$500,000 per couple primary residence exclusion and inflation

[mathjak107]

I don't believe you can do a 1031 on your personal home.

The property must be a business or investment property, which means that it can't be personal property. You would have to rent out your home for a couple of years before you can do a 1031

this is correct

 

[Gumby]

..

 

[anethum]

You might want to talk with an appraiser. I could see an argument that your house has negative value. The value could be the value of the lot less the cost of demolition and disposal.

I spoke with a long-time employee in the appraisals office several years ago. He told me that the appraisals are done entirely via software. They receive records of any construction permits so they know if rooms or amenties have been added. He also said that the software wasn't designed to handle a situation like mine where McMansions (probably the majority in my neighborhood now) are adjacent to small, old houses whose entire market value is in the land. He added that the software had originally been written for Florida, and that it could, however, give an accurate appraisal of a citrus grove, not particularly useful here in the mid-atlantic.

One thing that's infuriating is that the McMansions are routinely appraised far below their market value, unlike the old houses. There's a McMansion near me that's more than 3 times the size of my home. The owner paid $2.4 million for it 10 years ago. Prices have not dropped, but it's assessed currently at $1.6 million.

The best I can do is appeal my assessment, which I routinely do. I usually get a reduction, last time by 9%.

 

[Koolau]

one of the benefits of high cost areas is the fact that if one has owned a home for a while a home worth 700k today that appreciated 3% a year is a whole lot more then a home in lower cost areas that appreciated the same 3% and is worth 260k .

throw in the higher wages in a hcola and the larger social security checks and a person who eventually relocates from a hcola to a lower one is usually far wealthier then locals .

we saw that when we bought a second home in the poconos….

locals couldn’t come close to what transplants had as far as wealth

This concept ("rich" out of state people or "foreigners" buying up Hawaii real estate) is a huge issue in the Islands. As a SWAG, for every couple of such purchases, one family has to leave the Islands. Our population is declining for this (and other HCOL) reasons. We aren't building fast enough to take up the slack and housing prices are being bid ever higher. At least I'm old, so it can't be much longer until there will be one more place on the market for folks to fight over.

 

[Koolau]

Prop 13 is a life saver. Without it, I would move. No question.
Paid $325k in 1992, value now around $2m. Prop tax is about $5k/yr today.
And I can take my tax rate with me if I sell. If the new home value is the same or less.
So, looks like I will be staying in Calif. 6 generations here.
Would hate to be chased out by prop tax.

We have no Prop 13 or anything like it but the good news: We start at the lowest property taxes in the nation. We pay less RE tax on our place than we did on the mainland place which 17 years ago was worth 1/5 of what our place is worth now. So, when our assessment went up almost $100K a year ago, we sort of shrugged. We probably could have complained and just maybe got it reduced a bit, but, amazingly, we had to more or less agree with the taxing authority as to what the place was worth. We still pay less than $2K/year, so don't worry too much about it. One of our few "bargains" here in Paradise. YMMV

 

[Gumby]

Having enough to pay my property taxes was part of my retirement planning.

 

[pb4uski]

...The best I can do is appeal my assessment, which I routinely do. I usually get a reduction, last time by 9%.

Have you talked with an appraiser who does appraisals professionally who is not in the appraisers office?

If the jurisdiction appraises at fair value for property tax purposes a professional appraisal should have some sway with the grievance board.

 

[Koolau]

Having enough to pay my property taxes was part of my retirement planning.

I'm guessing that's in a FAQ "sticky" someplace.

