Author Topic: Capital gains on sale of home--Even if untaxed, will these blow up MAGI for ACA?  (Read 811 times)

RedwoodDreams

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We're looking at selling our house in a HCOL area in the next few years. Our proceeds will be below the 500k capital gains max for a couple. But today it occurred to me: We receive a hefty ACA subsidy. Should we expect to lose that subsidy during the year in which we sell our home, or do those home sale proceeds not factor into MAGI?


clifp

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walkwalkwalk

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No they do not. The gain is excluded. Only the gain could possibly be included (but it isn't), not the gross proceeds.

amoose

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The above responses are correct but i just wanted to add in my personal experience. I file MFJ and use Turbotax.

In 2015 I sold my house for a gain on sale of about $186,000. Turbotax had me complete a "Home Sale Worksheet" pursuant to IRS Publication No. 523: https://www.irs.gov/publications/p523#en_US_2017_publink100077247. This added nothing to the reported cap gains on our 2015 Form 1040, so our MAGI was unaffected by the sale. When all was said and done we were still able to collect a 100% Premium Tax Credit of $6,895 for the year.

Hope this helps!

RedwoodDreams

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Big thanks, everyone. This is a big relief. My son's medication is $5k/month. We'd be in big trouble without the ACA subsidy.

Firehazard

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Related question....when gains are calculated on the sale of your home, can costs for renovations be deducted?

sol

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Another related question:  what if you've sold a rental house instead of a principle residence, and don't get to use the $500k exclusion? 

amoose

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Related question....when gains are calculated on the sale of your home, can costs for renovations be deducted?

In many cases, home improvements will increase the property's tax basis (and thereby lower the seller's capital gains upon sale). IRS Publication No. 523 summarizes what kind of improvements do or don't increase the home's tax basis: https://www.irs.gov/publications/p523#en_US_2017_publink100010759.

Laura Ingalls

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Another related question:  what if you've sold a rental house instead of a principle residence, and don't get to use the $500k exclusion?

Your likely jacked.  OP also needs to remember that if you put the proceeds somewhere other than your mattress you may incur capital gains if you need to liquidate to buy a new place in the future.

sol

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Another related question:  what if you've sold a rental house instead of a principle residence, and don't get to use the $500k exclusion?

Your likely jacked. 

Yea, that's kind of the impression I was getting.

My situation is probably not terribly uncommon among this crowd.  I retired with two rental houses, and would like to sell one of them to pay off my primary mortgage in order to dramatically reduce my annual burn rate in order to qualify for better tax treatment like ACA subsidies. 

I was postponing selling the rental while working, in order to avoid paying the non-excludable capital gains taxes on top of high regular income taxes, but even without a paycheck coming in, the capital gain income from selling a rental house could be well over a hundred thousand dollars, which means we will pay full freight for health insurance that year. 

Well that kind of sucks.  After all of my careful retirement planning, how did I miss this little nugget?

walkwalkwalk

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Another related question:  what if you've sold a rental house instead of a principle residence, and don't get to use the $500k exclusion?

Your likely jacked. 

Yea, that's kind of the impression I was getting.

My situation is probably not terribly uncommon among this crowd.  I retired with two rental houses, and would like to sell one of them to pay off my primary mortgage in order to dramatically reduce my annual burn rate in order to qualify for better tax treatment like ACA subsidies. 

I was postponing selling the rental while working, in order to avoid paying the non-excludable capital gains taxes on top of high regular income taxes, but even without a paycheck coming in, the capital gain income from selling a rental house could be well over a hundred thousand dollars, which means we will pay full freight for health insurance that year. 

Well that kind of sucks.  After all of my careful retirement planning, how did I miss this little nugget?
You can do a like kind exchange to get a new rental. or TLH (tax loss harvest)

sol

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You can do a like kind exchange to get a new rental. or TLH (tax loss harvest)

The like kind exchange won't help in my case, because the whole point of selling is to generate cash to clear our primary mortgage. 

Tax loss harvesting might be useful because of the recent market dip.  I will need a new spreadsheet to figure how much loss I would have to realize in order to offset enough capital gains from the sale of a rental property in order to lower my income below the ACA threshold for a family of my size.  My mental ballparking suggests that I probably haven't bought enough stock in my taxable account since the market peak to generate that much taxable loss.

Other alternatives I have considered are 1) selling the rental as an installment sale, to spread the proceeds out over two tax years, and 2) refinancing the mortgage instead of clearing it, to lower the payments.  This second plan would make it more challenging for us to qualify for ACA subsidies because we would still be on the hook for generating ~18k of extra income each year to pay the reduced mortgage, in part due to rising mortgage rates offsetting part of the savings.  We can mitigate that extra cost for a while, by withdrawing from tax-free Roth IRA contributions, but long term it's probably not a sustainable plan because our allowable family income is going to drop as my kids leave the household.  Option number 3) is to just pay the extra $10k for health insurance in the year of the sale and suck it up.  In the grand scheme of things it's a drop in the bucket, it just pains me to be so inefficient with our funds.

