I have a question about capital gains.

[silverweb]

[font color="navy" face="Verdana"]A friend of mine is one of the old-school Republicans, a very decent guy who's fair and even-handed. We've discussed politics a number of times and he says he could be a Democrat because he agrees with most of the social justice platform. The reason he remains Republican, though, is because of "Democratic red tape" and some perceived unfairness in the tax code.

Specifically, he wants to know why, if he sells a small apartment complex he owns (valued at <$1.5 million) as his "retirement," he can't get a one-time deferment of capital gains taxes in the same way a homeowner can get a one-time deferment on the sale of their home. He thinks this should apply to selling any commercial property or business valued at <$4 million, a once-in-a-lifetime exception.

I started trying to research the law and was in way over my head. Are there any tax experts here who can answer his question? He's really willing to abandon the GOP if he can understand this, since he blames Democrats for the "unfair" lack of exemption in such a case, and is otherwise on board with most of the Democratic platform.

Thanks in advance!

[kelly1mm]

1. The homeowner capital gain exception is limited to $250k ($500k MFJ)

on the sale of a home the taxpayer has lived in as a primary residence for at least 2 of the past 5 years. It is not a deferment (like a 1031 exchange would be) as a deferment implies that the owed taxes will be paid at some later date. It is a true exception (as in not taxed as income at all, at least for federal income tax purposes)

It also is not a one time exception but can happen over and over. In fact there is a cottage industry of people doing "slow-flips" where in they 'live' in a property they fix over a 2+ year period, sell, pocket the tax free gain, and move to the next slow flip.

Why this does not apply to other capital gains is purely (IMO) politics. Not so much that the politicians want to punish holders of other types of capital assets, but rather that there is an incentive to 'buy off' homeowners (technically home sellers).

[silverweb]

2. Thank you.

[font color="navy" face="Verdana"]What does MFJ mean in your subject line? And what do you mean by "buying off" homeowners?

My own thinking on the subject was something along the lines of the exemption (thanks for the correction from "deferment&quot being for homeowners only because many more people are homeowners than are business owners and this was designed to help them in retirement.

Someone who owns a business or commercial property most likely already has a home with which to get this exemption and extending it to business property would give them an unfair advantage over the many who have only their homes. Am I close?

[kelly1mm]

3. MFJ = Married Filing Jointly. 'Buying off' = giving money to some person/group to make them

happy/more likely to support you.

I believe the part of your thoughts about the many more homeowners is key. Politics while run in large measure by money still takes actual voters once every 2 years to go in and vote for you. There are LOTS of home owners (or aspirational home owners) compared to business owners - particularly business owners who have 250k-500k capital gain assets.

He is already getting a break on the taxes he is paying as the gain will be taxed at a lower rate (basically 15%) compared to regular income (as high as nearly 40%). There are many reasons for this from an economic perspective but the reason homeowners get the further break is the homeowner class (roughly the 'middle class') is privileged in US politics, at least publicly.

[silverweb]

4. Excellent. One more question, if I may...

Last edited Sat Jan 16, 2016, 01:40 AM - Edit history (1)

[font color="navy" face="Verdana"]When you say 250k-500k capital gains assets, you mean the selling value of the home, not the amount of capital gain, right?

So if his home is worth $800k, he gets the exemption on up to 500k of the value of the home, not 500k in capital gain?

On edit: Sorry if I sound stupid, but on these matters I'm completely naive, since I've never been a homeowner or had capital gains of any kind.

[kelly1mm]

5. No, I mean the gain in value realized at sale. Without getting super technical, in the personal

home example the gain would be sales price after fees - cost basis of the home (purchase price + fees + improvements). for example say someone sold their home for $850,000. After sales fees they got 800k net. They bought the home in 2009 at the bottom of the market for 475k + 25k in fees and they spent 50k on a new inground pool.


the calculation would be sales price after fees (850k- 50k =800k) - cost basis (475k + 25k + 50K = 550k) = Total capital gain of $250k.

The calculation in a business property is more complex as you would have to account for adjusted cost basis after depreciation but the basic rules still apply (sales proceeds - cost basis = capital gain)

[silverweb]

6. Thank you again!

[font color="navy" face="Verdana"]You may have helped me win over a convert from the GOP!

[kelly1mm]

7. Glad to help! Have a good night!

[silverweb]

8. You, too!

[Hoppy]

9. Because that part of the tax law was written to benefit people who were going to

Retire and move to smaller quarters.

Neither party will help your friend so he might as well vote for Bernie.

[silverweb]

10. Indeed!

[font color="navy" face="Verdana"]He originally said he liked Trump "because Trump has management experience and a mayor or senator doesn't" (ignoring Trump's overall hatefulness).

But I've got him thinking about Bernie.

[progree]

11. Not just for downsizers. Also so people making a lateral move don't end up with a big tax bill

Say a couple bought a house 25 years ago for $80,000 that is now worth $250,000. They now need to move because of a job change. They sell the house for $250,000 and, say after $20,000 in selling costs have a capital gain of $250,000 - 20,000 - 80,000 = $150,000. If there was no exclusion, then at a 15% capital gains tax rate they'd face a tax bill of $22,500.

Hardly fair at all if the equivalent new home in their new location also costs $250,000. They are simply trying to live in an equivalent house.

What the Republican in the OP doesn't understand is that when Joe Blow earns, say $50,000, he pays income taxes on that $50,000.

Likewise when Joe Blow and just about anybody else buys almost any asset (stocks, collectibles, gold, an apartment complex, a business, a vacation home, whatever) for $X and sells it for $X + $50,000 (after selling costs), he pays taxes on the $50,000 gain. Most of us consider that fair (albeit they pay taxes at a lower capital gains rate). Why should the worker who gets up at 5:30 in the morning to earn a paycheck and gets home at 6 PM be the only one paying taxes?

Congress reasonably decided to exclude something we all need -- shelter to live in -- up to $250,000 individual / $500,000 MFJ, so that people simply trying to buy an equivalent house don't end up paying huge tax bills along the way when they move. As well as downsizers.

[PasadenaTrudy]

12. Could he do

a 1031 Exchange?

[silverweb]

13. He's retiring and doesn't want to.

[font color="navy" face="Verdana"]He's nearly 75 years old, and he and his wife just want to travel a bit, not reinvest.

[PasadenaTrudy]

14. I see

Can't blame them!