Selling a home and taxes

[CABarb]

Hi,

I've lived in my home for 35 years and it's in Silicon Valley (northern CA). We were only supposed to be in this house for 2 years, but DH decided to quit working after my son was born. He died and I stayed on in this house so that my son would have some stability. Son moved out and I have been living alone. I like living on my own.

The house was built in 1976 and needs so much work. There are cracks in the walls and a long crack in the ceiling. It needs interior and exterior painting, new floors and carpets. I did remodel the kitchen and the master bathroom. I'm overwhelmed trying to hire people to fix up the home and have thought about moving. People buy fixer uppers and so selling the house is not an issue. It's the taxes I would have to pay on it.

Homes in the neighborhood are going for about $700,000 in my neighborhood and people are overbidding. I paid $95,500 for the home in '80. Selling it now would mean I would have to declare at least $400K as capital gains. Of course it depends on how much it sells for, but I would still have to pay a very high capital gains on it.

What would be the best course of action? Rent it out? I want to move but don't want to pay such high taxes.

Thanks in advance,

CABarb

 

[pb4uski]

Sell. You'll get $700k and pay ~$50k in taxes [($700k sale price - $100k basis - $250k exclusion)*15%] so you'll pay ~7% of the sale proceeds in taxes and walk away with ~$650k.

Don't forget that you can add to your basis the cost of major remodeling you have done.

To me, the tax is quite reasonable given the proceeds that you will receive.

If you rent it out and later sell it then your taxes on the proceeds will likely be higher die to depreciation recapture and and loss of the $250k exclusion.

 

[MichaelB]

Have you made any capital improvements to the house since you purchased it? New A/C, furnace, kitchen or bathroom remodel, permanent appliances? These all add to your cost basis before figuring the capital gain.

 

[pb4uski]

Actually, now that I think of it, you may have a stepped up basis for 50% of the excess of the fair value of the home over its basis as of when you husband died, and that might eliminate the tax n part or entirely depending on the value when your husband died. This link gives a short explanation Stepped Up Cost Basis At Death Saves Taxes

So if for example, the home was worth $300k when you husband died, then, assuming a $100k original cost and $25k of improvements since your husband died, your cost basis would be $225k (50% of $300k value at husband's death + 50% of $100k original cost +$25k improvements). So if you sell for $700k, your gain would be $475k, of which $250k would be excluded and $225k woudl be taxable at 15% for a tax of ~$34k.

YMMV and you may want to get the advice of a tax CPA or tax lawyer.

 

[CABarb]

MichaelB, I've put in a new Trane furnace, dual pane windows, complete kitchen and bathroom remodel as well as a large redwood deck. The fences around the house were replaced, as well as the roof. Thanks for reminding me of the improvements!

 

[CABarb]

pb4uski

My husband died in 1997 and I'll have to check to see what the home was worth at that time. Thanks for the info and the link. This makes me feel better and I think it's worth talking to a RE agent as well as a CPA.

This is a starter home which we never moved out of. The RE market is hot in this area and I'm getting flyers and mailings asking me if I want to sell all the time.

Thanks again. I've learned something new already.

 

[MichaelB]

pb4uski

My husband died in 1997 and I'll have to check to see what the home was worth at that time. Thanks for the info and the link. This makes me feel better and I think it's worth talking to a RE agent as well as a CPA.

That's a good point by pb4uski about the step up cost basis.

You may not need a CPA, this isn't complex tax law. It's more making a list of all the capital improvements you made, documenting the costs, then applying them to calculate a new cost basis. If they were incurred after your husband passed away, 100% of the cost applies, if before, 50% of the cost applies. From your list, it sounds like you have quite a few.

Determining the value of your home when your husband passed is a bit more challenging. An RE agent may help you figure that out.

 

[target2019]

We considered moving a few years ago. After you analyze what proceeds you'll have after the sale, there are only three questions to answer (IMO). Where will you go? How much will you reduce expenses?

Our analysis leaves us in the same home, for now, for these reasons.

If we stay in this general area, we might reduce our monthly costs by 25% at best. And knowing how life is, there are probably some unknown costs that a deeper look-see would reveal. At least for a few years more, we will stay in this house. Some of the life-decisions holding us here could go away within 5 years. Then we could make a major move, looking to reduce housing costs by 50%.

It sounds like you have a few things that need repairing, and I totally understand how difficult it is to get a reasonable repair done. I myself have a backlog of those type of repairs. Whether you sell or stay, it might help to find the right person to fix the cracks, repaint a room, and so on.

