My husband and I have lived in our “starter house” for over 40 years. We are now at the point where we are looking for a small scale house.
As joint taxpayers, I understand that some of the profit from the sale of our home will be exempt. I also heard that there is a special rule about buying a new home within two years of the sale, which can save taxes.
In regards to the sale of our current home, we were told that he would decline any offer, using an offer on a new home as an emergency. For many reasons, what we do is probably buy a new home before we put our current home up for sale.
What are the rules for this type of transaction? How can you do better with such a big move?
Any advice would be appreciated. thank you.
Confused in Illinois.
‘The Big Move’ is a MarketWatch column that looks at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage.
Have a question about buying or selling a home? Want to know where your next move should be? Email Jacob Passy at TheBigMove@marketwatch.com.
You are confused dear
I’m sure the prospect of moving after living in the same house for decades is daunting – and today’s competitive real estate market makes things even more challenging.
But I think you should both thank yourselves for being proactive instead of waiting for cell phones to slow down to make such a big change. It’s always better to act from a position of strength, like buying or selling a home, than to be discouraged by financial transactions.
Before I get into how to think about buying and selling a home all at once (or in quick succession), I want to address your questions about taxes.
As a joint taxpayer, up to $500,000 of capital gains on the sale of your home are exempt. That’s because this is your main home – it’s treated differently for tax purposes than if it’s not your main residence.
To calculate your final capital gain, take the sale price of the home and subtract the original price you paid (also known as the cost basis). According to the IRS, there are other expenses that can be deducted for selling the home, including some closing costs or home improvement costs such as adding a bedroom or pool. Of course, you’ll need to collect receipts for those expenses as proof of what you paid.
What’s left over after those expenses and the cost basis is your capital gain — if it’s more than $500,000, you’ll pay tax. How much you pay in taxes depends on your income.
The second approach you mentioned to eliminate or reduce capital gains tax is called a Section 1031 exchange, which deals with investment properties. Since this is your primary residence, you won’t qualify for that tax break unless you convert the home into an investment property.
When it comes to buying a new home and how to go about selling your current one, that’s certainly a big challenge – one that many buyers face. In today’s market with a severe shortage of homes for sale, many sellers choose to stay put because of the perceived difficulty of finding a new home to buy.
The advice you received regarding emergencies was right on the money. A real estate marketing website owner’s maximum real estate exposure, compared to adding a “kiss to death” home sale condition to any offer in a market where most listings attract bidding wars.
“The real estate agent can throw it into the pile of offers that aren’t considered,” says Gassett, also with Re/Max Executive Real Estate in Hopkinton, Mass.
But Gassett and other financial experts say you don’t need to worry about selling your home. Although rising mortgage rates have somewhat dampened demand, it’s still very much a seller’s market.
“You can easily enter a contract to rent the house you live in for 30 to 60 days.’“
So when you’re in the market for other sellers as a home buyer, you’re in the driver’s seat when it comes to the home you own. This gives you greater flexibility, which may even help you make more attractive offers to other homes.
“You can easily enter into a contract by renting out your home for 30 to 60 days,” says Matthew Aaron Benson, owner of Sonmore Financial, a financial consulting firm in Arizona. As Benson notes, this allows you to avoid needing a bridge loan between the two properties, increase your down payment on your new home, or provide the comprehensive cash flow you need. Plus, this gives you more time to move your belongings between homes.
Also, consider other sources of savings, such as borrowing from a non-IRA or non-401(k) investment portfolio, a down payment if you don’t want to sell immediately, and the proceeds from the sale of your home. Of course, if money isn’t an issue, first buying your new home can be a bit of a stressful move. It also gives you time to bring your current home into a more salable condition.
At the same time, if you buy your next home before selling your current home, you want to be careful not to get in over your head. Sometimes people make the mistake of estimating how much they will get from the sale of their home, which can end up putting them in a bigger debt burden than they want. Consult with a financial advisor to determine how much home you can afford as a starting point, and make sure you cast as wide a net as possible to increase your chances of locking in the deal.
Sure, it’s a tough market right now, but taking a measured approach like this will ensure your next home will be a source of comfort in your golden years — and not another headache.
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