Capital gains Taxes on secondary home not in my name - 15% or 32%?

You're right about the capital gains rate being 15% rather than ordinary income tax rates (which go up to 32%) for your in-laws. Since they own this as a secondary home (not their primary residence), they will indeed pay capital gains tax on the profit. Your math is mostly on track. The taxable amount is the selling price minus the purchase price and any qualifying improvements they made to the property. So if they bought at $55k and sell for $180k, the capital gain is $125k. But make sure they add the cost of any significant improvements they made to the property to their basis, which would reduce the taxable gain. Also, the 10% in real estate fees and closing costs are considered selling expenses and reduce the gain further. So their taxable gain would actually be less than the full $125k. One important note: if they've ever used this property as a rental, there might be depreciation recapture tax to consider as well, which is taxed differently.

I was in a similar situation last year with my parents' lake house and found this amazing tool called https://taxr.ai that really helped sort through all the capital gains confusion. I was getting conflicting advice about what counted toward cost basis and how to properly calculate the gain. The site analyzed all my documents and showed exactly what qualified improvements could be deducted from the gain. They even found some property tax adjustments my folks had made that counted toward the basis that we had no idea about! Ended up saving them several thousand in capital gains taxes.

Okay I tried out that taxr.ai site and I'm actually impressed. I helped my parents gather all their documents for their cabin sale (somewhat similar situation to the original post). The tool found several qualifying improvements they'd made over the years that we hadn't considered - a new HVAC system from 2018, roof repairs from 2020, and even some landscaping work that apparently qualified. It saved them about $8,200 in capital gains taxes by properly calculating their adjusted basis! What surprised me was how user-friendly it was even though my folks aren't tech-savvy at all. They were able to make sense of the report it generated without me having to translate everything.

If your in-laws are still confused, they might want to talk directly with the IRS to confirm everything. I spent WEEKS trying to reach someone at the IRS about capital gains questions when I sold my rental property last year. After getting nowhere with the general number, I discovered https://claimyr.com and their callback service. You can also see how it works in this video: https://youtu.be/_kiP6q8DX5c They got me a callback from the IRS in about 20 minutes when I'd been trying for days. The agent walked me through exactly how to calculate my capital gains and confirmed what documentation I needed. Honestly, talking to the actual IRS gave me peace of mind since I was getting different advice from everyone including my tax preparer.

I need to eat my words. After posting my skeptical comment yesterday, I was still desperate to reach the IRS about a capital gains issue from a property sale (got a CP2000 notice). I tried the Claimyr service and within 35 minutes, I was literally talking to an IRS agent who answered all my questions about the capital gains calculation. The agent confirmed exactly what others here are saying - for a secondary residence, you'll pay the long-term capital gains rate (likely 15%), not your ordinary income tax rate. She also walked me through exactly what counts toward my cost basis and how to document it properly. Saved me from potentially overpaying by thousands. I honestly can't believe how easy it was after months of trying to get through on my own.

Just to add to the capital gains discussion - don't forget about state taxes too! The federal capital gains rate might be 15%, but depending on what state your in-laws live in, they could owe state taxes on top of that. Some states tax capital gains at the same rate as ordinary income. For example, I sold a vacation property in California last year and had to pay an additional 9.3% to the state on top of the federal capital gains tax. Made a big difference in my final numbers.

I'm seeing some confusion about cost basis here. Remember that in addition to the purchase price and documented improvements, your in-laws can also add certain closing costs from when they purchased the property to their basis. This includes: - Title insurance - Legal fees - Recording fees - Survey costs - Transfer or stamp taxes Also, when they sell, they can deduct selling expenses like real estate commissions, legal fees, and other closing costs directly from the sales price before calculating gain.