Q. My wife and I are selling our home of 40 years and downsizing to a 2-bedroom apartment in a 55+ community. We purchased the house for $40,000.00 and are selling it for $500,000.00. My wife is concerned about being assessed a capital gains tax. How do we avoid this?
A. You and your wife are in luck! Under the circumstances you present, you and your wife will not have to pay capital gains tax on the sale of your home.
Let me explain. Anyone selling a primary residence (not a vacation home) in which the person has lived for at least two of the past five years is eligible for a $250,000.00 profit (sale price minus cost basis (what you paid for the house)) exemption from federal capital gains tax. Where a married couple owns the residence, the exemption is doubled to $500,000.00. Your profit (sale price of $500,000.00 minus cost basis of $40,000.00) is $460,000.00, so you will not have to pay any capital gains tax.
Even had the sale price minus cost basis been greater than $500,000.00, you could have added the cost of capital improvement (e.g. dormer, new patio, etc., not painting) which increased the value and life of the house to your home to the equation to reduce the amount of profit shown. If your profit, even after adding in capital improvements, had been greater than $500,000.00, you would have owed capital gains tax only on that portion of the profit greater than $500,000.00. For more information, please see https://www.irs.gov/taxtopics/tc701, IRS Topic No. 701, Sale of Your Home.
W. Zehava Schechter, Esq. specializes in estate planning, administration and litigation; real estate law; and contracts and business law. Her law practice is located on Long Island. Please send your comments to SchechterLaw@gmail.com. Her podcast, the LI Law Podcast, may be downloaded on itunes, Google Play, Spotify, Stitcher, or wherever you get your podcasts. The podcast website is: https://lilawpodcast.podbean.com.
No column is a substitute for competent legal advice. Please consult with the attorney of your choice concerning specific legal questions you may have.