Liz Weston

Dear Liz: I’m 67, divorced since 1992 and retired with a good government pension, a retirement investment fund, some stocks and cash savings. I plan to sell my home of 33 years soon for a hefty profit and buy a smaller home. I owe $100,000 on the mortgage. I worry about a significant increase in payments to Medicare and tax obligations to the IRS. What financial advice do you have for me? This is my first time selling and buying a property on my own.

Answer: Now would be a great time to consult a tax professional about your options. You can exempt as much as $250,000 of home sale profit, but gains beyond that would incur capital gains taxes and could increase your Medicare premiums.

The amount you owe on your mortgage doesn’t affect the tax you owe on a home sale, but other expenses might. For example, you may be able to reduce your taxable profit if you kept good records of the amounts spent on home improvements. What you spent on maintenance and repairs over the years won’t help, but any work that improved the value of your home may be added to what you paid for the home to increase your tax basis. This basis is what’s subtracted from the sale price to help determine your taxable profit. Certain expenses you incurred to buy your home, such as closing costs, and to sell it, such as real estate commissions, also can help reduce the taxable portion.

IRS Publication 523 goes into detail about how to calculate home sale profit, but an enrolled agent (you can get referrals from the National Assn. of Enrolled Agents) or a CPA could be extremely helpful in advising you about these calculations.