Too many corporations are getting involved in buying houses. This is what we get when regulations and zoning people don’t know what is best. Definitely not enough multi-family units are built today. No one wants them in their neighborhood.
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I’m not clear how the taxes all work when downsizing. We’ve owned our home for a LONG time. It isn’t in a crazy RE area, but because we’ve been here so long, it has still increased in value substantially. We’ve considered downsizing, and simplifying, but anywhere we want to go, cost this same if not more than the current value of our house.
BUT, when we sell, because of the huge capital gains, we’ll still owe taxes? Or if you reinvest in another residence (costing more), there’s no penalty no matter how much the value of the current home has increased?
What is the time limit to reinvest in another home? I thought it was 2 years. Someone else said it was only 45 days. There’s no way we can both find AND sell our home in a 45 day time period. If we find something, we need to act FAST, and then will need time to prepare our home to sell. I’m not willing to do it in reverse, and hope we can find a replacement in time.
AND, what happens with Medicare premiums? It will look like we’ve made A LOT of money when we sell our house, but in reality it will just be trading for another house. Does Medicare still see it as substantial capital gains income, and you’re hit with the HUGE Medicare premium. Yes, for a year – but again, it isn’t like we’re banking a windfall to use elsewhere. It is just going from one house into another.
If it’s your primary home, you are exempt up to 250k for single and 500k per couple. This is allowable every 2 years. Rentals are different. I believe if you buy another rental, same or more, you can defer capital gains. Google 1031 exchange.
There’s no getting around paying capital gains. You can reduce it keeping track of home renovations and add to the home basis. Or tax loss harvesting with the current stock market crash!
Best to avoid Medicare premiums for that one year is to sell before Medicare age. We simply plan for the worst case scenario and go from there. There are many moving parts so consult your tax advisor if you are not comfortable reading tax codes.
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Capital gains. Let me ask if I get this correctly.
Buy a house for $200,000. Sell for 1,000,000. Buy a new house for 500,000. Throughout the years you’ve put 150,000 in the house you just sold.
So you would add the 200,000 + 150,000= 350,000. 1,000,000-500,000= 500,000. Minus the 350,000 you invested in the house. So the capital gains would be 150,000. Well within your allowance. Is that how it works?
A relative sold their vacation home. No capital gains allowance on second homes. They had a nice big tax bill this year. Made the profit about 1/3 less.
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Yup. Your total basis in that situation is $350k. You also have to satisfy the 2 year residency (use and ownership) in the last 5 years. (Some people apparently “move” into their vacation property for 2 years to be able to claim that $250k/person deduction and then move back into their permanent house… but that means there could be state income tax implications…)
ETA: here is the info from the IRS.
I don’t think that is correct. The old tax code let you exclude gain when you bought a house, I believe the current just allows for the 250/500 exclusion. Seems like the 150k would be taxable capital gain.
I think @deb922 meant the $150k ($1m sale price - $350k cost basis (purchase price and improvement) - $500k exclusion) would be subject to capital gains.
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I don’t think the new home purchase factor into the capital gains any more. If my read of tax codes is correct, it will be:
Home basis: 200K + 150K = 350K cost basis
Capital gains: 1M - 350K = 650K gain
You can exempt 500K from 650K for a couple, or 250K for a single person. Don’t forget to add the selling cost to the home basis. Commission and misc expenses can add up to 10% so it will reduce the gains even more.
For a couple, you’ll pay tax on about 150K or less.
Someone can correct me if I am wrong. If I am then I will never have to pay tax since my next home will cost more than my current one!
If your relatives have purchased another rental, they can defer the capital gains but not if they cashed out. And the 500K exempt only applies to the primary home. Of course, had they moved into the vacation/rental home for 2 years then that could have counted as their primary home when they sold. It’s complicated!
Vacation home sale was a divorce situation. Neither will purchase another rental property so unfortunately they had to bite the bullet on paying the taxes.
I guess neither wanted to postpone the divorce by living in the vacation property either.
We sold a home in February for about 3X what we paid 24 years before. Haven’t figured out the tax effect yet (there were some capital improvements made), but the fact is we made a very large profit on this house and are exempt from the first $500K. So if we have to pay some taxes on the profit so be it. I mean there are millions of people who have/will never own a home or never make that much profit on a sale. I call us lucky.
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Lucky indeed. Good appreciative attitude 
We once did job transfers where we about broke even in a depressed market after 8 years in the house. (And the next house was in an appreciating market - 2x the size but 3x the cost.). We did not complain because we had a bit of equity to work with. We had friends who were “underwater” with their mortgage and had to use 401K savings to make up the difference.
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My California tract house is now worth 1.5 million. We owe under 300k and have a mortgage of $1800 a month. My oldest can’t find an apartment to rent for $1800 a month. I feel bad for my adult kids trying to launch. We should get tax breaks for having young adults living at home. My street has a post college adult child in about half the houses because they can’t afford to move out.
