Get out of house without too much taxation?

[GaryInCO]

I'm 66. I have two sons that I want to leave as much as possible. (Hopefully not soon, but eventually.)

I have a too-large house. It's a beautiful place, on a lake, and it's been wonderful to live here for the last 33 years. (It was nicer before ex-DW decided to take a hike, but ohwell.) But it's stupidly large for one person, over 4000', expensive to keep up, and *lonely*. I built a separate apartment in the walk-out basement which helps the cashflow and reduces the loneliness, but ... Lately I've been thinking of down-sizing. Maybe move into one of those over-55 communities so I have more social interaction opportunities.

But I have over $500k equity/gains in the house, and I would rather that money goes to my boys instead of my Uncle. If I kept it until I died, the basis would reset and my sons wouldn't owe any tax on it. But if I downsize, I would get a $250k exemption and then taxes on $250k or so would go to Uncle.

What's the smart way to keep the $$ for my boys?

 

[pb4uski]

You're 66. Does it make any sense to carry this big house that you don't really want or need for another 15-25 years or more so they can get $38k more?

Sell it, pay the tax on the taxable gain and go on to enjoy the rest of your life.

How much will your annual expenses decline by if you downsize?

Do what is good for you. They get anything that's leftover.

You could get married and double your exemption to $500k, but you asked for smart ways to avoid the tax so forgettaboutit. [emoji23]

 

[badatmath]

Don't worry about the kids. They want you safe and happy more than they care about a few dollars after you are gone.

 

[SecondCor521]

You're 66. Does it make any sense to carry this big house that you don't really want or need for another 15-25 years or more so they can get $38k more?

Sell it, pay the tax on the taxable gain and go on to enjoy the rest of your life.

How much will your annual expenses decline by if you downsize?

Do what is good for you. They get anything that's leftover.

You could get married and double your exemption to $500k, but you asked for smart ways to avoid the tax so forgettaboutit. [emoji23]

+1.

Also, you can reduce your capital gains by increasing your cost basis by certain purchase costs (hopefully you saved records for 33 years!) and the cost of any capital improvements (did you add a deck, or a water softener, remodel the kitchen or bath? That basement apartment would count too.).

You can also reduce your proceeds by selling expenses, including, most notably, the realtor fees.

So it's probably less than, and may be a lot less than, the $38K figure @pb4uski noted.

See IRS Pub 523 for all the gory details.

 

[tulak]

Agree with others. Pay the tax and move on.

If it makes you feel better, you’ll save a lot in future maintenance costs, which will help offset the taxes paid.

 

[ivinsfan]

Money is one thing but you say you are lonely...life is too short and loneliness IMO has a way of feeding on itself...if want to sell , sell you don't owe your boys money at the cost of you feeling lonely.

 

[pb4uski]

Another angle is if you have taxable account positions with realized losses you can harvest those losses and use them to offset some of the gain on the sale of the house.

 

[pb4uski]

Money is one thing but you say you are lonely...life is too short and loneliness IMO has a way of feeding on itself...if want to sell , sell you don't owe your boys money at the cost of you feeling lonely.

I'm betting that the boys would say the same thing... sell the house and don't worry about maximizing our inheritance.

Just don't give them too much time to think about it.

I have 4 siblings and we all have told our mother to spend what she wants and enjoy her life and we're all doing fine... not that mother has done that but that's a whole different thing.

 

[GaryInCO]

All good points, thanks. My basis actually got reset 11 yrs ago when I bought out ex-DW's half, but it's gone up $500k since then. I put about $100k into it 4-5 yrs ago (whole-house remodel and landscape refresh) so that reduces it too.

If I went to one of the over-55 communities I'd have to pay a crazy-high rent, but I'd lose the mortgage payment ($3k/mo), property taxes ($500), insurance ($200), utilities ($300), landscape maintenance, other maint (it costs about $6k to paint the place every 6-7 yrs), etc. So yeah that would make up for a lot of the cap gains I'd have to pay.

Emotionally it's really hard to consider selling. My then-fiancé and I built it while we were planning our wedding, and I have very happy memories of our newlywed period. My sons were born upstairs in our bedroom. This has been my home for half my life, and the "big fancy house on the lake" is kinda embedded in my self-image. But it makes less and less sense as I get older.

You could get married and double your exemption to $500k, but you asked for smart ways to avoid the tax so forgettaboutit. [emoji23]

Heh. Actually I'd love to get married again, or at least partnered. I never wanted to grow old alone, and I find I don't enjoy it. But your point is well taken.

 

[marinauser]

Is there some reason why you can't buy a place in an over 55 community? Perhaps those you are interested in don't have sales prices that would match up with your home sale?

 

[pb4uski]

.....the "big fancy house on the lake" is kinda embedded in my self-image. But it makes less and less sense as I get older. ...

Boy, I get that.

Our lake house is 5 doors down the lake from my mother's that she and my dad built in 1961. As a kid we lived at the lake every summer... moved the day after school ended and moved out the say before school started (home was only 25 miles away). Now DW and I have our own lake house that we use for less than 1/2 the year. On a cost per day that we use it it is a totally stupid cost... but we love it there and I've been part of that wonderful community for 62 of my 68 years.

I'm guessing that we'll keep it until one or the other of us passes... too much inertia. But I don't really want my kids to get stuck with it like we are... they love the lake as well and have grown up there... but it is sort of like inheriting a liability with high property taxes, insurance and upkeep.

