I've searched the "Taxes" and "Real Estate" sections of the forum and haven't found this particular situation addressed. I'm hoping it strikes some of you as interesting.
A little less than five years ago, in 2012, my wife and I and our two boys moved from Seattle to Vermont to work at a private boarding school. We had purchased a home in Seattle in 2008 and we kept it as a rental while here in Vermont. The primary motivation here was uncertainty about whether we might want to return to Seattle and wanting to keep a beachhead in that rapidly appreciating real estate market. Now that we know we are
not returning to Seattle, we are preparing to sell it.
I do not believe this qualifies as our primary residence anymore, because we have not lived in it for two of the last five years. I've read the IRS guidelines on selling your main home, and there's an exclusion (i.e. reduction in taxable gains) if you've moved to take a job, but they also write that the exclusion requires that "You sold your home not long after the situation arose." which I doubt we qualify for.
One more bit of background is helpful for context: For the last few years, my wife and I have not paid any federal income tax. When we came to the boarding school, we exchanged my ~$110k/year salary for something closer to $45k/year BUT we get free housing (including utilities and wifi), lots of free food, and a bunch of other strange perks. Because our primary expenses were housing and food (raising small children, we weren't really going out much...) the change to the lower paying job, in terms of cash, has actually allowed us to save more than on my higher paying job previously. We now invest ~60% of our annual income. We have also added two more children (we're done now!) so between the child tax credits and our low starting income, we haven't had to pay any federal income taxes in a couple years. Because of this, I've been doing as much of our investing in Roth vehicles as possible, meaning IRAs (one for me and my wife) and a 403(b) for me.
I also had a misguided understanding of capital gains rates. Reading sites like this:
http://www.schwab.com/public/schwab/nn/articles/Taxes-Whats-New I had the mistaken notion that if our AGI, or MAGI was below $75,900 (we are married and filing jointly) then our capital gains rate would be 0%. NOT TRUE! It's 0% on the portion that takes our income UP TO $75,900 and then anything above (up to $470,700) this is taxed at 15%.
Final bit of context: for reasons that are not worth going into here, we are not interested in rolling it into another rental property and doing a 1031 exchange.
So, my question is,
What should we be doing to reduce our capital gains taxes due next year?Thus far, I am thinking of two things:
1) Switching our usual Roth investments to standard IRA and 403(b) offerings for 2017, thereby reducing our AGI, and consequently the part of our capital gains on which we'd pay 0%. I think this nets me a tax savings of 15% of $29k ($18k being my max for the 403b and $5500 each being the max for each of the IRAs).
2) Combing through my records for every receipt I can find to increase the cost basis used in calculating the capital gains.
What am I missing? Any other great ideas out there? Thanks in advance for any suggestions or guidance. I am meeting with someone from H&R block in a couple days to sound them out on ideas. If anyone has advice on how to approach that conversation, it could be helpful.
PS - as a side note, although sometimes I regret not selling earlier to avoid the tax bill, I do think 1) the taxes can be thought of as the price we paid for maintaining our flexibility about returning to Seattle in the last five years, and 2) Some of MMM's more philosophical posts are relevant here too, i.e. if there are tax efficiencies to be found, great, but if not, this is not worth investing too much emotional time and energy in, and I should just move on to the next project.