 

[Accidental Retiree]

pb4uski

My husband died in 1997 and I'll have to check to see what the home was worth at that time. Thanks for the info and the link. This makes me feel better and I think it's worth talking to a RE agent as well as a CPA.

Thanks again. I've learned something new already.

Get a historical appraisal done. There are people who do date of death valuations and they can look back at 1997 and work up an appraisal appropriate for that time frame.

 

[nwsteve]

While admittedly imperfect, your property tax appraisal for 1997 taxes could be useful for at least an approximation. CA residents would know better, but CA tax authorities are known for putting the highest possible value on anything that generates tax revenues. I would also look at 1996 and 1998 tax receipts as well. If these receipts are no longer available, your county will have them. If you are happy with the values that generates, I believe the IRS will find them acceptable since it originates from an appropriate third party govt
Good Luck
Nwsteve

 

[W2R]

Sell. You'll get $700k and pay ~$50k in taxes [($700k sale price - $100k basis - $250k exclusion)*15%] so you'll pay ~7% of the sale proceeds in taxes and walk away with ~$650k.

Or even better,

tax of ~$34k.

+1 When all that money hits your portfolio you won't care if some of it goes for taxes! You said you want to move, so sell, sell, sell.

Repairs and repairmen are a PITA, whether you are doing it to sell the house, or doing it for yourself as you would probably do eventually. So, I wouldn't let the repairs keep you from selling the house.

 

[pb4uski]

While admittedly imperfect, your property tax appraisal for 1997 taxes could be useful for at least an approximation. CA residents would know better, but CA tax authorities are known for putting the highest possible value on anything that generates tax revenues. I would also look at 1996 and 1998 tax receipts as well. If these receipts are no longer available, your county will have them. If you are happy with the values that generates, I believe the IRS will find them acceptable since it originates from an appropriate third party govt
Good Luck
Nwsteve

Great point Steve... that is certainly a good place to start to give her an idea of the value back then to see if the increase from when they bought is large enough to justify getting a formal date of death appraisal done as Accidental Retiree suggests.

 

[AllDone]

Unfortunately, your 1997 property tax appraisal is useless in California! However, if you are over 55, you do get to transfer your low property tax basis to a new home as long as you are downsizing.

It sounds like you might be a lot happier in a condo where the maintenance is managed for you.

Edit: you have to stay in the same county to transfer your property tax base or choose one of the counties that accept a transfer of the property tax base.

 

[38Chevy454]

In the hot market, just sell the house as it is, don't bother with repairs and the hassles of all that. You may not even get back the costs of doing the repairs, and by letting buyers do it their way, it let's them get in lower initial cost to buy. You do not need to have the repairs in order to expedite sale of the house.


I agree the stepped up basis, and get the historical appraisal to help you out with value at date of death for your husband. By the time you add the improvements you made, it may not be too bad on taxes and you can take most of it as post-tax money. Then buy the smaller place in location you want, and invest the rest to boost living expenses.

 

[GrayHare]

Re pre-sale upgrades, most selling RE agents will handle those for you via contractors they've worked with. Though the agent may tell you he/she won't charge you for such help, it's likely the contractors are paying the agent some percentage of the upgrade costs as a finders fee.

 

[harley]

We considered moving a few years ago. After you analyze what proceeds you'll have after the sale, there are only three questions to answer (IMO). Where will you go? How much will you reduce expenses?

I'm on the edge of my seat! What's the third question?

 

[target2019]

I'm on the edge of my seat! What's the third question?

Dang-it. I really meant three.

1. Where will you go?
2. How much will you reduce expenses?
3. Do you very much like your current environment?

 

[MBAustin]

CABarb - sounds iike you are ready for a new phase of your life, and although you may not LIKE paying the capital gains taxes, when you look at the big picture, it's not a good reason to stay in a house that is difficult/stressful for you to maintain, especially when you indicate you want to move. Just do it - don't focus on the taxes, focus on the nice sum you will have left after taxes. You've received good advice above on how to make it as painless as possible.

Good luck and keep us posted!

 

[target2019]

MichaelB, I've put in a new Trane furnace, dual pane windows, complete kitchen and bathroom remodel as well as a large redwood deck. The fences around the house were replaced, as well as the roof. Thanks for reminding me of the improvements!

One end of the scale is "flipped home" meaning everything is new, or newish. The other end of the scale is "needs to be flipped". Your home is more than a fixer-upper, in my opinion, since you have made improvements.

New carpets and paint will probably be recommended by the R.E. agent.

