$500,000 per couple primary residence exclusion and inflation

[LateToFIRE]

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

That is somewhat our scheme. Purchase price of the semi-rural house we've retired to was less than one fifth the market value of the NYC home. Though the trade is not so much about value as it is about wanting a calmer, quieter lifestyle. Now, the only question is if we want to maintain our connections to the city - do we buy a condo/co-op apt, rent, or just stay in hotels.

P.S. With respect to the relative wealth of transplants, we've learned to watch out for the "special" pricing levied upon transplants by local contractors, merchants, and r.e. brokers.

 

[almost there]

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.

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.

 

[anethum]

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.

It's extremely arrogant of you to presume what my "mindset" is, simply for responding to the OP and explaining the bizarre circumstances of my current tax situation. I am very happy I purchased my home when I did. I know that in most respects I am fortunate to own my home free and clear, and to live where I do. But a $11,000 & rising annual property tax bill on a sub-1,200 sq ft teardown house is absurd, IMO. I'm in the 12% federal tax bracket, and in recent years my property tax has been double my federal & state income tax combined. (My tax bracket will increase in 2024 as I start receiving Social Security this year.) I have no control over the local real estate market. Nor can I withdraw 1% of my home's current market value from an ATM to pay my annual property tax bill. The aggregate inflation rate in the US since I bought my house has been 276%. The increase in my property tax has been slightly over 1,000%. (I have not made any changes which affected the assessment.) I have the right to be less than thrilled about that, combined with the way the federal tax law was changed after my purchase which would severely adversely affect me were I to sell now. I don't appreciate being attacked by you for explaining my crazy tax situation.

You may be looking at things from your personal housing mindset. You might be happy to uproot youself at some time in the future, and that's fine. I have no desire to move to another region or another country, and you shouldn't presume that somebody might want to, just because they can do it financially. My friends & family are here. I have had several retired neighbors move away in recent years solely because they could no longer afford their property tax bills here. They wanted to stay in this area. Nobody should be put in that situation when their property tax bills increase far in excess of the rate of inflation every year. Such enormous property tax increases because of local real estate market changes are not the sort of expenses than can be easily anticipated and planned for. I am fortunate that I can afford my property tax. That doesn't mean I'm happy about it, or that I don't have the right to express that.

Also, I have every reason to be annoyed about a change in federal tax law made AFTER I bought my home. The change was designed to enable folks living in LCOL & MCOL areas of the country avoid capital gains taxes when they sell their primary homes, but to stick it to some folks living in HCOL areas. Same thing with the $10K SALT cap.

 

[pb4uski]

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.

It's extremely arrogant of you to presume what my "mindset" is, simply for responding to the OP and explaining the bizarre circumstances of my current tax situation. I am very happy I purchased my home when I did. I know that in most respects I am fortunate to own my home free and clear, and to live where I do. But a $11,000 & rising annual property tax bill on a sub-1,200 sq ft teardown house is absurd, IMO. I'm in the 12% federal tax bracket, and in recent years my property tax has been double my federal & state income tax combined. (My tax bracket will increase in 2024 as I start receiving Social Security this year.) I have no control over the local real estate market. Nor can I withdraw 1% of my home's current market value from an ATM to pay my annual property tax bill. The aggregate inflation rate in the US since I bought my house has been 276%. The increase in my property tax has been slightly over 1,000%. (I have not made any changes which affected the assessment.) I have the right to be less than thrilled about that, combined with the way the federal tax law was changed after my purchase which would severely adversely affect me were I to sell now. I don't appreciate being attacked by you for explaining my crazy tax situation.

You may be looking at things from your personal housing mindset. You might be happy to uproot youself at some time in the future, and that's fine. I have no desire to move to another region or another country, and you shouldn't presume that somebody might want to, just because they can do it financially. My friends & family are here. I have had several retired neighbors move away in recent years solely because they could no longer afford their property tax bills here. They wanted to stay in this area. Nobody should be put in that situation when their property tax bills increase far in excess of the rate of inflation every year. Such enormous property tax increases because of local real estate market changes are not the sort of expenses than can be easily anticipated and planned for. I am fortunate that I can afford my property tax. That doesn't mean I'm happy about it, or that I don't have the right to express that.

Also, I have every reason to be annoyed about a change in federal tax law made AFTER I bought my home. The change was designed to enable folks living in LCOL & MCOL areas of the country avoid capital gains taxes when they sell their primary homes, but to stick it to some folks living in HCOL areas. Same thing with the $10K SALT cap.

$11,000 property tax bill isn't outrageous on a $1m+ property in this day and age.

You can withdraw to pay your property taxes. Put a HELOC in place and use draws from it to pay for your property taxes if they are a burden to you.

