Selling Your Home? Minimize Your Capital Gains Tax! is contributed by Carmen Andrew – The Weitzel Home Team. This article is published in the Spring/Summer 2023 Edition of Vibrant Senior Options Resource Guide.
Most clients we meet with have a loose idea of what Capital Gains taxes are and how it might affect them. You likely know that to AVOID capital gains tax, you need to have lived in the home you are selling a minimum of two out of the past five years. You might also know that if you are single, you get up to $250,000 free capital gains or if married, $500,000 free capital gains on your primary residence which means you don’t pay capital gain tax up to that amount.
But do you know how your capital gains are calculated? What if your gain is more than the free amounts and what rate would you pay? What happens when a spouse passes away, what can you do to minimize the capital gains? So many questions and we have some great answers!
Please note: we always recommend that you speak to your accountant/tax professional for specific advice for your situation. Here are some basic rules to follow though that will help you when you go to sell your home.
First, Keep ALL your receipts from any improvements you have put into your home over the years as you can subtract them from your gain. Your gain is calculated the following way: NET SALE PRICE – BASIS = GAIN
- NET SALE PRICE = Final sales price – all fees to sell (commissions, excise tax, title & escrow fees, etc.). Note: if you have a current mortgage on the property, the remaining balance is NOT considered a fee and is not to be calculated anywhere in regard to your gain.
- BASIS = Initial purchase price of the home + all home improvements
For example: Let’s say you are now single and you purchased your home for $200,000 and over the years you put another $100,000 into it with new roof, deck, siding, kitchen, etc. Your BASIS would be $300,000. You sell the home for $600,000 with $50,000 in fees to sell.
- Your Net Sales Price would be $550,000 in which your Gain would be $250,000 and you are in the clear – no capital gains tax.
Set Some Money Aside for Capital Gains Taxes
What if you sell that home for $900,000 instead? Your GAIN would be $550,000. You would get $250,000 of that gain FREE and would owe capital gains tax on the remaining $300,000. You tax rate on that gain would be approximately 15-20% depending on your tax bracket and income (talk to your accountant). Those taxes would be due the year AFTER you sell, when you file for your taxes, so make sure to set it aside!
If a Spouse Passes Away, Hire an Appraiser
Lastly, it is extremely important that if a spouse passes away, you should hire an appraiser to do a private appraisal as soon as possible. Why? As the surviving spouse, you will “inherit” the property at the value it was worth on the day your spouse passed away. Which means that your NEW BASIS is at today’s market value and not when you purchased it and almost guaranteeing that you won’t pay any capital gains tax if you sell in the somewhat near future.
An Important Note for Your Heirs
One more thing…if you hold onto your home and your heirs inherit when you pass, they will also inherit at the current market value, also eliminating the capital gains tax if they sell right away.
What about non-primary homes you ask? Capital Gains taxes are always paid on 2nd/vacation homes and investment properties. You can defer them on an investment property by taking all your proceeds and purchasing a new investment property. That’s a different topic for a different day with a set of it’s own rules.
For more info on this or any other real estate related topics, please give us a call! 360-312-5151