In either case, I'm headed back into spreadsheet land to work out a new plan.  I've only been retired three months and I'm already looking at revamping my entire retirement financial strategy.

less4success

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Other alternatives I have considered are 1) selling the rental as an installment sale, to spread the proceeds out over two tax years, and 2) refinancing the mortgage instead of clearing it, to lower the payments. ... .  Option number 3) is to just pay the extra $10k for health insurance in the year of the sale and suck it up.

My vote is for option 3.

Edit: removing some potentially inaccurate information
« Last Edit: December 06, 2018, 10:25:23 PM by less4success »

tralfamadorian

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Other alternatives I have considered are 1) selling the rental as an installment sale, to spread the proceeds out over two tax years...

Seller financing might be a nice way to work around your ACA cliff. 20-30% down, 8-9% interest. Then you could sell the note to a third party at some point in the future.

CareCPA

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Other alternatives I have considered are 1) selling the rental as an installment sale, to spread the proceeds out over two tax years, and 2) refinancing the mortgage instead of clearing it, to lower the payments. ... .  Option number 3) is to just pay the extra $10k for health insurance in the year of the sale and suck it up.

My vote is for option 3.

One other (crazy) option would be to move into that house for at least 2 years prior to selling it. Given the state of the housing market (i.e. potential for a slowdown/downturn), I would avoid this option at present, but if you had planned this from the beginning it could have helped... assuming the house is even remotely close to meeting your needs :)
It doesn't work that way. Check out Worksheet 3 in IRS Publication 523: https://www.irs.gov/pub/irs-pdf/p523.pdf
If you used the property for non-residential use (i.e. rental use) after 2008, then your gain gets allocated between the rental time period and the personal time period. The gain exclusion is only applicable to the gain allocated to personal use.
You would still potentially have gains allocated to the time it was a rental, plus any applicable depreciation recapture.

clifp

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Tax loss harvesting might be useful because of the recent market dip.  I will need a new spreadsheet to figure how much loss I would have to realize in order to offset enough capital gains from the sale of a rental property in order to lower my income below the ACA threshold for a family of my size.  My mental ballparking suggests that I probably haven't bought enough stock in my taxable account since the market peak to generate that much taxable loss.

Other alternatives I have considered are 1) selling the rental as an installment sale, to spread the proceeds out over two tax years, and 2) refinancing the mortgage instead of clearing it, to lower the payments.  This second plan would make it more challenging for us to qualify for ACA subsidies because we would still be on the hook for generating ~18k of extra income each year to pay the reduced mortgage, in part due to rising mortgage rates offsetting part of the savings.  We can mitigate that extra cost for a while, by withdrawing from tax-free Roth IRA contributions, but long term it's probably not a sustainable plan because our allowable family income is going to drop as my kids leave the household.  Option number 3) is to just pay the extra $10k for health insurance in the year of the sale and suck it up.  In the grand scheme of things it's a drop in the bucket, it just pains me to be so inefficient with our funds.

In either case, I'm headed back into spreadsheet land to work out a new plan.  I've only been retired three months and I'm already looking at revamping my entire retirement financial strategy.

Any chance you could sell it this year. Assuming no, I wouldn't beat yourself up too much.  At some point you either had to pay higher taxes while working, or pay lower taxes and lose the ACA subsidy.

sol

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Other alternatives I have considered are 1) selling the rental as an installment sale, to spread the proceeds out over two tax years, and 2) refinancing the mortgage instead of clearing it, to lower the payments. ... .  Option number 3) is to just pay the extra $10k for health insurance in the year of the sale and suck it up.

My vote is for option 3.

One other (crazy) option would be to move into that house for at least 2 years prior to selling it. Given the state of the housing market (i.e. potential for a slowdown/downturn), I would avoid this option at present, but if you had planned this from the beginning it could have helped... assuming the house is even remotely close to meeting your needs :)
It doesn't work that way. Check out Worksheet 3 in IRS Publication 523: https://www.irs.gov/pub/irs-pdf/p523.pdf
If you used the property for non-residential use (i.e. rental use) after 2008, then your gain gets allocated between the rental time period and the personal time period. The gain exclusion is only applicable to the gain allocated to personal use.
You would still potentially have gains allocated to the time it was a rental, plus any applicable depreciation recapture.

Moving back into the houses isn't going to work in my specific case anyway, because they are outside of the school district my kids want to stay in.

I could potentially refinance all three properties to new 30 year mortgages.  That would lower the amount I owe each month on our primary residence to about 18k/year, and it would generate about 8k in additional positive cashflow per year, leaving only $10k in extra income we would have to show for ACA purposes.   It is of course a bit more complicated than that, because it would also change our schedule E, but as a rough ballpark I think I could at least narrow the gap some without selling any of them.  The down side is that the refis would probably cost me at least another $8k out of pocket on day one, so the first year's savings would be negligible anyway.

less4success

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It doesn't work that way. Check out Worksheet 3 in IRS Publication 523: https://www.irs.gov/pub/irs-pdf/p523.pdf
If you used the property for non-residential use (i.e. rental use) after 2008, then your gain gets allocated between the rental time period and the personal time period. The gain exclusion is only applicable to the gain allocated to personal use.
You would still potentially have gains allocated to the time it was a rental, plus any applicable depreciation recapture.

Thanks for the correction! I had seen enough articles mentioning the "moving back for a while" strategy that I didn't think to double-check it.