Minimize Capital Gains Tax on the Sale of an Appreciated Home
Residential real estate has been a highly productive investment for many Americans in recent years, and in particular, rental homes producing a competitive net yield have exemplified the successful growth and income investment. The time and effort required to maintain a home can become burdensome with age, however, and hiring professionals for every maintenance and repair project eats into investment returns. These dynamics make the ownership of physical homes impractical for many by their mid-late retirement years, inspiring a generally taxable sale of property. Be well acquainted with the ways you can minimize, or even avoid capital gains taxes on the sale of an appreciated home:
Individuals selling a primary residence can exclude up to $250,000 in profits ($500,000 for married couples filing jointly) from taxes. The two prerequisites are 1) minimum of two years of ownership, and 2) the home must be the primary residence for 24 of 60 months preceding sale.
Those who inherit a highly appreciated property do so with a “step-up” in cost basis. This means the cost basis (non-taxable investment amount) becomes the value on the day of the former owner’s death. An appreciated home in this case sold immediately following the inheritance would result in minimal or no tax bill.¹
Becoming a full-time resident of a state that does not tax capital gains prior to selling an appreciated property can eliminate more taxes than you might imagine, but don’t underestimate the significance of a move, financially or otherwise, and be well acquainted with the behavior of your present state in such cases.
Understand many expenses incurred to maintain, repair and improve a home become part of the cost basis. Keep an accurate record, and every receipt for these expenses.
In the tax year of selling an appreciated home use realized losses on other investments to offset your taxable gains, and don’t forget about carry-over losses realized in former years. Your CPA should retain this figure from year to year.
1031 and 721 Exchanges allow for a continued deferral of capital gains taxes following the sale of an appreciated property, which can include the sale of a high maintenance physical home and corresponding purchase of certain zero maintenance Real Estate Investment Trusts (REIT’s). One prerequisite is the new investment must be a “like” property with the same purpose as the one sold.²
Don’t ever miss an opportunity to reduce capital gains taxes, which directly reduce net profit. That said, seek professional counsel from your team of financial professionals, and understand every detail of each of these tax reduction strategies before acting.
Think about it, Shaun.
“Give to Caesar what belongs to Caesar, and to God what belongs to God.” Mark 12:17
“Unquestionably, there is progress. The average American now pays out twice as much in taxes as he formerly got in wages.” ~H.L. Mencken
1 Smart Asset, “We’re Inheriting a House. How Can We Avoid Capital Gains Tax When We Sell It?”, July 9, 2024
2 Centura Wealth Advisory, “Trapped by Your Real Estate Investment?”, Sean Clark, Director of Financial Planning, 2019
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. This information is not intended to provide tax advice, and it is recommended that you consult a certified tax professional prior to acting on this information. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the author.
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