 

[LeapDay2012]

It's clearly a first world problem, but a fair frustration for some of us. DW and I have lived in same home 24 years in SoCal.. appreciation exceeds $1.5M (yay). But, as we age and realize living in a multistory home poses some future problems. Our adult children have settled in the community, so we would like to transition to comparable single level home in same area. Cal law let's us transfer property tax basis to new home, but tax on capital gains on existing home or gain in excess of $500k limit options... it essentially devalues our current home when looking for comparable but single level replacement. Sounds like whining, but in many communities this wouldn't be a problem. I think it's reasonable to view as somewhat unfair that the exclusion isn't indexed in some way to level the impact by region... Many other communities we could do the transition without economic loss. Here we're penalized. In the end, it costs our kids because they'll eventually get a stepped up basis in whatever we leave them, but if we move, we'll have carved off a big chunk to Uncle Sam's benefit at their expense. (And they'll need the equity to buy in this community because it's no longer affordable for young couples..) Done Ranting. -LD2012. (Just celebrated 3rd anniversary of FIRE, 12 years later )

 

[imnontrad]

I am getting close to the 250K/single limit. But that is "Zillow" value and my place needs updating so I imagine I have about 2 years to reach that. I am finally getting to the 10 year point and would get a break on property taxes - next year. It's enough of a break to cover capital gains costs for a while.
But honestly, my decision to move will not be made based on capital gains but the political climate of the city and country. This area seems to be getting more hostile.

 

[2retireearly]

Keep track of all the improvements you put into your home. They then are added to the cost basis of your home when you bought it. Thus reducing your profit from the sale of the home....I bet you can whittle it (up) so that you can reduce the profit to below 500k, or at least reduce it a lot.

 

[RobLJ]

We're up almost 50% in 7 years but a a ways below the 500k exclusion. My study and two bedrooms are on the lower floor accessed by stairs (it's a basement home) so if the yewt moves out and one of us has trouble with stairs, it might make sense to sell and buy a smaller one story. Or move out of state, but we're only 200 miles from the grandkids, so that's an issue. Oregon or Washington, maybe, but I suspect their real estate isn't much cheaper than Reno.

 

[LeapDay2012]

2retireearly -- That's is a very important point. We've track all improvement and when I talk about our taxable gain it takes into account the increased basis due to improvements (to the tune of several hundred k).. it would be even worse without that. Again.. in many other communities, especially with tracking improvements, this wouldn't be any issue.. it just severely impacts certain communities where folks want to relocate into the same community's market

 

[explanade]

I have no clue what our house is worth. I built it mostly myself in 1993, and I expect that the value would be close to $500k more than what I put into it.

That said, the only criteria I have for selling is when DW says that she wants to move. I may be able to persuade her a bit with some tax talk, but that alone wouldn't push her into moving.

And I'm sure that the house that we buy if/when we move will cost more than what we get for our current house.

Yeah and for Californians, you may get a huge gain from selling a home owned for 20 years or more but then when you buy another home, it will also cost as much or more than what you sold for.

Not to mention a big increase in property tax basis for Californian homeowner.

 

[cathy63]

Yeah and for Californians, you may get a huge gain from selling a home owned for 20 years or more but then when you buy another home, it will also cost as much or more than what you sold for.

Not to mention a big increase in property tax basis for Californian homeowner.

If you wait until age 55, you can move your property tax basis with you.

 

[LeapDay2012]

Yep. We're 55+, so that is accounted for.

 

[67walkon]

We were in the same home for 33 years. Built it, raised kids there and loved it. But, the maintenance became a problem. We sold it last year and just missed the peak of the seller’s market for Florida waterfront homes. We exceeded the $500,000. We kept almost every receipt for capital type improvements. We paid a 6 figure capital gains house, put a big chunk in the retirement accounts and built a new house that I hope will not require much expensive maintenance for 10 or 15 years. I’ve got a very happy wife, no mortgage and a beautiful new home.

I wouldn’t spend much time worrying about exceeding the $500,000 exemption. It just means you are making a lot of money.

 

[triangle]

I have often wanted to start a similar thread here asking if there was a way to sale one's residence to a holding company, and then buy it back a year or two later, after a holding period that would not trigger some wash sales rules so they could reset their home's cost basis. While in the meantime they are living in the home and paying property taxes, maintenance, insurance, etc, much like a triple-net lease in the REIT world. Essentially paying the holding company a modest premium to their interest/borrowing rate for their service of holding the home with a contract to buy it back in full at the agreed time and agreed price.