Laws change and as a result there are winners and losers. It wasn't some conspirancy to penalize HCOL homeowners vs LCOL or MCOL homeowners.
Be thankful that you are sitting on a big unrealized gain.

Could you lease the land to a buyer with an option for the buyer to buy the land from your estate and avoid the capital gains tax and other bad stuff that goes with it? Lease structured so they pay property taxes and have an insurance requirement with you as a named insured and they also indemnify you from anythng that happens on "your" land?

 

[anethum]

$11,000 property tax bill isn't outrageous on a $1m+ property in this day and age.

You can withdraw to pay your property taxes. Put a HELOC in place and use draws from it to pay for your property taxes if they are a burden to you.

Laws change and as a result there are winners and losers. It wasn't some conspirancy to penalize HCOL homeowners vs LCOL or MCOL homeowners.
Be thankful that you are sitting on a big unrealized gain.

Could you lease the land to a buyer with an option for the buyer to buy the land from your estate and avoid the capital gains tax and other bad stuff that goes with it? Lease structured so they pay property taxes and have an insurance requirement with you as a named insured and they also indemnify you from anythng that happens on "your" land?

Thanks for the ideas, but as I previously wrote, "I am fortunate that I can afford my property tax." That doesn't mean I'm happy about its enormous increase nearly 4 times the rate of inflation. In most jurisdictions, when property values go up, the tax rate tends to go down.
Not where I live, however. I'm also in the crazy situation where regardless of how much I spend on improving my home, it won't add a penny to the resale value. On each assessment, the house value drops, but the lot value increases. When contesting my assessment one time, I argued that the "structure" (house) valuation should be $0, because if a meteorite were to destroy my home, the property market value would increase due to the savings for a builder on the cost to destroy the house. My argument was rejected.

As for the tax code changes, we'll have to disagree. But regardless of intent, there's little doubt about where most taxpayers live who are adversely affected by the current rules.

 

[Sunset]

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.

What a different environment. Our house is worth about 13% of yours and our property taxes are a little higher.

I feel like I live in LoserTown ...

 

[almost there]

What a different environment. Our house is worth about 13% of yours and our property taxes are a little higher.

I feel like I live in LoserTown ...

Turn on the news. And hear how bad it is here. You will feel better.

 

[aja8888]

My wife died in late 2022 and last year I decided to sell the family home (just me in it) and downsize. Plus, I didn't care for the 55+ community it was in. Being in Texas with gains on houses in the order of 25% of the HCOL areas, banking my gain was tax free.

So, I bought a much smaller home "near" town where my family (daughter) and friends are easily available to visit with.

Moving is NO FUN. And moving is EXPENSIVE, and it was especially for me, a 79 year old guy. I ended up getting rid of 50% of our accumulated belongings. My mistake was I should have gotten rid of 90% of it.

I made the right decision to downsize, but it was a royal PIA.

 

[LateToFIRE]

It's extremely arrogant of you to presume what my "mindset" is, simply for responding to the OP and explaining the bizarre circumstances of my current tax situation. I am very happy I purchased my home when I did. I know that in most respects I am fortunate to own my home free and clear, and to live where I do. But a $11,000 & rising annual property tax bill on a sub-1,200 sq ft teardown house is absurd, IMO. I'm in the 12% federal tax bracket, and in recent years my property tax has been double my federal & state income tax combined. (My tax bracket will increase in 2024 as I start receiving Social Security this year.) I have no control over the local real estate market. Nor can I withdraw 1% of my home's current market value from an ATM to pay my annual property tax bill. The aggregate inflation rate in the US since I bought my house has been 276%. The increase in my property tax has been slightly over 1,000%. (I have not made any changes which affected the assessment.) I have the right to be less than thrilled about that, combined with the way the federal tax law was changed after my purchase which would severely adversely affect me were I to sell now. I don't appreciate being attacked by you for explaining my crazy tax situation.

You may be looking at things from your personal housing mindset. You might be happy to uproot youself at some time in the future, and that's fine. I have no desire to move to another region or another country, and you shouldn't presume that somebody might want to, just because they can do it financially. My friends & family are here. I have had several retired neighbors move away in recent years solely because they could no longer afford their property tax bills here. They wanted to stay in this area. Nobody should be put in that situation when their property tax bills increase far in excess of the rate of inflation every year. Such enormous property tax increases because of local real estate market changes are not the sort of expenses than can be easily anticipated and planned for. I am fortunate that I can afford my property tax. That doesn't mean I'm happy about it, or that I don't have the right to express that.

Also, I have every reason to be annoyed about a change in federal tax law made AFTER I bought my home. The change was designed to enable folks living in LCOL & MCOL areas of the country avoid capital gains taxes when they sell their primary homes, but to stick it to some folks living in HCOL areas. Same thing with the $10K SALT cap.

