I am a CPA, but taxes are not my area, so you might get some better advice but I wanted to give you some information to hopefully help.

The non-excluded capital gains are included in taxable income.

Capital gain for home = realized amount - adjusted basis - Section 121 exclusion. So assuming there are no commissions or fees to sell and your father’s adjusted basis is $22,000. Your capital gain calculation would be $450,000 - $22,000 - $250,000 = $178,000.

Your father’s adjusted gross income would depend on the nature of the $38,000 of income. If some of that is social security, pension, or an annuity, some of it may be excludable, but for now let’s assume it is all included in taxable income.

The AGI calculation would be $38,000 + $178,000 = $216,000.

If your father took the over 65 standard deduction of $15,350 in 2023 his taxable income would be $216,000 - $15,350 = $200,650.

Your father’s regular income tax will be calculated on $200,650 - $178,000 = $22,650 (this is not the tax just the amount that will be subject to regular tax).

His capital gains tax would be 0 on the first 44,650 - $22,650 = $22,000 and 15% on the remaining $156,000 which is $23,400.

Please note, I am not saying this is the tax. This is the tax with a lot of assumptions. I am a bit out of my depth with selling properties acquired prior to the section 121 adoption so you really should see a tax professional.

How is he paying for the care home? His annual income surely doesn't cover that?

Very few people pay capital gains taxes upon selling their primary residence. I'm assuming that thie house is your father's primary residence and was not used as a home office.

The first thing to determine is his cost basis in the house. The starting value is the purchase price. Then you add in all the capital improvements made in the house. For example, the cost of the last roof, any windows that were replaced, the driveway that was resurfaced, new floors that are still in the house, any additions or modifications made to the house, countertops, cabinets, plumbing fixtures, etc. That becomes the adjusted cost basis.

Next, Was he always the sole owner of the house or did he inherit half the house when a partner died? If so, one-half of the market value on the date of co-owners's death gets added to his adjusted cost basis on date of death to become his adjusted cost basis. This is called a stepped-up cost basis. Finally, subtract his adjusted cost basis from the net selling price (net after all selling expenses have been subtracted, including commission, local taxes and fees, cosmetic improvements to help sell).

If the net gain is less than $250,000, there is no taxable gain, regardless of his income. If there is a taxable gain, the capital gains tax rate (0%, 15%, or 20%) will vary based on his adjusted gross income.

Thanks for the response and thanks to bry911.

This is the part that confuses me:

"If the net gain is less than $250,000, there is no taxable gain, regardless of his income. If there is a taxable gain, the capital gains tax rate (0%, 15%, or 20%) will vary based on his adjusted gross income."

The information on legitimate websites is very misleading when it comes to capital gains. This is the information on all websites.

"Single filer status: If your income is less than $40,000 a year [his SS and pension is around 38K], you will pay zero percent in capital gains taxes. If you make between $40,000 and $441,450 a year, you will pay fifteen percent in capital gains taxes. If you make over $441,450 a year, you will pay twenty percent in capital gains taxes."

But all the CG calculators and members of the forum say, if after all deductions, there is still a substantial gain, he will owe taxes (capital gains taxes) on the profit.

As I said earlier, since he bought the house in 1966 for 22K and it will sell for at least 450K, there will be capital gains even with all the deductions, including the $250,000. Also, we can't find receipts for the 1990's new roof or the 1980's remodel of kitchen and bathrooms. I have a feeling we'd be in trouble if we guessed at the amounts spent without proof??

So, apparently, Capital gains are included as “income” for purposes of determining the marginal CG bracket? I just don't understand why the websites all say "If your income is less than $40,000 a year, you will pay zero percent in capital gains taxes."

They should tell you that gains on the sale of the house are included in determining if your income is < 42K.

Again, thank you for your time!

You can use estimates for the value of the capital improvements, but it is better to have some independent basis for the estimate. Do you know who replaced the roof? Do you have pictures of the house before and after the renovations? Was a permit required for the renovations and was a dollar value provided on the permit application? Did the town change the value of the property after the renovations?

Yes, capital gains are included in income. They are income so of course they are included in determining your tax rate. Income is an inclusive term. Capital gains income is taxed at a different rate than wage income, but they are all income. Don't confuse not having to pay capital gains tax due to not having any capital gains (which is specific to the asset being sold) with not having to pay capital gains tax due to a capital gains tax rate of 0% (which is specific to your income level).

If you inherit the property at your father's death, the basis for you is the value at the time of his death. If you sell for that price, you will have no CG.

As AnnKH has indicated, you will receive a stepped-up cost basis if you inherit, but you will have to maintain the house until that time. This would include routine maintenance and paying real estate taxes.

If you are able to determine that the capital gains tax will be minimal or naught if sold by your father, the current sole owner, it would probably be better to sell now.

One other comment, more for completeness than any other reason: if your dad had a spouse and that spouse had lived in the house within the last two years of the date of sale (and died), he and the spouse could deduct 500,000 as the capital gains exemption.

Also, I agree with the “making a reasonable effort” to show costs such as the roof etc. to reduce your potential capital gains.

A CPA is a very cheap investment vs what you're dealing with.

Did he have a spouse during this time who passed while the home was owned? There may be a step up in basis. You will also deduct the net selling costs including title & escrow fees.

