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This is about US tax law.

When you sell an asset in a year, how does your income computed?

Here is a scenario:

say you are a 100K/year salary guy. You sell a home ( an investment home, not your primary residence ) for 1M with 500K capital gain. Is your income for that year, 100K + 500K? or because you got a 1M in the sale, your income would be 1.1M?

My gut says the income should be the salary + the capital gain and therefore it should be 600K.

If this is correct, what about a capital loss. Let's say you got a capital loss of 300K rolling over from the previous years from say some stock market loss.

Would you then factor that in and say, the real capital gain on the home sale would be 500K-300K and therefore your income for that year would be computed as 200K + 100K = 300K?

Determining the income does affect the tax rate.

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    Please identify the country when asking tax questions. – mhoran_psprep Apr 17 at 15:58
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    This is HIGHLY dependent on local tax laws and your specific details. Example: For US federal tax your income would be 97k (if married filing jointly). The first 500k gain on the sell of your primary home at exempt nd deducting capital losses is capped at 3k. If you were single that looks totally different. – Hilmar Apr 17 at 16:57
  • Thank you Hilmar and @mhoran_psprp for your intitial replies. I updated the question that it is about US tax law. Hilmar, I'm filing a married joint and this is not my primary home for the last 5 yrs. So I cannot do that awesome 500K deduction. All I can do is to deploy the capital loss against the capital gain. Sorry for not making this clear earlier. ( I updated the question also that it is not my primary home ). Given this, what would the income be for that year? – Haluk Karamete Apr 18 at 9:22
  • What do you mean here by "income"? The tax rate on earned income is different from the capital gains tax rate (and there are long- and short-term capital gains rates so it matters how long you've held the asset). You'd generally calculate the tax due on earned income separately from the tax due on capital gains though you can write off 3k of capital losses against income. Some people use "income" more colloquially to include earned income and capital gains but then we'd need to know exactly how you are defining the term. – Justin Cave Apr 18 at 10:52
  • Excellent point Justin. That's exactly the confusion I have. There is the "ordinary income" and there is this capital-based-income which is ( capital gain - capital loss ). In my case, my earned salary based income is say, 100K. Let's add some rental income to that as well, say a 30K comes from that too. We can call all that 130 as ordinary income. And there is a tax rate for this. Let's say %15. When you bring in say 200K capital gain to this, do they compute %15 on 130K? and I pay that first. And secondly. in addition to that ---> – Haluk Karamete Apr 18 at 16:34
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say you are a 100K/year salary guy. You sell a home ( an investment home, not your primary residence ) for 1M with 500K capital gain. Is your income for that year, 100K + 500K? or because you got a 1M in the sale, your income would be 1.1M?

Your income would be $600k ($100k salary + $500k capital gain). The proceeds of the sale are never relevant, only the gain.

If this is correct, what about a capital loss. Let's say you got a capital loss of 300K rolling over from the previous years from say some stock market loss.

Would you then factor that in and say, the real capital gain on the home sale would be 500K-300K and therefore your income for that year would be computed as 200K + 100K = 300K?

Capital gains net with capital losses before being added to your income, so yes, it would be a capital gain of $200k ($500k gain - $300k loss), plus your $100k salary for a total income of $300k. Also worth mentioning that if there were no capital gain, capital losses are limited to offsetting $3k of regular income per year, so in that case your income would be $97k.

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  • Thanks Craig. My confusion is on the tax rates. Looks like there are different tax rates for capital gains vs ordinary income. There is a difference between 100K guy's tax bracket and 600K guy's tax bracket. We can change the numbers to make this more dramatic. When a person has capital gains, does his regular "ordinary" income amount tax is changed? Or is it that that amount ( which deals with only with the ordinary income ) is treated as if there was no capital gain AND the capital gain part ( the 200K in my case ) is taxed against the 200K capital gain tax rate -- regardless of the income? – Haluk Karamete Apr 18 at 16:51
  • @HalukKaramete Qualified dividends and long-term capital gains are eligible for lower tax rates, but they are stacked on top of other income. Regular income (including short-term capital gains) is taxed at the same rate regardless of the amount of qualified divdiends + long-term capital gains, but the reverse is not true because of this stacking effect. For more detail you can refer to the Qualified Dividends and Capital Gain Tax Worksheet. – Craig W Apr 18 at 17:06
  • Hi Craig, could you shed some light on " they are stacked on top of other income." That's not ordinary income, right? In my case, there are no dividends. I just have salary and dep recapture that's all. --- If we go by an example, say we have 400K capital gain And separately from that, we will have 110K depreciation recapture, and 50K salary income, and nothing else. What percentages do I apply to these numbers when married joint here? There is the IRS and there is the CA side of things. My math is 400K*15% (fed ) + 400K*13.4 ( california ) + 160K ( ordinary income ) * %22 federal + CA ? – Haluk Karamete Apr 19 at 9:42
  • @HalukKaramete You figure tax on your regular income. Then you go to the long-term capital gains brackets and start filling them up, starting from your regular income. So let's say you had a taxable income (not AGI, like the numbers in my answer) of $600k: $100k salary + $500k capital gain, married filing jointly in 2021. The $100k has a tax of $13,497. Then you go to the capital gains brackets. You start at 15% because of the $100k. The first $401,600 is taxed at 15%, and the remaining $98,400 is taxed at 20%, for a total tax of $79,920. Grand total tax is $93,417. – Craig W Apr 19 at 11:59
  • @HalukKaramete Note however that there's also the Net Investment Income Tax which would add another ~$14k to your tax bill for the above example. – Craig W Apr 19 at 12:00

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