 

[Accidental Retiree]

In the hot market, just sell the house as it is, don't bother with repairs and the hassles of all that. You may not even get back the costs of doing the repairs, and by letting buyers do it their way, it let's them get in lower initial cost to buy. You do not need to have the repairs in order to expedite sale of the house.


I agree the stepped up basis, and get the historical appraisal to help you out with value at date of death for your husband. By the time you add the improvements you made, it may not be too bad on taxes and you can take most of it as post-tax money. Then buy the smaller place in location you want, and invest the rest to boost living expenses.

We sold out of the Bay Area a year ago. We did a few fixes, but they were not required. We had multiple offers over asking, in two rounds of offers on a 50 year old house, and all contingencies were waived: inspection, loan, and appraisal.

I hear things are hotter now.

We got a bigger house but for less than we sold for, so because we moved to one of the 9 counties that permit it, we transferred our 1983 assessment to the new house. Google Propositions 60 and 90
(I think those are the numbers.)

 

[Accidental Retiree]

Unfortunately, your 1997 property tax appraisal is useless in California! .

Thanks to Prop 13.

 

[meierlde]

Sell. You'll get $700k and pay ~$50k in taxes [($700k sale price - $100k basis - $250k exclusion)*15%] so you'll pay ~7% of the sale proceeds in taxes and walk away with ~$650k.

Don't forget that you can add to your basis the cost of major remodeling you have done.

To me, the tax is quite reasonable given the proceeds that you will receive.

If you rent it out and later sell it then your taxes on the proceeds will likely be higher die to depreciation recapture and and loss of the $250k exclusion.

Note that you add real estate commissions to your basis So its (700 -100 -42 (6% commission) -250)*.15 = 43k in cap gains. As with most things such as stocks commissions paid to sell increase the basis (also you may add other closing costs you pay to the commission line, and if you have the settlement statement from when you bought the house you could also add any title and escrow fees paid back then to the line)

 

[pixelville]

Actually, now that I think of it, you may have a stepped up basis for 50% of the excess of the fair value of the home over its basis as of when you husband died, and that might eliminate the tax n part or entirely depending on the value when your husband died. This link gives a short explanation Stepped Up Cost Basis At Death Saves Taxes

So if for example, the home was worth $300k when you husband died, then, assuming a $100k original cost and $25k of improvements since your husband died, your cost basis would be $225k (50% of $300k value at husband's death + 50% of $100k original cost +$25k improvements). So if you sell for $700k, your gain would be $475k, of which $250k would be excluded and $225k woudl be taxable at 15% for a tax of ~$34k.

YMMV and you may want to get the advice of a tax CPA or tax lawyer.

It may be even better than that. CA is a community property state, so the step up in basis if the property was appropriately titled, is 100%, so both halves (not just 50%).
Basis of Inherited Property (Community and Non-Community Property) - CFP | Investopedia
Step-Up in Basis Rule-Common Mistakes | Financial Alternatives Inc

CABarb, based on where you are located, you can stop by a AARP TaxAide location during tax season (Feb-Apr) and our wonderful volunteers can help you with your taxes (for free). Google it.
I volunteer at South Bay locations here in Bay Area. PM me if you'd like.

 

[kaneohe]

Unfortunately, your 1997 property tax appraisal is useless in California! ........................................................

This is true. Appraisal values were frozen when Prop. 13 took effect, or if you bought later, the yr that you bought. From that point on, they were allowed to increase 2% /yr so if you've owned a long time, there is no relevance to real values.

You may want to how the property was titled when your spouse passed away.
If it was titled as a joint revocable living trust or community property, it would get a full basis step up vs 50% if JTWROS. I have even heard talk that you would get the full step up if if were JTWROS if it were bought with community property funds.........but I've never heard a lawyer say that. Might be worth investigating though. And check to see if you have a signed community property agreement in
which both spouses agree that community funds were used to buy the house.

sorry, pixelville.........you beat me to it by a mile...don't know why I missed it.

 

[pb4uski]

Note that you add real estate commissions to your basis So its (700 -100 -42 (6% commission) -250)*.15 = 43k in cap gains. As with most things such as stocks commissions paid to sell increase the basis (also you may add other closing costs you pay to the commission line, and if you have the settlement statement from when you bought the house you could also add any title and escrow fees paid back then to the line)

I was just trying to keep things simple for the OP but agree that any commissions paid would reduce the gain. Technically, I think commissions paid are a reduction of sales price and not an increase in basis, but either way the gain is reduced.