My POV is why should a person/family who moves every decade or so get to keep their real estate gains (the 250/500K exclusion used multiple times), while those who live in a similar home down the street get penalized if they decide to move years later. By penalized, I mean taxes consuming some of the gain in equity value that would have otherwise been generated and used to purchase a replacement home. While some of the increase in value is due to regional population surges, a lot of it is due to Federal Reserve and congressional action side effects which cause currency devaluation.

 

[Gumby]

Sounds like a 14th Amendment equal protection lawsuit would be in order. As someone who has been in the same house for 32 years, I look forward to your success.

 

[triangle]

We were in the same home for 33 years. Built it, raised kids there and loved it. But, the maintenance became a problem. We sold it last year and just missed the peak of the seller’s market for Florida waterfront homes. We exceeded the $500,000. We kept almost every receipt for capital type improvements. We paid a 6 figure capital gains house, put a big chunk in the retirement accounts and built a new house that I hope will not require much expensive maintenance for 10 or 15 years. I’ve got a very happy wife, no mortgage and a beautiful new home.

I wouldn’t spend much time worrying about exceeding the $500,000 exemption. It just means you are making a lot of money.

I chose to worry about it all the same. As it is the same house, but now the government wants a slice of it. "Their" slice increases in percentage each year while the home is the same.

Since it is costly to move and buy a new home in the same general area I decided to update my home and stay in place. Deferring the taxes.

 

[Jimonlimon]

Our house has recently passed $500K, but we have it much remodeled to our exact liking and I would not move.

Remember that capital improvements may add to your basis value.

 

[Badger]

I bought my small depression-era house in the 1980s. Home prices started to explode in the DC area shortly after I purchased it. For the past 30 years, every small old house sold in my neighborhood has been razed and replaced with a McMansion. A lot of beautiful large old houses nearby get razed, too. There is constant construction. My house itself has no market value. 100% of the value is in the small lot it sits on. Most small old homes like mine are sold directly to a developer, so there's no real estate commission.

My property value has increased 900%. My property tax has increased 1,000%. (There's no prop 13 nor any senior property tax credit available to me.) If I were to sell now, I'd have more than a $1.1 million capital gain. I'd only get a $250K exemption. Between federal & state income taxes, plus IRMAA, I estimate I'd owe about $250K in taxes unless I were able to finagle some sort of like-kind exchange.

I like living here, I like my neighbors, I like being able to walk and bike everywhere, but I hate my property tax. If I sell, I wouldn't be able to afford a similar walkable property. I'm damned if I stay and damned if I sell.

The current tax law about primary home sales changed after I bought my home. The tax law will change again.

I could have easily written this same post except I live a couple of blocks from the ocean in NE Florida and my taxes are lower. I have about $100k total in the house and it is estimated to be worth $1.25 M. The value is in the property. Once the house is sold it will be torn down and replaced by a McMansion like all the other houses in the neighborhood. If I die first then I am concerned how my wife will deal with the issue. For now I suggested that she contact our estate lawyer for advice since this is way beyond my area of expertise.

 

[Retired2021]

Just like FDIC insurance limits (i.e., $250k per institution), the government of the people, for the people, by the people, never indexes these limits based on inflation. So frustrating...

 

[Gumby]

Just like FDIC insurance limits (i.e., $250k per institution), the government of the people, for the people, by the people, never indexes these limits based on inflation. So frustrating...

Not indexing for inflation is an old trick to increase revenues.

"The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing."

Jean-Baptiste Colbert 1619–83
Controller-General of Finances for King Louis XIV of France

 

[Ginny]

I would not sell if it just helped my tax situation. Where you live, with a spouse or not is worth more than $500k. We used it when we relocated from San Diego to Murrells Inlet before the covid bullshit. I also kept track of all the expenses because it reduces the capital gain too.