Estate Planning Dilemma: When to Sell Your Home?
John Geiger, a 68-year-old retired manufacturing executive, and his wife stand on the precipice of a decision that plagues many: should they sell their primary residence now or wait until one of them passes away? Their lakefront dream house in Hickory, North Carolina, constructed in 1989, has seen a significant appreciation in value, from an initial cost of $290,000 to an estimated worth of around $950,000 to $1 million.
The Tax Implications of Selling
Such a surge in value, while beneficial, brings along the specter of a hefty capital gains tax bill if the house is sold. However, the U.S. tax code offers some semblance of relief with two provisions. The first is the home sale exclusion, permitting homeowners to avoid taxes on up to $250,000 of capital gains for single filers and $500,000 for married couples filing jointly. The second is the step-up in basis provision, which sets the capital gains back to zero for heirs, meaning they would only be liable for taxes on the appreciation post the original owner’s death.
The Taxable Gain
For the Geigers, selling the home now would entail considering the taxable gain, which is the appreciation coupled with the adjusted basis, including renovations and specific selling expenses. It’s crucial to maintain records for capital improvements as they can augment the cost basis. To qualify for the home sale exclusion, homeowners should have owned and used the house as their primary residence for at least 2 out of 5 years before the sale.
Community Property States and Tax Advantage
In community property states, the entire property gets a step-up in basis after the first spouse’s death, creating a more significant tax advantage. However, for the Geigers residing in North Carolina, only half the property’s basis would be stepped up upon the first spouse’s death, potentially lowering taxes for the surviving spouse. The surviving spouse could still potentially claim the full $500,000 exclusion if the house is sold within two years of the death.
The decision to sell is a complex one, woven with not only tax considerations but also the costs of home maintenance and finding a new place to dwell. It’s a dance with financial implications, and for the Geigers, the music is still playing.