Selling Your Home or Downsizing | How Will Taxes Impact What You Keep | Retirement Planning and Real Estate

Many of you are thinking about downsizing your home, entering retirement, maybe selling your home and relocating to be closer to the children or grandchildren. This video is going to talk about what happens from a taxation standpoint when you sell your home (when) entering retirement or any other time.

Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, CERTIFIED FINANCIAL PLANNER™ Professional (CFP®), certified tax specialist and host of The Retirement Income Show.

So the first thing we have to be able to calculate is what is the actual gain in the home that we’re selling? The gain is equal to whatever we sell it for, minus the settlement costs (settlement costs are your closing costs and real estate commissions essentially), minus your basis. What is basis? Well, basis is what you purchase the home for, plus any renovations, positive capital improvements that you’ve made to the property over the years. I’m going to have a list in a couple of minutes that shows you what qualifies for an increase to your basis.

So if you sell it for $500,000 and it cost you $50,000 in closing costs, that’s $450,000. Then you bought the home for $200,000 plus you’ve made $100,000 of improvements, that’s $300,000. So now it’s just the difference between your basis and the sales price minus settlement costs. That portion right there is your gain.

Here’s a list of examples of things that can increase your basis. You want to keep your receipts. You want to keep really, really good records. If you’ve owned your home for many, many years, try to go back and dig this stuff up.

But if you’ve bought your home, remember your basis is what you bought the home for. Plus, any increases that you’ve made, capital improvements that you’ve made to the home over the years. So if you’ve added a bedroom, a bathroom, a deck, if you’ve done this landscaping, added a driveway, a walkway, anything you’ve done to the exterior, insulation, plumbing, interior systems over here, vacuum, HVAC, et cetera. This is a good little blog that I found preparing for this video. It’s homelike.com, income tax on the sale of the home. If you Google that, you’ll find this.

These are things that will increase your basis. If you’ve spent money on these things over the years, they’ll increase your basis, which reduces your gain, which could help you save money on taxes. If you are a single taxpayer and that gain is less than $250,000 to 100% tax free. If you’re a married filing jointly taxpayer, the gain– you get a double of the $250,000 to $500,000. So if your game is $500,000 or less, it’s 100% tax free.

This is pretty cool here. There’s no impact to your modified adjusted gross income when you sell the home if the capital gain is tax free. Now, what does that mean? Why does that matter anything? Well, your modified adjusted gross income is what determines– if you’re younger than sixty five– what you pay for health insurance. This will not impact your health insurance cost. You could still possibly qualify for the Obamacare subsidy. If you’re 65 or older and you’re on Medicare, this will not impact the cost of your Medicare premiums.

Medicare Part B and Part D could be subject to what’s known as IRMAA. It’s an acronym (for) Income Related Monthly Adjustment Amount. If your income is above certain thresholds and having a big gain like this, you might be afraid that it could push you up above those thresholds. Your Medicare premiums can go up pretty significantly.

But because the capital gains tax treatment, tax free tax treatment– But because the capital gains is tax free and you don’t have to report it on your tax return, it won’t impact your Medicare premiums. So it’s a good bonus.

Now, how do you know if you qualify for this tax free treatment of the sale of your home? Because there are some qualifications. (For) 2 out of the past 5 years, you have had to have owned the home and also lived in the home. It does not have to be 2 consecutive years living in the home, as long as it’s 730 days out of a 5 year period. You could have lived there for 6 months, maybe rented it out, went to a vacation place, come back, and lived there for six months– as long as 730 days, over the past five years, you have lived in that home, you can qualify for this exemption as long as you’ve not used this exemption in the past 2 years on the sale of another property, and you’ve not done a 1031 exchange. A 1031 exchange is when you take the equity from a prior home and you’ve deferred those gains and rolled it into this current home that we’re talking about now.

If you haven’t done those things and you’ve lived in the home and owned it for 2 out of the past 5 years, you will qualify for the tax free treatment of the sale of your primary residence as long as you’re up to that $250,000 or $500,000 game, depending if you’re married or single.

If it’s not your primary home, maybe it’s a vacation home, maybe it’s a secondary or rental home– if you’ve owned it for less than 1 year, you will pay short term capital gains, which essentially is income tax rates. And if you’ve owned it for more than 1 year, you’ll pay long term capital gains rates, depending on how big that gain is that determines what your capital gains rate is. You could also have something that’s called depreciation recapture, or you have to pay income tax on the depreciation that you’ve taken to settle out that final tax bill.

Lots to consider here when we’re thinking about selling our home, but the good news is for the vast majority of you, you’re going to qualify for that 2 out of 5 years as long as it’s your primary residence.

Taxes could be confusing, but I hope I was able to simplify it in this video for you. As always, consult with the CPA if you have questions surrounding taxation. The Internal Revenue Code is not simple. It is tremendously complex with a lot of different interacting or interdependent pieces so make sure to talk with your CPA.

In a few videos, we’re going to be talking with a real estate agent who specializes in downsizing, heading into retirement. That’s going to be interesting. We’re going to get her perspective on what it’s like to downsize and what some of her experiences are, pros, cons, things you should be aware of. I’m really looking forward to that interview.

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