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Q&A: How to reduce capital gains taxes on a home sale

May 2, 2022 By Liz Weston

Dear Liz: We’re retired and living in California. We are planning on selling our home, which is paid for, and moving to Tennessee in a couple of years. I think we qualify for a “one time” capital gains exemption. Our home is worth over $1 million and we paid only $98,000 in 1978. We plan on buying a home in Tennessee for around $800,000. Will we have to pay capital gains tax?

Answer: Before 1997, a homeowner could defer paying taxes on home sale gains as long as they rolled the proceeds into the purchase of another home of equal or greater value. In addition, there was a one-time exclusion for homeowners over age 55, who could exclude up to $125,000 in home sale gains.

Those rules were replaced in 1997 with the current law. Now homeowners of any age can exclude up to $250,000 each in capital gains on the sale of their primary residence, as long as they’ve owned and lived in the house for at least two of the previous five years. As a married couple, you can exclude up to $500,000 of gain — but that still leaves you with more than $400,000 of potential capital gains.

The capital gains calculation doesn’t factor in the value of your replacement home or whether you have a mortgage. However, you can use the value of home improvements you’ve made over the years to reduce your taxable gain — assuming you kept those receipts. The IRS defines home improvements as expenses that add to the value of your home, prolong its useful life or adapt it to new uses. Examples would include additions (bedrooms, bathrooms, decks, garages, etc.), heating or air conditioning systems, plumbing upgrades, kitchen remodels and landscaping, among other costs.

Improvements don’t include maintenance required to keep your home in good condition, such as painting, fixing leaks or repairing broken hardware, or improvements that are later taken out. If you put wall-to-wall carpeting and then removed it to install hardwood floors, only the cost of the hardwood floors would count.

Many of the costs you incur to sell the home, such as real estate agent commissions and notary fees, also can be used to reduce the capital gain. You can find more details in IRS Publication 523, Selling Your Home. A big home sale gain can affect other areas of your finances, such as your Medicare premiums, and may require you to pay quarterly estimated taxes. Consider talking to a tax pro before the sale so you know what to expect.

Filed Under: Q&A, Real Estate, Taxes Tagged With: capital gains tax, q&a, real estate, Taxes

Tuesday’s need-to-know money news

April 19, 2022 By Liz Weston

Today’s top story: Credit card debt has dropped, but inflation may change that. Also in the news: How to make summer 2022 travel plans that actually happen, how the end of the mask mandate could increase travel costs, and how much house you can get for $350K.

Credit Card Debt Has Dropped, But Inflation May Change That
Americans made big gains in paying off credit card debt over the past few years, but it may not last.

How to make summer 2022 travel plans that actually happen
After two years of cancellations, deferments and marathon sessions with airline customer service, many travelers are hoping to book summer trips that actually pan out this year.

Passengers cheered the end of masks on flights, but they won’t be cheering these prices
More people are taking to the skies than at any point since the start of the COVID-19 pandemic. And it’s costing them more as a result.

Here’s How Much House You Can Buy for $350K
The median home price gets you a studio apartment in some cities and a mansion in others.

Filed Under: Liz's Blog Tagged With: credit card debt, home prices, inflation, real estate, travel costs

Wednesday’s need-to-know money news

January 26, 2022 By Liz Weston

Today’s top story: 5 ways businesses can get ahead of stalled supply chains. Also in the news: What you need to know about Medigap Plan A, traveling without a vaccine, and questions to answer before buying a house with a friend.

5 Ways Businesses Can Get Ahead of Stalled Supply Chains
Virtually no small business has been spared from recent supply chain disruptions.

What Is Medigap Plan A? What You Need to Know
Medigap Plan A offers all of the “basic benefits” included in every Medicare Supplement Insurance plan without any extras.

Ask a Travel Nerd: Can I Travel Without a COVID Vaccine?
Traveling while unvaccinated, whether domestically or internationally, will introduce some challenges.

Answer These Questions Before Buying a House With a Friend
Make it through the process with your friendship intact.

Filed Under: Liz's Blog Tagged With: ask a travel nerd, buying a home with a friend, Medigap Plan A, real estate, supply chain issues, traveling and vaccines

Thursday’s need-to-know money news

January 6, 2022 By Liz Weston

Today’s top story: What the No Surprises Act means for your medical bills. Also in the news: A new episode of the Smart Money podcast on buying your dream house, the January mortgage rate forecast, and 5 steps to reach your money goals in 2022.

