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How is Capital Gains calculated on sale of second home in Wisconsin which has large home equity loan balance?

Aurora, IL |

I live in Illinois and purchased a summer home in Wisconsin 40 years ago for $43,000. Over the last 10 years I have taken out Home Equity loans up to the current loan balance of $565,000. Now, I am selling that vacation property in Wisconsin and may only get $600,000 for it. My only income is $1100 per month Social Security, and I have a reverse mortgage on my primary residence in Illinois, with about $60,000 in available equity remaining.
1) Do I have to treat the entire amount of home equity as profit in calculating Capital Gains? In other words, $565,000 minus the $43,000 + improvements (minimal) upon the sale of the second home?
2) Do I pay Illinois or Wisconsin capital gains? And what percentage are they?
3) If I have no money to pay the capital gains, what will happen?

Attorney Answers 2


When you sell real estate the capital gain is calculated as your proceeds from the sale, less the basis, plus improvements, and less any commissions and closing costs. The tax at the federal level is currently 15%, and your state will have a tax due as well. If you do not pay the tax when due, and you properly filed the return, the taxing authorities will begin collection procedures which could include levies upon any assets you may have. You should consult with a tax professional if you cannot pay the tax and discuss the options available.

Any individual seeking legal advice for their own situation should retain their own legal counsel as this response provides information that is general in nature and not specific to any person's unique situation. Circular 230 Disclaimer - Advice given in this response cannot be used to eliminate penalties with the IRS or any other governmental agency.

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Your capital gain would be the sale price (600K) less your basis in the property (565K). You would only owe tax on 35K (assuming the above figures).

THESE COMMENTS ARE NOT LEGAL ADVICE. They are provided for informational purposes only. Actual legal advice can only be provided after consultation by an attorney licensed in your jurisdiction. Answering this question does not create an attorney-client relationship or otherwise require further consultation.

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This answer is incorrect. The basis in the property is not 565k The basis is 40K plus any capital improvements and repairs made to the property. Equity loans taken out on the property do not affect your basis.



I am an Enrolled Agent who represents people before the Internal Revenue Service. I'm licensed by the Department of Treasury.

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