Thanks. Sorry for the long response.

My Mom died in 1992. They purchased the house in 1966. I did know about other deductions, including selling the house costs. As I've said we can't find receipts from home upgrades in 1969 (added family room), the 80's (remodeled kitchen, bathrooms and 90's (new roof, etc.)

I would like to consult an expert. No one is living in the home since my dad is doing well (moderate dementia, but no other health issues) in a care home. At 93, next month, he could live another 2-3 years. The LTC policy will run out in the next 23-24 mos.

His only money source (besides SSA + small pension = total 38K) is the home. We can either sell it now or wait for a year or so and see how he's doing. If we wait and he passes in the next 12 months, we can sell the house with no CG's.

If we sell it now, we don't need to worry about the monthly home costs and it's possible deterioration, but it's a tough sales market and there are those CG's issues.

Should we hire a CPA, a tax attorney, or a tax attorney that specializes in taxes and elder law. I've been told that when the policy runs out, he could qualify for Medi-Cal in addition to Medicare. That could help pay for care post LTC policy. But once he passes, California gets repaid out of the sale of the house.... unless some legal mumbo jumbo is done by an attorney prior to his passing.

I don't want to waste our money on the wrong expert. I live in Sacramento so there should be some good choices.

Again, sorry for the long response and thank you for your time! Doug

An attorney who specializes in elder law will be the one. They will have seen your same scenario many times, and know the tax implications and the MediCal rules, etc. It's too late for the legal mumbo jumbo because there's quite a long look-back period, The state will get the money. Even if you sell it now, the state will come back to you to pay expenses. later.

But yes, an elder law attorney is your best bet.

@Doug - You will likely need to consult with an attorney about a Medi-Cal asset protection trust and the related rules on property transactions and timings. I suspect the particulars of that conversation will be the deciding factor for the sale of the home as that is likely to become more impactful than the capital gains.

In your latest post, you noted that your mother passed away in 1992 and that the home is in California. California is a community property state and the step-up in basis works a bit differently in community property states than in states that are JTROS. Your father would get the full value of the property as the step-up in basis rather than simply half. So his cost basis is likely significantly more than $22k, which alone may eliminate most of the tax liability.

You may need to assign a value to the property for 1992 to take advantage of that step up basis. Local appraiser (Carmichael) Ryan Lundquist has great access to historical records.

I would recommend an elder care case manager for you overall. Mine saved me a ton of time and money and they have a great list of trusted contacts to help you navigate all these issues (where you'll have no experience and trying to learn when a loved one's well being hangs in the balance isn't a good feeling) . They will have accountants and other professionals that are well versed in the challenges you are facing.

Hang in there; this isn't easy.

Why the necessity to sell the house now? Wait as others had said so the stepped-up cost basis will apply, but is there a transfer on death deed for the property to anyone? If not it goes to probate, will take years and cost thousands, not just a few but closer to or even over $10K before it can be sold.

If you want the money now and the house is sold, and all the CG taxes are paid by Dad it's still Dad's money. If he gives you more than $15K over the gift limit you'll need to pay taxes again on the same money. If there isn't an urgent dire need for the money make sure there the house is deeded over with a TOD and wait.

Does your dad know you want to sell his house?

You need to see someone about the Medi-Cal Asset Protection trust before you do anything else. The discussion on basis and proceeds are moot if there is no uncaptured value remaining after the claw back.

A quick search of Medi-Cal lookback for trusts says 30 months. Which may mean you should get the trust established soon and pay some of your father's long term care costs to protect the remainder of the home until you have passed the lookback period. Lookback periods vary and I am not familiar with the specifics of asset protection and lookback period for Medi-Cal, but understanding a bit about lookbacks and claw backs is enough to know that time is of the essence.

You need to make an appointment with an estate attorney. The biggest issue, what if he outlives his LTC policy? $38,000.00 won't cover the bill. What is the best way to be able to keep him where he is and pay the gap? Keep the house or sell the house? Either way, the estate is going to pay. Dying isn't cheap.

@bry911, not contradicting you, but it is my understanding that Medicaid can not take his house while he is alive. If more money is needed, Medicaid pays, but when Dad dies, Medicaid will get repaid with the proceeds from the house. The rub is, if the house is rented, it is viewed as income.

Please advise, thanks

This is not Medicare, but rather MediCal, which is the name of California's Medicaid, which covers costs for low income individuals. Entirely different from Medicare. Medicare does not get paid back, and only covers limited nursing home services, not assisted living.

@elcieg - I don't really understand your comment. I was discussing claw back and didn't mention a home seizure. The OP should act to protect his father's assets from claw back upon his passing, which is what I was advising.

To reiterate my point... It does not matter if the net cash after capital gains tax is $400,000 or $325,000 if the amount the government is going to claw back exceeds both those amounts. You are just worrying about writing a check to the right hand instead of the left hand. So, the more important thing is the protection of the value.

Yes, get yourself an care attorney and CPA! Here in MO we sold my mom’s home and had to put it in a trust to pay Medicaid. You need to know your facts!

Have your dad get remarried with a bulletproof pre-nup. Now his deduction is $500,000.00 instead of $250,000.00.

I made this offer to my girlfriend if she paid me 20 large, but she turned me down.