Seniors: A Tax-Wise Alternative to Selling Your Appreciated Home

A single-story house with a well-manicured lawn under a sky with a dramatic orange sunset

In recent years, the residential real estate market has surged in many areas. That means many homes have greatly appreciated, and the $250,000 home sale gain exclusion ($500,000 for joint filers) isn’t always sufficient to protect a home sale from federal income taxes. If you’re a senior thinking about selling your highly appreciated home, the transaction may bring a painful tax bill. One alternative to consider is aging in place.

If you remain in your home until your death, the tax basis generally will be adjusted to your home’s fair market value as of your date of death. When your heirs sell the home, they’ll owe federal capital gains tax only on appreciation that occurs after this date. The rules are a little more complicated for married couples, but ample tax savings can still be reaped from aging in place.

Tax planning usually calls for action. But this is one situation where it might make sense to hang tight. Contact the office to determine if this strategy is right for you and your family.

408-252-1800

Photo by Gus_Ruballo from Freerange Stock

Home Sale: Failure to Plan may Raise Your Tax Bill

Selling your home and handing over the keys

As the saying goes, there’s nothing certain in life except for death and taxes. But when it comes to selling your home, proactive tax planning can help you reduce your federal income tax bill.

A Costly Mistake to Avoid

Let’s say Tom is a soon-to-be married homeowner who’s looking to sell his principal residence. If certain tests are met, an unmarried individual may be able to exclude up to $250,000 of taxable gain.

Just before the wedding, Tom sells the home he’d purchased 20 years earlier. The home had appreciated by $500,000. He and his future wife, Stacy, plan to move into her much smaller fixer-upper home after the wedding.

As an unmarried taxpayer, Tom can exclude $250,000 of the gain from his home sale, leaving a taxable gain of $250,000 ($500,000 minus the $250,000 federal home sale gain exclusion). He owes 15% federal income tax on the gain, plus the 3.8% net investment income tax and state income tax.

Instead, suppose that Tom and Stacy had taken the time to seek tax planning advice. Their tax advisor would have let them know that the home sale gain exclusion for married couples is $500,000 if various tests are met, including that both spouses have resided in the home as their principal residence for at least two years.

Rather than sell Tom’s house before the wedding, they might have kept it and lived in it as a married couple for two years. That would have allowed them to avoid the full $500,000 in taxable gain and the resulting taxes when they later sold it. Even if Stacy had sold her fixer-upper home before the wedding, the gain would likely have been much smaller and may have been fully sheltered with her $250,000 home sale gain exclusion.

Slow Down and Seek Advice

Proactive tax planning is generally worth the effort, especially if you have a lot at stake and/or tax rates increase. Even if you don’t need advice on the subject of home sales, other issues may be much more complicated and a lack of knowledge could lead to costly mistakes. Contact the office to get the best tax planning results for your circumstances.

(408) 252-1800