income to determine their taxable income for the year. This can push their total income into higher tax brackets, potentially subjecting a portion of the capital gain to the 15% or even 20% capital gains tax rate.

For example in 2023, the 0% capital gains tax rate generally applies to taxable income up to $44,625 for single filers, but gains exceeding that threshold are taxed at 15%, and potentially 20% at higher levels. If your client realizes $350,000 in capital gains, this will push their total taxable income well above the 0% rate threshold, resulting in tax liability.

For a detailed breakdown of how capital gains are taxed, you might refer to IRS Publication 550, https://www.irs.gov/forms-pubs/about-publication-550 .

cdkirchn22

Hi dgiesel,

I may be misreading your question but here goes:

Capital gains are stacked on income so as a single 72 year old, income + gains over $47,025 puts him into the 15% bracket, over $518,900 puts him into the 20% bracket. Keep in mind that depreciation recapture (if it applies in this case) is taxed differently than capital gains.

Dorene

We sold property in 2024 which will have capital gains. Does FreeTax USA address this for us or should we use another tax preparer?

PhillipB

Yes, FreeTaxUSA can handle the reporting of your capital gains.

MaxwellD

Hi Dorene,

Yes, FreeTaxUSA Does support the sale of properties. Form 1099-S is typically the form used to report real estate transactions (for example, the sale of your main home).

If you received a 1099-S because you sold your main home, you can determine if you need to report the information from the 1099-S by going to the "Sale of Main Home" page in the "Income" tab. The software will help determine if the sale of your home needs to go on your tax return.

If the 1099-S is for a vacation home, investment property, or land, you will enter the sale information shown on the 1099-S on the "Investments and Savings" page in the "Income" tab. Even though you received a 1099-S, vacation homes, investment property, or land are considered investments and are reported in this section.

If the 1099-S is for the sale of a rental home, enter your rental property information by clicking on Income > Rental Income (Schedule E). On the page titled "Tell us about your rental property," be sure to select "Yes" to the question that asks if you disposed of your entire interest in the property.

Here are some links that may prove useful from the IRS to help you file the sale of your property.

https://www.irs.gov/taxtopics/tc701
https://www.irs.gov/faqs/capital-gains-losses-and-sale-of-home

ACA

Can I clarify something here. Do you pay different capital gain tax rates based on the thresholds your capital gains push you through? Easy example, married filing jointly, 50,000 in ordinary income and a $1 million in capital gains. Subtract the standard deduction of roughly $30,000, and you have $20,000 in ordinary income and $1 million in capital gains. In this situation, would you pay 0% capital gains tax on the first roughly $75,000 in capital gains, 15% after that but only up to roughly $600,000 total income and 20% on the remaining gains?

GeorgeM

Hello ACA:

Your analysis is generally correct assuming the capital gains are all long term gains. Short term capital gains are taxed the same as ordinary income, and thus, do not get the benefit of the same preferential tax treatment accorded to long term capital gains.

Additionally, and to use your example, long term capital gains of $1 million would also be subject to the Net Investment Income Tax, Form 8960. The NIIT is a 3.8% tax on the lesser of an individual’s net investment income or the excess of their modified adjusted gross income (MAGI) over certain thresholds ($200k single/head of household, $250k married filing jointly). It applies to interest, dividends, capital gains, rental income, and passive business income. In your example, and assuming the gains were all long term, the NIIT would be roughly $30,000 in additional tax.

Lastly, you can review how the tax was calculated in your example by reviewing the Qualified Dividends and Capital Gain Tax Worksheet which is included with your tax return.