$500,000 per couple primary residence exclusion and inflation

[Montecfo]

Will have a taxable gain when we sell. Can't worry about that too much.

 

[Stwicky]

Should you die while living in the house, isn't the cost basis adjusted to current market value? If the house is in both of your names, Might have to leave it to the kids to get this adjustment.

 

[Fermion]

The "fair" way to implement something like prop13 would be that when finally you sell and don't rebuy, you must pay back the reduction in taxes received over the years. Or something like this, so that two people living in the same size, quality house in the same area don't pay drastically different property taxes.

But nothing is really fair, which is why I don't feel guilt scrambling for any advantage. Someone else is also getting something, be it prop13, a solar rebate, or tax credit on a EV.

 

[Koolau]

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.

I often wondered if those issues didn't generally retard sales in California specifically and perhaps in HCOL areas in general.

It would seem at some point, the taxing authorities may ask too much of constituents and create a tax-revolt. Of course, YMMV.

 

[MichaelB]

The typical home value in the US is around $340k and increases slightly above the rate of inflation, so even over decades they will not see $500k in profit. The $500k exemption is fine for the majority of homeowners.

It’s not clear why the exemption should be increased or indexed when most people won’t benefit.

 

[tulak]

Maybe it would be better if there was no exemption?

But I doubt anyone would argue for that.

And for the record, I'm in favor of keeping the exemption since I will benefit.

Even though I'm single, so I think it isn't fair that married people get 500k and I only get 250k. Such is life!

 

[almost there]

Why tax any of it at all? Any of it?
Do they kick in if you lose money on a home? They are now after Every red cent they can get.

 

[HI Bill]

The typical home value in the US is around $340k and increases slightly above the rate of inflation, so even over decades they will not see $500k in profit. The $500k exemption is fine for the majority of homeowners.

It’s not clear why the exemption should be increased or indexed when most people won’t benefit.

Most people who live in the urban areas (SF, LA, SD, NY, etc., and Hawaii) would likely benefit, and most of these are the ones paying the highest property taxes, so I see this as fair.

We bought a house just 3.5 years ago, and we're already past the $500K increase in value. When we sell the house to move into a condo, we'll certainly appreciate the exemption, as we'll need the gain in tax-free basis if we want to buy something comparable in size/quality in Honolulu.

 

[Wile E. Coyote]

Your comment on "major home improvements" made me look up Publication 523.

My reading of the Pub is that any "improvement" qualifies for an increase in the basis. At least I sure hope so as I already will need most of my $262,000 improvements to avoid exceeding the $500,000 allowance when I sell. Some of my 104 entries on the my "increase in basis" spreadsheet are small ($12.71 is smallest), but I have documentation and receipts to support every entry.

That was what I was going to mention is improving the place. Capital improvements increase your basis in the property. I have a $250k exclusion and $100k in increased basis due to improvements (so far).

Also, take advantage of tax credits for energy improvements over the next few years. https://www.irs.gov/credits-deductions/home-energy-tax-credits

Research how long elements of a house last and act accordingly and analyze the cost versus value report to align with the improvements you desire https://www.remodeling.hw.net/cost-vs-value/2023/.

Improving the place, if nothing else you get to use as long as you live there and the state of maintenance/improvement makes the house a lot easier/faster to sell down the road. If you have made good decisions you should get paid back around 50% of your improvements.

 

[Wile E. Coyote]

Guess what though guys?

You only get to count the second kitchen renovation, not the first in this scenario.

You have owned this prime piece of real estate for decades. You first renovated your kitchen in the 90's, however, you did a Tuscan design that is badly out of style (and it's very worn). You paid $100k for that renovation that included a bump out of the breakfast nook (and anyways without explaining the whole thing you paid $100k for it and it was worth it). Okay, so, now The Mrs. wants the thing done again because you do the big family celebrations and you entertain friends frequently. So, this time it is going to require a rework of the first floor floor plan and the abutting landscaping and it's going to cost you $250k because you are also having custom cabinets and other pricey upgrades.

1990 Kitchen $100k
2024 Kitchen $250k

Is this $350k basis in the same house? Nope! You can only deduct the second one. You cannot keep renovating the same items and adding them to basis.

This adds $250k to your basis.

 

[4legsgood]

...Also, take advantage of tax credits for energy improvements over the next few years. https://www.irs.gov/credits-deductions/home-energy-tax-credits
...

Another detail, tax credits received should be subtracted from the cost for basis calculation:

https://turbotax.intuit.com/tax-tips/going-green/what-is-the-irs-form-5695/L9D6ARQ0p

"So, if you spend $10,000 for a qualifying solar electric power system and receive a 30% credit totaling $3,000, your cost basis of you home will increase by $7,000 ($10,000 expenditure - $3,000 tax credit = $7,000 increase in tax basis)."

 

[Fermion]

Why tax any of it at all? Any of it?
Do they kick in if you lose money on a home? They are now after Every red cent they can get.

It is a gain. Person A invests $300,000 in Microsoft and rents an apartment, person B invests $300,000 in some house in California and lives in it. After a few years both have an asset worth $1 million, both need to pay tax.

 

[almost there]

I just don't look at my primary residence as an investment.
Like owning a rental or buying stock.
I pay prop tax for 40 years. Then retire and decide to downsize
And they feel the need to just keep on taking... And you agree with it. LOL LOL

Just a difference of opinion.

 

[Fermion]

Look at it this way.

You could get a loan for $400,000 to buy a house with $100,000 down, paying 3% interest (not anymore but this is how it was for the past decade). That house increases in value to $1.5 million while you are able to deduct the interest on your federal taxes. When you sell, you don't pay tax on the original $500,000 purchase price and you don't pay tax on an additional $250,000 to $500,000.

You might not look at this as an investment, but it was an amazingly good investment and a good deal provided by the government.

 

[MichaelB]

It is a gain. Person A invests $300,000 in Microsoft and rents an apartment, person B invests $300,000 in some house in California and lives in it. After a few years both have an asset worth $1 million, both need to pay tax.

Yes, and to this I would add the interest paid on the mortgage was a deductible expense, and this favors the more expensive home over the lower cost options.

For the homeowner the choice of location is work dependent, so the home buyer employed in Silicon Valley has enjoyed greater gain than the peer in Terre Haut Indiana not because of real estate investment prowess or because more risk was taken. The greater return was good fortune. Why should this homeowner enjoy a greater tax benefit?

 

[almost there]

Am guessing your ret. is paid with tax dollars. )

 

[Fermion]

Am guessing your ret. is paid with tax dollars. )

Sort of. I have 10% in Roth and 90% in 401K/IRA, which have been tax deferred. But just like the $1 million dollar gain on a house, I will eventually have to pay tax when I sell from my 401K.

 

[almost there]

You should try both. Fun fun fun.