Question

Mark sold his primary residence for $201225 after owning it for seven years. His profit on the sale was $25900. The long-term capital gains tax rate is 0 percent for those in the 10 or 12 percent tax brackets, 20 percent for those with taxable income over $434550 (single), and 15 percent for everyone else. If Mark is in the 35 percent tax bracket, how much tax will he owe on the listed transactions?

Answer 1

Mark is in the 35 percent tax bracket, and as can be asssumed from the question, Mark is single. This implies that Mark's taxable income lies between $204,101 to $510,300. (2019 tax brackets)

Thus, Mark's taxable income can be either below $ 434,550 or above $434,550.

Thus, if his income is below $434,550 and knowing that he is in the 35% bracket, his Long Term Capital Gains will be taxed at 15 per cent.

However if his income is above $434,550, his Long Term Capital Gains will be taxed at 20 per cent.

We will consider both situations.

Another point, to keep in mind is that IRS allows to exclude gains to the extent of $ 250,000, from the total gains on sale of primary residence, in case of single -filers, which Mark is. This exclusion is allowed as here we are assuming that Mark had owned and resided in the house atleast for 2 years in the immediate prior 5 year period, and that he is hasn't sold any other house during the prior 5 years. This has been assumed, keeping in mind that no contrary information is available in the question.

Also, for the sale we are taking the the profit from sale to be the net long term capital gain from sale of the house.

Keeping in mind the above point, the long term capital gain is $ 25,900. This is less than the total amount allowed to be exclude by IRS on sale of residence, which is $ 250,000. Thus the entire gain of $25,900 can be excluded and thus tax need not be paid at all by Mark on the long term capital gain earned on the sale.

Thus no tax needs to be paid in either tax rate 15% or 20%. Long term capital tax paid = $0