I’m Selling My House and Netting $675k to Downsize for Retirement. How Can I Avoid Capital Gains Taxes?

I’m Selling My House and Netting 5k to Downsize for Retirement. How Can I Avoid Capital Gains Taxes?

It’s often said that buying a home is one of the best investments you can make. And like any investment, it involves tax issues.

With an investment like stocks or bonds, the profit you make when you sell your holdings – minus the initial investment and any expenses that make up your tax basis – is subject to tax. If you buy and sell an investment in 12 months or less, your profit is taxed as ordinary gain, just like all your other taxable income. If you hold the investment for more than a year, you get a break and your profit is considered a capital gain, which is taxed at a lower rate of 0%, 15% or 20%, depending on your other income. But some options exist for homeowners to help them reduce or, in some cases, avoid capital gains tax altogether.

A financial advisor can help you establish a plan for managing taxes associated with real estate. Get matched with a financial advisor today.

Article 121 Exclusion

There is additional breathing space when you take advantage of selling a home. If the property has been your principal residence for two of the last five years, you benefit from a one-time exemption that allows you to exclude from tax $250,000 of your profits if you are a single filer, or $500,000 if you are a joint filer. depositor. To qualify, you also cannot have used this exclusion in the past two years, although there are some exceptions. as the IRS points out here, including moving for work or health-related reasons.

If you’re a single filer, that means only $425,000 of your profits are taxable. But this is only the beginning.

Adjust your cost basis

In addition to your initial purchase price, your home’s tax basis may include certain improvements and other related costs, including abstract title fees, transfer or stamp taxes, owner’s title insurance, and other related fees. on sale. You can also include home improvements, such as adding a deck, improving windows, updating a kitchen or bathroom, etc. Repairs don’t count, but items requiring repair and part of an improvement do. If you receive tax relief for an improvement, such as an energy tax credit, you must deduct this from the total cost.

If you made $50,000 worth of improvements to the home and paid miscellaneous selling costs of $5,000, you have now reduced the taxable gain to $375,000. And you’re not even done yet.

A financial advisor can help you determine which costs associated with your home contribute to your basis and thus reduce your taxable gains. Talk to a financial advisor today.

Use other losses

If you have capital losses on another investment, such as stocks, you can use those losses to offset gains on your home. However, you can offset long-term gains with long-term losses only, and short-term gains with short-term losses.

So if you lost $10,000 on a bad stock bet and sold those stocks after holding them for more than 12 months, your taxable gain is even smaller, at $365,000.

Tax laws can quickly get tricky. It’s better to consult a financial advisor or another tax professional to calculate your tax liability.

Another option

How about simply moving all your real estate gains to a new home? This was once allowed, but was replaced by the Section 121 exemption. But if you don’t mind complicating things, you can delay taxes by making the sale a like-kind exchange, which applies to real estate investments. In this case, you move, rent the house for at least two years, sell it and use the proceeds to buy a similar property, which you will also have to rent for a while before converting it into your primary residence. There are other complications too, so consult an experienced advisor before trying it yourself.

But even without complicated property swaps, you can still reduce what looked like a $675,000 gain to $365,000. If you are in the 20% long-term capital gains bracket, your initial tax bill of $135,000 has been reduced to $73,000 for a savings of $62,000.


A gain on the sale of your home that exceeds your single exclusion limit is taxable as a capital gain, but can be reduced by the cost of property improvements and other capital gains losses.


  • Taxes are complicated and property taxes can be even more complicated, especially if you’re planning to move into a nursing home. Before making a sale, it is worth consulting a experienced financial advisor to find ways to retain as much profit from your home as possible.

  • Keep an emergency fund on hand in case you face unexpected expenses. An emergency fund should be liquid – in an account that doesn’t have the risk of large fluctuations like the stock market. The tradeoff is that the value of cash can be eroded by inflation. But a high interest account allows you to earn compound interest. Compare the savings accounts of these banks.

  • Selling a home is a big financial decision, but Financial Advisor can help you assess its impact on your overall financial plan. Finding a financial advisor doesn’t have to be difficult. The free SmartAsset tool connects you with up to three licensed financial advisors who serve your area, and you can have a free introductory call with your advisor to decide which one seems best for you. If you are ready to find an advisor who can help you achieve your financial goals, start now.

Photo credit: ©iStock.com/Jacob Wackerhausen

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