$500,000 per couple primary residence exclusion and inflation

[CSdot]

Anyone else bumping up on the $500,000 per couple primary residence exclusion and wondering if they should sell and move?

Per the IRS: If you meet certain conditions, you may exclude the first $250,000 of gain from the sale of your home from your income and avoid paying taxes on it. The exclusion is increased to $500,000 for a married couple filing jointly.

We are at that point (maybe beyond), and I would hate to wait 5 or 10 years and learn that the government gets to share in even more inflation generated equity, as the person selling me my next home is not going to give me a special credit for the equity lost to the government.

I know it sounds like a dumb reason to move, but the kids are grown. We don't even use the upstairs, so other than the high cost of finding a replacement property in our hot market, not a bad time to move.

How did you handle the decision?

 

[ShokWaveRider]

Yes, it is keeping us from selling at the moment. Although, it makes it more stomach able paying over $100k to sell our $1.25m home including closing costs. The costs of selling a home in the US is getting ridiculous for what one gets in return.

 

[Gumby]

Since we bought 32 years ago, if we sold our home today, it is very likely we would exceed the exclusion amount. I don't see that as a reason to move from a home we love. But, then, I am not as tax averse as some people.

 

[jollystomper]

Since we bought 32 years ago, if we sold our home today, it is very likely we would exceed the exclusion amount. I don't see that as a reason to move from a home we love. But, then, I am not as tax averse as some people.

+1

We bought our home 34 years ago and (based on input from realtor friends) would exceed the exclusion amount if we chose to sell. But that would not be a factor in our decision to sell, other factors have much more weight.

 

[MC Rider]

The market will not stay hot forever. Sell hot, buy cool. If you can.

 

[Gumby]

I've only ever bought one house and I intend to sell only one house (or less).

 

[almost there]

The market will not stay hot forever. Sell hot, buy cool. If you can.

.

 

[MC Rider]

^^^


LOL. The currency being worth less seems to be another issue. But sounds like an argument to hold something other than just cash. Maybe a free and clear residence.

 

[cathy63]

If we worried about that, we'd have had to sell about 15 years ago! We'll probably stay here until one of us dies and the other gets a full step-up in basis (yay for community property states).

 

[brydanger]

You can actually do this as long as you've lived in it 2 out of every 5years!

I know most on here aren't using real estate as an active investment... but this happens to be one of the built in "loopholes" in the US tax code that make real estate one of the best investments. Where else can you make $500k TAX FREE in 2 years?

But, you're right... the biggest value is likely the reduced ongoing monthly costs from downsizing now that you no long need a huge home for the kids. Win/win!!

 

[statsman]

Our only kid moved out of state as a career move. Soon after, they wanted us to follow, knowing full well that my DW would be keen on the idea. We sold our house in late 2018 after living there for 23+ years, along with 9 years of deferred capital gains on the previous house (sold prior to the May 1995 exemption rule change).

So, 32 total years of capital gains in Silicon Valley. Yeah, we exceeded the married joint exemption limits. By quite a bit. The Federal government and California were more than delighted to take our tax payments. The good news is the house we purchased in Central Texas took less than 1/3rd of what we cleared on the sale of our house (after paying off the mortgage, the realtor and closing fees, the capital gains tax implications, and the moving costs).

 

[DrRoy]

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

 

[LateToFIRE]

In NYC, the exclusion is somewhat inadequate. Gain on our city home exceeded that threshold a long, long time ago. But, not the worst problem to have.

 

[LateToFIRE]

Yes, it is keeping us from selling at the moment. Although, it makes it more stomach able paying over $100k to sell our $1.25m home including closing costs. The costs of selling a home in the US is getting ridiculous for what one gets in return.

Why is it keeping you from selling? It's not like the issue is going to get better. And seems counterintuitive to wait for the value of your home to drop.

 

[mathjak107]

In NYC, the exclusion is somewhat inadequate. Our city home exceeded that threshold a long, long time ago. But, not the worst problem to have.

one other thing to watch is your estate tax exemption.

years ago we were shocked to learn that when we went over new yorks estate tax exclusion at that time that we didn’t just pay on the overage .

you lost the entire exemption and paid estate taxes from dollar one .


ny is now at the federal level thankfully but that estate tax cliff is still alive and well .

go over by just 5% and you lose the entire estate tax exemption .

i wish we had that problem now at the federal level but over time inflation can make that an issue again

 

[Ronstar]

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.