 

[GaryInCO]

Is there some reason why you can't buy a place in an over 55 community? Perhaps those you are interested in don't have sales prices that would match up with your home sale?

I've only just started to look around, but the places I've seen are all rent-based.

 

[DrRoy]

I thought there was an IRS rule that someone over a certain age could skip taxes one time on a personal residence appreciation. Try looking it up.

 

[Badger]

It appears that your mortgage, utilities, insurance, maintenance, etc. for just one year will more than covers the taxes. Seems like a no brainer to me. Am I missing something? Getting out from under the housing cost in a large home and going to a smaller house may even lower your expenses resulting in more money to pass on to your children.
There may be other choices other than the 55 communities including a smaller house in a nice family neighborhood. Our choice is to stay in our modest home in such a neighborhood. We enjoy social life with tennis (wife), volunteering (me), and other group activities in the area.
Bottom line is if you aren't happy then "What's the point"? Sounds like you are putting the emphasis on saving taxes instead of your loneliness.

Cheers!

 

[pb4uski]

I thought there was an IRS rule that someone over a certain age could skip taxes one time on a personal residence appreciation. Try looking it up.

Never to my knowledge and I'm a retired CPA, but not a tax practitioner. It used to be that the game was deferred if you bought a more expensive house. The current rule is what the OP describes.

 

[RunningBum]

This is a classic case where you shouldn't let the tax tail wag the dog. Consider tax impact is fine, but not to this degree, especially since the lower expenses of living elsewhere probably more than makes up for it.

 

[foxcreek9]

File this under, "I wish I had your problem". Lived in our current house for 20 years, it has appreciated 37% over what we paid for it and 23% more than what the original owners paid for it in 1998.

 

[pb4uski]

All good points, thanks. My basis actually got reset 11 yrs ago when I bought out ex-DW's half, but it's gone up $500k since then. I put about $100k into it 4-5 yrs ago (whole-house remodel and landscape refresh) so that reduces it too.

If I went to one of the over-55 communities I'd have to pay a crazy-high rent, but I'd lose the mortgage payment ($3k/mo), property taxes ($500), insurance ($200), utilities ($300), landscape maintenance, other maint (it costs about $6k to paint the place every 6-7 yrs), etc. So yeah that would make up for a lot of the cap gains I'd have to pay. ...

Exactly.

So with that extra $100k of improvements you're talking about a $400k gain (less after selling costs) and a $250k exclusion so less than $150k taxable gain and less than $23k federal tax but perhaps state tax too.

But on the other hand you'll avoid almost $50k a year of PITI and utilities, but have to pay rent or the costs of a downsized place. So let's say that you save $10k a year... payback is just a few years.

Move on and be happy.

 

[GaryInCO]

File this under, "I wish I had your problem". Lived in our current house for 20 years, it has appreciated 37% over what we paid for it and 23% more than what the original owners paid for it in 1998.

Ya it's just about 4x'd in 33 years, with the extra $100k I put into it and other improvements that DW & I did. Maybe up 3x or so if you factor those in.
Northern CO has been a good place to own real estate -- my rental has gone up about 8%/yr.

I'm a fellow Iowa Stater BTW, EE/CprE '79.

 

[cathy63]

Ya it's just about 4x'd in 33 years, with the extra $100k I put into it and other improvements that DW & I did. Maybe up 3x or so if you factor those in.
Northern CO has been a good place to own real estate -- my rental has gone up about 8%/yr...

Since you mention the rental ... have you been reporting that income on your taxes and taking depreciation on that portion of the property? That makes your taxes on the sale a bit more complicated.

I agree that you should sell. The tax hit is still going to be less than your the savings on expenses, but it's not quite as straightforward as pb4uski's estimate when you factor in that rental usage. If you're not comfortable with the section of IRS pub 523 that talks about gain/loss calcs when having a separate rental unit on the property, then you should plan to have a pro do your taxes for the year that you sell.

 

[ncbill]

Ya it's just about 4x'd in 33 years, with the extra $100k I put into it and other improvements that DW & I did. Maybe up 3x or so if you factor those in.
Northern CO has been a good place to own real estate -- my rental has gone up about 8%/yr.

I'm a fellow Iowa Stater BTW, EE/CprE '79.

I bet over 33 years you and ex-DW put more than $100k in improvements (not just maintenance & repairs) into that house.

Which will reduce any gains even more.

 

[Jimonlimon]

You could always donate the taxable amount to your charity of choice. That would put it to good use and avoid any taxes.

 

[marko]

With few exceptions, (TLH being one) I've always felt it was a bad idea to make decisions based on taxes. Pay the tax, move on and be happy.

As someone noted above, the difference is about $38K over $500K in the pocket. Let it go and good luck.

 

[GaryInCO]

Since you mention the rental ... have you been reporting that income on your taxes and taking depreciation on that portion of the property? That makes your taxes on the sale a bit more complicated.

Oooh, good point. I don't think @ncbill's point about DW/my improvements is an issue, since my basis reset when I bought out her half. That's how my CPA showed it anyway. (I hope so! My records from 20-30 years ago are, ahh, spotty...)

But the depreciation for the rental, and for my home office (I've been self-employed and worked from home since 1991), will definitely have an impact. That'll increase the cap gains, about $30k or so I think, but it won't really change the decision.

 

[Sunset]

File this under, "I wish I had your problem". Lived in our current house for 20 years, it has appreciated 37% over what we paid for it and 23% more than what the original owners paid for it in 1998.

Ha, we must be neighbors. I think ours went up about 25% in 20 years