+1, you have my sympathy on the prop tax issue. We see same issues in NYC - old timers that bought a townhouse for $50K, now worth millions. Yes, they won the home equity lottery, but no, they often don't have the cash flow to service the greedy money grab on prop taxes, insurance, etc. and do not want to lose their homesteads. Probably their heirs will be the ones to benefit in the end. I bet it probably feels like you've got a target on your back that says "kick me". Whatever whining other people have about cost of housing, blah, blah blah, has nothing to do with you. IMO, you have right to how you feel about being victimized via taxes.

 

[CSdot]

OP here. Good comments. Very sympathetic to Anethum's plight. Seems very unfair.

Glad I am in a low tax state, with a 15% cap of reassessment years for primary residences. I paid @$2,400 property tax on my $1M+ fully paid for house. That said, I get popped with very expensive coastal insurance. Between flood and wind and hail, I am probably paying $10K+.

 

[pb4uski]

...I'm also in the crazy situation where regardless of how much I spend on improving my home, it won't add a penny to the resale value. On each assessment, the house value drops, but the lot value increases. When contesting my assessment one time, I argued that the "structure" (house) valuation should be $0, because if a meteorite were to destroy my home, the property market value would increase due to the savings for a builder on the cost to destroy the house. My argument was rejected. ...

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.

 

[almost there]

IMO primary res. Prop tax should end at 65. Just my 2.

 

[hopefullyoneday]

If i had it to do all over again i would sell my primary house every 5 or 6 years to take advantage of the gains tax free. I would take the gains from each sale and buy rental properties. Rinse and repeat, creating wealth without tax and giving me another source of income in retirement.

 

[Romer]

This is our 4th home and my Dream house. When I saw it on the relator web site I told my wife that one day I want a house like that. And then the 2008 market dumped and the house sat on the market and came down $120K. I said we need to go look at it and bought it. It took a few months to sell our previous house and paying two mortgages was hard, but the delta in price was $100K in 2008. I had learned that it is OK to be house poor as your income will grow into it. That is what I did with my previous houses starting with the one I bought when I was 24. It was home ownership that enabled me to step up to a better home each time.

If it wasn't for the market implosion, we wouldn't have this house and it has grown to be worth about $1.4M over 15 years, almost 2.5 times what we paid for it. Fortunately I have kept tract of every allowable improvement to track the cost basis and we are just over the $500K exemption in profit, maybe a wash after factoring in costs to sell.

BUT, we don't plan on selling. If we ever do decide to sell, then we will have $1.4M in cash tax free and some Capital gains to pay taxes on.

This house is more than an asset, it is our home and one I still think of as my Dream house.

I created a document for my wife on how to step up the cost basis of 50% of the house and how the exemption gets reduced to $250K if she doesn't sell it within 2 years of my passing. Then she can make an informed decision. Me, I plan on living here until I am no longer able to.

 

[N02L84ER]

We have lived in our home 21 years. So far, it looks like it is worth $130K more than what we paid for it. Don't think we need to worry about the $500K limit.

 

[Sunset]

.......

I created a document for my wife on how to step up the cost basis of 50% of the house and how the exemption gets reduced to $250K if she doesn't sell it within 2 years of my passing. Then she can make an informed decision. Me, I plan on living here until I am no longer able to.

Nice, and subtle. I didn't realize it until I looked for something else.

I'm going to let my DW know, Just in case everyone is CA moves here to CheapLand and drives our housing cost up.

Bing Explained the same:

**Surviving spouses** may exclude **$500,000** of home-sale profits from taxes if they sell the house within **two years** of their spouse’s death, provided they owned and lived in the house for **two of the five years** before the spouse passed away. If more than two years have elapsed, then no more than **$250,000** of the profit is tax-free¹².

Additionally, if you and your husband owned the home jointly, part of the tax bill was automatically forgiven when your husband died. At least **half of the property’s basis** was stepped up to its value on the date of his death. In most states (except community-property states), **half of the property** receives a step-up in basis. If you live in a community-property state, then the **entire basis** is stepped up to its value when the first spouse dies. For example, if you and your husband purchased the house jointly for **$200,000**, and it was worth **$500,000** when he died, your basis would now be **$350,000** (your half of the original basis plus your husband’s half of the date-of-death value). Community-property states include **Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin**¹.

Remember that the cost of any major home improvements you made while owning the house also adds to the tax basis. For more detailed information, consult **IRS Publication 523, Selling Your Home**¹.

