Downsizing your home? Watch out for capital gains taxes

Are you living in “too much house” these days: too many rooms to clean, too much yard to mow or too many stairs to climb? Or perhaps your home is perfect — except it’s too far away from the grandkids. 

For many retirees, their home is a valuable asset — especially if the mortgage is paid off. If you decide to downsize, you might sell your home for considerably more than you paid for it, depending on the housing market in your area and your home’s general condition. 

Selling a home that has increased in value may mean more money for you on closing day — but that increase could be considered a capital gain for tax purposes. On the other hand, if you were to sell your home at a loss, this amount isn’t tax-deductible. 

If you’ve made improvements over the years, these can add to your home’s value. Be sure to keep good records regarding your home’s purchase as well as any major improvements so you can include them in your total basis. 

How are capital gains taxed?

If your home has appreciated in value, you may see a capital gain on its sale. But the IRS has outlined certain situations that may allow you to exclude all or a portion of that gain from your income. 

Depending on your filing status and length of time you owned and used your home as your residence, you may be able to exclude up to $250,000 ($500,000 if filing jointly) worth of capital gain. Generally, this exclusion can be taken once every two years and applies to your principal residence. Any gains above those amounts would be taxable. 

What if your home is “a keeper”?

You may want to pass your home to your heirs. The good news is there are several ways to accomplish this — your financial advisor, estate-planning attorney or tax professional can help. By using a will, revocable trust or beneficiary designation, your heirs would inherit your house at its current market value — known as a “step-up” in basis — which would help eliminate capital gains on the growth of your home until the time of inheritance.

If you choose to gift your house during your lifetime, this removes the asset from your estate — but your heirs would also lose the step-up in basis. This can also happen with certain irrevocable trusts. It’s important to talk with your estate-planning attorney and tax advisor before making any decisions about gifting your home.

You can feel at home with Edward Jones

On paper, your home is a valuable asset — but more importantly, its value lies in the hard work you put into it and the memories you’ve made in it. Your financial advisor and tax professional can help you manage any taxes that may result from selling or gifting your home.