 

[ShokWaveRider]

Why is it keeping you from selling? It's not like the issue is going to get better. And seems counterintuitive to wait for the value of your home to drop.

It is actually a bit more than that. The cost of selling and buying again would pay for another 5 years of our current home's upkeep unless something drastic changes things. That to me makes selling counterintuitive.

The counter argument is:

We have a 1.5 story and only use the ground floor.
We have 3,300sqft and only use 2,700swft (Ground Floor)
We have a pool that we just maintain and never use anymore and have not for the last 4 years

We cannot find a suitable home in as nice an area and location as we have, no point in paying what we sell our home for in our area just to pay 3/4 of that sale price for a home 2/3rd the size. Again, the selling and closing costs are the biggest detractor for me rather than the $500k limit.

 

[LateToFIRE]

It is actually a bit more than that. The cost of selling and buying again would pay for another 5 years of our current home's upkeep unless something drastic changes things. That to me makes selling counterintuitive.

The counter argument is:

We have a 1.5 story and only use the ground floor.
We have 3,300sqft and only use 2,700swft (Ground Floor)
We have a pool that we just maintain and never use anymore and have not for the last 4 years

We cannot find a suitable home in as nice an area and location as we have, no point in paying what we sell our home for in our area just to pay 3/4 of that sale price for a home 2/3rd the size. Again, the selling and closing costs are the biggest detractor for me rather than the $500k limit.

Ahh, I see. Makes more sense now given you want to stay in basically the same area. We have a bit of a similar issue in that we're going to downsize from a city home that is about 4x too large for us, to a 1BR apartment, like a pied a terre set-up, but will incur massive selling costs and taxes to make that trade. Still, I don't want to hold onto the property, its not a fit for our long-term needs, its insanely expensive to carry, and I don't want the hassles of renting it out. Selling won't be the best investment decision, but need more simplicity in my life going forward.

 

[pb4uski]

... How did you handle the decision?

Might be the epitome of the tax tail wagging the investment dog. Just saying.

That said, I have heard of people who are serial movers to tax full advantage of the tax-free gain on the sale of principal residence... more when I was younger than now though.

 

[anethum]

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.

 

[Sunset]

Interesting idea, unfortunately unlike you folks, our cheap home we lived in for ~20 years has gone up maybe $50K.

 

[ShokWaveRider]

Interesting idea, unfortunately unlike you folks, our cheap home we lived in for ~20 years has gone up maybe $50K.

We have only had 2 homes in the USA since 1991.

The SoCAL home we sold in 2002 got us the Full $500k + a little capital gain. We owned this home outright when we sold it (No Mortgage).

We lived in on a boat in the Carribean from 2003 - 2006 and then in Rentals in N.E. Fla. until 2008.

Our current N.E. Fla home, purchased in late 2008 could realize ~$650k today, I am struggling to collect improvement costs to reduce that as much as possible.

As mentioned, the cost of selling and buying makes the move impractical at the moment.

 

[4legsgood]

I recently sold my primary residence and have to cough up about $70k for Federal taxes. If I didn't sell, I'd be looking at some costly repairs in the next few years plus the property taxes on the place are killing me.

I do think it's a good point in time to at least think about selling when your gains exceed the exclusion. Make sure the house is still a good fit and that you love the place.

 

[mathjak107]

Interesting idea, unfortunately unlike you folks, our cheap home we lived in for ~20 years has gone up maybe $50K.

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

 

[brydanger]

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.

This type of negative perspective/mindset is frustrating.
Especially as an entire generation right now is struggling to afford rents and may never be able to even own their own home?

It's hard to imagine having a $1.1M equity in anything and the takeaway being that you feel "damned if you do, damned if you don't".

We are all given MANY options in life... and you shouldn't never feel trapped, certainly not in your own home.
No finagling needed - 1031 the home into a plex or two that allow you to live off the income, maybe rent out the house and live off the income, pull the equity out to make other sound investments - the only way having $1.1M in equity is a "damning" situation is if you allow your brain to make it one (and I assure you there are PLENTY of other walkable neighborhoods in multiple countries other than yours, for way less than the $850k you'd clear even if you went that route).

IF you're there because you love the location and your neighbors so much there's no where else you'd rather be (awesome!)... it might be time to add a bit of gratitude to your mindset - because what you're looking at/describing as stuck in damnantion - most would call a goal/opportunity.