RE capital gains - can this cause me to lose ACA subsidies?

[waltworks]

We sold a rental property last year and have some capital gains taxes to pay, but I was surprised to see that our AGI has bumped up because of that to such an extent that we have to pay back 100% of the subsidy we received for healthcare.

Is Turbotax doing something stupid, or do I not understand this correctly? I was under the impression (quite possibly wrong) that capital gains from the sale of RE weren't considered ordinary income and didn't contribute to AGI.

Any help would be appreciated - I haven't run into this before, despite selling other rentals in the past.

-W

[eightyeighttoone]

I do recall the subsidies at 26 USC 36B (ACA subsidies) are based on household income, which is defined in that statute as modified AGI. So experiencing a gain from selling rental property could bump you out of being eligible for subsidies I think.

There is that law where you can exclude the first 250k or so of cap gains from gross income (26 USC 121), but this is limited to selling your primary residence and has some other rules. Maybe you were thinking of that?

I would double check with your tax advisor, but it seems like turbo tax might be correct ... unfortunately.

[FIPurpose]

Capital Gains on RE are just that. Capital gains. They count towards AGI, but are taxed differently. If it was your primary residence for 2 out of the past 5 years, then it is a mostly tax free sale.

My guess is that your previous home sales didn't appreciate enough for you to notice a significant tax difference.

Note: not a CPA.

[EarthSurfer]

Just a note on the "2 of 5" rule with a rental property. It is a bit more complicated than a simple exclusion. (Aka "Section 121 exclusion")

The $250,000/$500,000 exclusion is prorated based on the time it was an owner's principal residence. If you lived in the property 2 of 5 years, you are only eligible for 2/5 or 40% of the allowed exclusion. (I think the tax law changed around 2009.)

Worse yet, if you don't use a 1031 exchange, the claimed depreciation on the rental property is counted as income, not LTCG, and taxed accordingly.

Alas, unwinding all of this was a bit more than I could accomplish with tax programs. 2017 was a CPA year for me. She saved me far more than her fee in taxes. I spent several days trying to work through things, and she definitely earned her keep.

[cooking]

Just a note on the "2 of 5" rule with a rental property. It is a bit more complicated than a simple exclusion. (Aka "Section 121 exclusion")

The $250,000/$500,000 exclusion is prorated based on the time it was an owner's principal residence. If you lived in the property 2 of 5 years, you are only eligible for 2/5 or 40% of the allowed exclusion. (I think the tax law changed around 2009.)

EarthSurfer, I don't think the above is accurate.  I'm not an accountant, so hopefully someone who is will weigh in here.  Also, IRS Pub. 523 gives a good guide on how to apply Section 121.

In my reading of the IRS Publication, the 2 out of 5 yrs. test is the minimum for the full exclusion.  Prorating comes into play for those who can't meet the 2 yr. minimum for specific reasons that are suggested in the Publication.  These are usually things beyond the taxpayer's control, such as having to move for a job far away.  In those cases, the IRS allows the taxpayer to take a partial exclusion even though he doesn't meet the minimum requirements.

[LightStache]

Unfortunately capital gains income is included in MAGI used for ACA subsidies. I just sold a rental and it pushed me over the limit for Schedule E losses. Come tax time, it sucks to make so much $.