What the No Surprises Act Means for Your Medical Bills
The No Surprises Act bans surprise medical bills for emergency services and unexpected out-of-network providers.

Smart Money Podcast: Buying Your Dream House
Sean and Liz chat with Nerd Elizabeth Renter about how she bought her dream house.

Mortgage Outlook: Rates May Stand Still in January
January mortgage rates forecast.

5 Steps to Reach Your Money Goals in 2022
With inflation and economic uncertainty clouding 2022, shoring up your finances this month can feel even more urgent.

Filed Under: Liz's Blog Tagged With: medical bills, money goals, mortgage outlook, No Surprises Acr, real estate, Smart Money podcast

Q&A: House gift needs a lawyer’s help

December 13, 2021 By Liz Weston

Dear Liz: I have a rental house that I would like to give to my sister as an outright gift. (She is the current tenant but cannot afford to buy the house.) How can I do this legally? Do I need a lawyer? If so, what kind? I have already asked a real estate agent, and I’ve been told that I don’t really need her services. She suggested asking an escrow company. The house is in the name of my revocable trust and I own it free and clear. For various reasons, I would like to give her the house now rather than leave it to her in my will. I realize she will be stuck with my cost basis, but she has no plans to ever sell it because she has lived there for 10 years and wants to live in it for the rest of her life.

Answer: Talk to a real estate attorney, who can help you through the multi-step process of transferring a house deed and getting it recorded. You could try to do it yourself, but the attorney can ensure the transfer is done properly and answer any questions you may have.

Because the house probably is worth more than the annual gift exemption limit — which is currently $15,000 and rising to $16,000 next year — you also will have to file a gift tax return. Actual gift taxes aren’t owed until you’ve given away millions of dollars in your lifetime. If you’re wealthy enough to be concerned about that, please also consult an estate planning attorney.

Filed Under: Q&A, Real Estate Tagged With: q&a, real estate

Q&A: Should you sell a house or let heirs deal with it? The taxes shake out differently

August 3, 2021 By Liz Weston

Dear Liz: My mother, who will be 101 later this year, is leaving me real estate in her trust. The value of it is $4.5 million. She has other assets that will put her estate over $5 million when she passes. I currently have an offer from someone who wants to buy the real estate. Is it better for her to sell it now and reduce the value of her estate? She has never exercised the option for the one-time sale of her primary residence tax free. What are the tax implications if it remains in her estate until she passes?

Answer: There’s no such thing as a one-time option to sell a home tax free. Decades ago, homeowners could defer the recognition of taxable gain if they bought another house, and homeowners 55 and older could exclude as much as $125,000 of gain. That was a one-time deal, so perhaps that’s what you’re remembering.

Since 1998, however, taxpayers have been able to exempt as much as $250,000 of capital gains from the sale of their primary residence as long as they owned and lived in the home at least two of the prior five years. Taxpayers can use this exemption as often as every two years.

Clearly, your mom needs to find a source of good tax advice, such as a CPA or other tax professional. If you have the authority to act on your mother’s behalf through a power of attorney or legal conservatorship, then you should seek the tax pro’s advice as her fiduciary.

Under current law, if she retains the real estate it would get a “step up” to the current market value as of her death. That means all the appreciation that happened during her lifetime would never be taxed. If she sells now, on the other hand, she probably would owe a substantial capital gains tax bill, even if she uses the exclusion. The tax pro will calculate how much that’s likely to be.

That tax bill has to be weighed against the possibility that her estate could owe taxes. The current estate tax exemption limit is $11.7 million, an amount that will continue to be adjusted by inflation until 2025. In 2026, the limit is scheduled to revert to the 2011 level of $5 million plus inflation. President Biden has proposed lowering the limit to $3.5 million and modifying the step up, but those ideas face stiff opposition in Congress.

An estate planning attorney could discuss other options for reducing her estate if she’s still with us as 2025 approaches. The tax pro probably can provide referrals.

Filed Under: Inheritance, Q&A, Real Estate Tagged With: Inheritance, q&a, real estate, Taxes

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