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Our mortgage is just over $1000/mo (bought in 1998). It’s a major disincentive to downsizing, esp since we’ll pay it off by early next year.
S1 bought in San Jose in 2020 and paid about 4% under asking price. Got a loan at 2.875%. Incredibly good timing.
OTOH, ExpatS worries about returning home from overseas because the cost of housing is so high. Apartments here start at $1700 for 1BR.
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@socalmom007 your comment gave me flashbacks to when DH and I were first married. We were living on East Coast where I am from and where DH was stationed in the Navy. He was getting out of the Navy and interviewing for jobs both here and Silicon Valley area where he grew up and family still lived. Several of his married friends were living with parents while saving for a first home, as the tech boom had made housing unaffordable for young couples. We were three years i to our marriage and owned a home here - decided living with his parents was not an option we were interested in. 25 years later we are still East Coasters!
MIL sold her 1960s tract home almost exactly 10 years ago as it was time to downsize (FIL had passed away years earlier) - paid around $25K for it. Sold it for around $1.4M. Out of curiosity, I looked at its current estimated sale value, 10 years later, $3.4-3.9M! Too bad she didn’t hang on longer LOL. Though her house was definitely too big for her needs, she had a main floor master and could easily have remained in the house. In some ways, I wish she had b/c all of her friends still live in the area. She moved to San Francisco to be closer to her son and daughter’s families. Dh and I were discussing the other day how isolated she is now. She no longer drives so rarely gets to see her friends 45 mins away (and didn’t for the first year of Covid). Tho she sees her kids/grandkids often, they are busy with their own lives. She really needs more socializing with friends. This is certainly something DH and I will remember when considering where we want to be after retirement.
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We got lucky with the timing of our’s as well. We bought our retirement house for $20k under list in March 2020 with 5% down, 2.9%; our bank allowed us to do a 5% down-payment knowing we would recast it after the 90 day loan hold period. We wanted to stay in Charlotte until DD graduated, and our current house needed a lot of renos. It allowed us to stay in NC and pack while they did all the renos at our new house. 2 months into the pandemic Charlotte housing started to explode. We listed and sold for what we thought was a nice profit, cash offer over list. We took the equity and rolled it into our current house and recast the loan, so no additional closing costs or paperwork. We were lucky to hit the timing right because we wouldn’t be able to do that in this market.
@4kids4us that’s one of the reasons we moved here, lots of friends. Sadly, one of our good friends passed away on Friday; the funeral was on Monday and there were 40 of their old teammates present. Many of them recently moved back to the area or work at the university, so we have a whole supportive community here. Since most of our friends graduated from Clemson, people are always coming into town for events or to visit their own college kids. We both have small families, so our friends have been more like our family. My parents moved here to be with us, but my MIL stayed in PA with her friends. It’s the best environment for her: she’s still active and has a lot of life-long friends in the area. My parents are ex-military and didn’t meet their friends until after retirement; it was “easier” for them to start over in a new place. They’re meeting a lot of people their age in their new neighborhood, so hopefully they aren’t regretting their decision. They seem happy; they just bought a golf cart to cruise the neighborhood 
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@Tigerwife92 I have a smallish family here - just my parents, my brother and SIL. My parents both grew up in other states so extended family, including my sister, are all over the place. DH is one of five kids and his whole family is on the west coast, all but one in CA.
DH went to the Naval Academy, and we currently live in the same town. Many of his former classmates are here, and lots of former and retired military (and 28 yrs worth of friends we’ve made). Ideally, when retired, depending where our four kids end up, we would like to maintain a home here and one somewhere in CA, preferably southern CA rather than Bay Area (currently have one D living in San Diego but not sure if she will stay due to COL). That is our ideal if we can afford it, but not sure whether that will happen or if we will decide to stay here.
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We just want to change locations, ideally to be closer to the family. BUT, our home, although appreciated, has not kept up with nearly any other area in the USA. The main reason we’ve gained so much in value is simply because we’ve been here so long. To move to something much smaller will cost us more than what we can sell our home for at this time. That’s partially why it bothers me so much to pay taxes and Medicare penalties. It really isn’t a “windfall”.
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This!
We could sell our house for quite a bit more than what we paid to build it. BUT we would be living in a tent while looking for some place to buy that is 1/3 the size in a location we want. So…we are just staying where we are.
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That is why it is so important to start out in an area that has a high cost of living. I wish 28 years ago I would have headed west to SoCal and made a go of it. Probably would be retired now in like AZ or some place cheaper. I am in a higher cost city than where I grew up so if I wanted to go back I could afford it.
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@gpo613 I live in CT…pretty high COL area. We looked at houses in the greater Phoenix area. Costs have really gone UP in that area…we saw nothing we could buy without taking a mortgage.
I definitely could move back to Ohio where I grew up…and live in a pretty fantastic place. But I can’t convince my husband to move to Ohio…and really, I’m not sure I want to deal with NE Ohio wonters ever again in my life.