Capital gains taxes 101

Can anyone give me some ballpark figures on how deeply capital gains taxes bite? This is mainly for my parents…they’ve got a house that’s worth ridiculously more than when they bought it in 1957, and my father inherited about 30K worth of stocks in 1978 which now are worth around 300K depending on market conditions. Then in cash and IRA’s they have around 100K. So what’s the skinny on the dreaded capital gains taxes, should my folks decide to liquidate any of the non-cash assets? If you bought a house in 1957 for less than 30K, and it’s now worth 800K, what’s your tax bill if you sell that house? Are there ways to circumvent the taxes?

Your folks need to spend an hour or so with a CPA. $150 or so is well worth it to not make a misstep.

As far as selling the house, there is a one-time exemption if they are old enough (not sure of the exact age to qualify, 55?), so they won’t have to pay ANY tax on that gain. Even if they did have to pay, it’s only 20 percent now, it used to be much higher. And then there’s a reverse mortgage, where a bank buys their house from them over time, spreading the gain out over several years. Another way around the cap gains tax on a house is to buy a house worth more than the one you sold, then you can roll all your gains from the previous house into the basis for the new house. Since your parents are probably not going to trade-up though, they most likely would want to take advantage of the one-time no-gain provision, if they qualify.

For the stock, they might look into selling little by little over the next few years. There may be something they can do with an annuity because of their age, I’m not sure.

They can just hold on to the cash and the IRA. With the IRA they can take an annuity with that too, so they don’t have to take it all out at once, that eases the pain somewhat.

This is all just general info though. They should talk to a REPUTABLE financial advisor (be careful). If I had to recommend a financial advisor I would probably go with Fidelity, just IMHO of course.

Correction: The 20 percent gain is for a house you don’t live in (investment property). I believe the cap gains on your primary residence has been abolished all together.

I agree with Ringo - see a CPA. Too many factors and variables to consider.

For the record, from the IRS’s Publication 523 (Selling your Home):

General info on capital gains

Thanks for the responses. By any age-related yardstick, I’m sure my folks qualify as they’re 79.

Current long-term cap gains tax rate is 15%. The exclusion on capital gains on sale of a house is as follows: You must have lived in the house as your primary residence for two (2) of the last five (5) years. You can then exclude $250,000 of the gain ($500,000 if married filing jointly). There is no age restriction, you don’t have to trade up to another house, and you can take advantage of this exclusion as many times as you are eligible. ccwaterback was referring to out-of-date information. This is all covered in IRS Publication 523, which is available at www.irs.gov.

It is definitely time to spend a few dollars to work with a pro. Tax planning must be done before you sell assets. Spending $500 to save $50,000 or more in taxes would be money well spent.

Yeah dude. The general capital gains rate is 15% of the difference between the taxpayer’s amount realized (i.e., what they sell the property for) and basis (i.e., what they bought the property for).

There’s no capital gains tax reason to liquidate non-cash assets because selling the assets will generate capital gain, most of which will be taxed (see below about the house). However, there may be some estate planning reasons to sell some assets or to give some of them to their children, which is why they need to see a CPA.

As someone else mentioned, and assuming your parents lived in the house as their primary residence, they’d pay tax on 800-30-500, or $270k, so the tax bill would be $40.5k.

The only ways to “circumvent” the tax is to (1) have losses to offset it (but this means you lost money to generate the losses, so that’s no good) or (2) do something stupid like not report the sale of the house, which is way too easy for the IRS to catch.

Hey ccwaterback, maybe you shouldn’t answer tax-related questions if your knowledge of tax law stopped evolving in 1997. Specifically:

This is incorrect. There is no such exemption for taxable years ending after May 7, 1997.

Hey, this one’s a little more up to date, but still wrong. The general capital gains rate is now 15%, and its lower for some stuff.

Again, this is wrong. And this statement is not made correct by your later post that this applies to rental property, because that’s wrong, too. If it’s used as rental property, then your parents could do a 1031 exchange and trade this house for other real property, but their basis in the new property would be the same as their basis in their old property. Their gain would not be rolled into the basis of the new property. If it’s a residence, then they can’t do a 1031.

OP: since your parents are 79, they definitely need to talk to someone who knows about estate planning; the issues here go beyond simply capital gains.