Capital gains tax
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 "****" return, where his capital gains are in the $350,000, he owes capital gains tax. Could you help me understand this?
Answers
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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,
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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. -
We sold property in 2024 which will have capital gains. Does FreeTax USA address this for us or should we use another tax preparer?
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Yes, FreeTaxUSA can handle the reporting of your capital gains.
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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.