Dear Liz: Why do you seem to discourage older people living in homes that have appreciated over the years from selling because of the tax consequence? Recently, someone complained they could not move out of their family home because they would owe $400,000 in taxes. Why don’t you show the math: If they owe $400,000, even at the maximum (20% capital gains), that means they received $2,000,000. So even after taxes, they net $1,600,000. People who are asking the question you answered today need to either recognize they are swimming in money after taxes, or that they incorrectly think their net profit is taxed 100%.
Answer: If you’re referring to the couple who wanted to use their home sale proceeds to give down payments to their children, your math is a bit wonky.
The couple said selling their paid-off home would generate more than $1 million in proceeds. Proceeds aren’t the same as taxable gains, and the tax bill depends on the home’s original cost, qualifying improvements, selling expenses and the $500,000 home-sale exclusion for eligible married couples.
Taxable home sale gains can have the same impact as Roth conversions, in that they can raise Medicare premiums, make more Social Security benefits taxable and push other income into higher tax brackets. Some taxpayers also face the 3.8% net investment income tax.
Furthermore, the couple weren’t complaining that they couldn’t sell their home — they wanted to. My response was to remind them that their generosity could have big financial consequences.
Your ultimate point is a good one, though. Taxes matter, but they should never be the only consideration in a major financial decision.