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Considering Selling? Older Homeowners May Face Unexpected Taxes

Jan 9, 2018

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Rightfully so, future homeowners have lots of questions about how the new tax laws affect presumed advantages to owning a home. It’s true that some significant changes took effect January 1, 2018 such as the allowable interest deduction on mortgage loans and the deduction of state and local taxes which also includes the payment of property taxes.

When older homeowners are ready to sell a long-held family residence as part of a pro-active plan for the future or due to an unexpected life event, they often have to face capital gains taxes on a portion of their sale proceeds. While no changes were made to the tax laws regarding gains realized on the sale of a principal residence, there are limits that could impact these homeowners as they consider a fruitful financial strategy.

With home prices soaring in the Pacific Northwest, older adults considering a lifestyle change must contend with home values that have appreciated beyond limits excluded for capital gains taxes. These limits - $250,000 for a single person and $500,000 for a married couple - may be easily exceeded even for homes purchased just 10 years ago. It can be an alarming concern for those who bought residences 20 or 30+ years ago.

For example, if married homeowners paid $250,000 for a home in 1989 and its current market value exceeds $750,000, cap gains taxes could be owed on the amount received above $750,000 ($250,000 purchase price + $500,000 exclusion). For the same home held by a single taxpayer, gains taxes would be anticipated on the portion of the sales price above $500,000 ($250,000 purchase price + $250,000 exclusion). This creates a huge difference in proceeds expected from the sale of the same home. You must have lived in your home 2 of the last 5 years to use the exclusion, and, additionally, the overall impact of gains may include adjustments for closing costs and significant renovation expenses.

A dutiful real estate professional, especially one who holds a credential as a Seniors Real Estate Specialist®, should ask older clients if capital gains taxes on the sale of their home have been considered in future financial plans. Having a frank discussion about these unexpected expenses will go a long way in avoiding money surprises while also building a positive experience that could ultimately add to a better financial future for the client.

As always, real estate brokers should strongly suggest to anyone considering the purchase or sale of a home that they seek the advice of a tax professional to fully understand the financial impact of their decisions.


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