Source: Conversation with Bing, 3/3/2024
(1) Paying Taxes on a Home Sold After a Spouse's Death | Kiplinger. https://www.kiplinger.com/article/t...es-on-a-home-sold-after-a-spouse-s-death.html.
(2) The $250,000/$500,000 Home Sale Tax Exclusion | Nolo. https://www.nolo.com/legal-encyclopedia/the-250000500000-home-sale-tax-exclusion.html.
(3) Selling a home after a spouse dies – don’t forget taxes!. https://rockhousefinancial.com/financial-planning/selling-home-spouse-dies/.

 

[Surewhitey]

Same here. We bought 6 years ago @$282k & we may be ~$500k now, so we have a ways to go. We'll sell before we get to $500k equity, likely.

 

[Tadpole]

We bought our house in 2011 for $225K and the county auditor says it now is valued at $643K. My two years after spouse death will be up in July this year. I will probably keep living in the house and just eat the taxes if I need to sell in the future. I've heard that this state has pretty hefty excise taxes on house sellers too.

 

[Ready-4-ER-at-14]

Interesting thread that got me thinking.

Doing the math, it seems like our downsized place could hit the 500k gain at about the time we might be looking at a transition housing place and let us move in there relatively mobile and independent. I like the idea of us moving independently and not just be lovingly plopped down somewhere by kids. Should the gain go a little above that 500k amount even paying some in fed taxes and a little more to realtors or house in the cloud arrangements seems you do get to keep more.

I also realize I remember nothing about the lifetime gain limit amounts. Another thing on my learn now agenda.

 

[Dash man]

We bought our home in 2001 and are well under the $500k exemption. We have another home at the Jersey Shore that is approaching the exemption, but doesn’t qualify unless we move their full time for two years. We were never destined to make money on real estate. Good thing we’re better at stock investing.

 

[Mark1]

Remember that the cost of any major home improvements you made while owning the house also adds to the tax basis. For more detailed information, consult **IRS Publication 523, Selling Your Home**¹.

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.

 

[Sunset]

We bought our house in 2011 for $225K and the county auditor says it now is valued at $643K. My two years after spouse death will be up in July this year. I will probably keep living in the house and just eat the taxes if I need to sell in the future. I've heard that this state has pretty hefty excise taxes on house sellers too.

Since you didn't say it, I will point out (assuming Washington State).

If you live in Washington, then upon death of your spouse the basis is stepped up (should get an appraisal to have proof of value at that time, can still do it for that timeframe). County tax values are not market values.

So just using made up numbers: bought for $225K
July 2022 step up value: $550K (a savings on capital gain of $325K now tax free).

Value now after selling fees (could include improvements): $700K

Means a capital gain of $150K, so all tax free as individual allowed $250K gain.

Tracking and being aware of the step up basis will mean a savings of approximately $60K in taxes.

 

[Bigbass]

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.

Proposition 19 became operative on February 16, 2021

Under Proposition 19, can I transfer my base year value to a home of any value?
If the replacement home is of equal or lesser value than the original home, then the original home's factored base year value may be transferred to the replacement home without any value adjustment. In general, "equal or lesser value" means:
100% or less of the full cash value of the original home if a replacement home is purchased or newly constructed before the sale of the original home, or
105% or less of the full cash value of the original home if a replacement home is purchased or newly constructed within the first year after the sale of the original home, or
110% or less of the full cash value of the original home if a replacement home is purchased or newly constructed within the second year after the sale of the original home.
However, if the full cash value of the replacement home is greater than the adjusted full cash value of the original home, the base year value of the original home may still be transferred to the replacement home, but with any excess value above the adjusted full cash value of the original home added on. Thus, the new taxable value of the replacement home would be the sum of the adjusted base year value of the original home plus the difference between the full cash values of the original home, as described above, and the replacement home.

For example, an original home was sold and had a full cash value of $400,000 and a factored base year value of $100,000 at the time of sale. If a replacement home is purchased in the first year after the sale for a full cash value of $600,000, then 105 percent of the full cash value of the original home is compared to the full cash value of the replacement home. The original home's adjusted full cash value equals $400,000 X 105% = $420,000. The difference between the full cash value of the replacement dwelling ($600,000) and the adjusted full cash value of the original property ($420,000) is added to the factored base year value ($600,000 - $420,000 = $180,000 + $100,000 = $280,000). Thus, the replacement home will have a taxable value of $280,000.

 

[Bigbass]

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 -

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

 

[pb4uski]

IMO primary res. Prop tax should end at 65. Just my 2.

By chance are you in your early-to-mid 60s? Very self-serving methinks.

Do you stop benefiting from municipal services once you are 65? Arguably, you use more municipl services as you have more time to enjoy your local parks and recreasion facilities.

With respect to school taxes, do you stop benefitting from an educated citizenry once you reach 65?

Why can't seniors just pay their fair share like everybody else rather than look for preferential treatment? Especially if you retire at 51.