By Michael Edlen
Special to the Palisades News
I frequently find that people are confused about what tax breaks are available to seniors who may want to sell their homes. There are at least two different types of issues involved.
If you are age 55 or older:
You can keep your current property tax basis if you sell your home, and if you meet certain requirements. The essential basics are:
- The home you are selling and its replacement must be in Los Angeles County or in one of about 10 other counties that allow a transfer of property tax base between them.
- At least one of the owners must be at least age 55, or severely and permanently disabled, and the property must be their principal residence.
- If all eligibility requirements are met, relief is granted for a single family residence, condominium, unit in a planned development or cooperative housing unit that is subject to local real property tax.
- The transfer must be done within two years before or after the sale of the old property.
- The replacement property must be “equal or lesser” in value. An exception to this is if the new home is bought or built within the second year after the sale of the property, then the value can be up to 110%.
- You can only use this transfer one time, unless you later become severely and permanently disabled.
The transfer is not automatic, and forms must be filed within three years of purchasing the new home. For further information, check with your tax advisor or the Los Angeles County Assessor’s office. For more information, visit assessor.lacounty.gov.
Keeping Capital Gains Taxes in Perspective:
Most people don’t want to give more than 20 percent of their home equity to governments, but would like to find a way to take their money and move to a retire- ment community or other type of living arrangement. There are a variety of approaches that may be considered, as well as different perspectives that can be taken about capital gains taxes.
We recommend you always check with your accountant to be certain about any tax-related questions and issues. We believe that under current law you can exclude from taxable capital-gains income up to $500,000 if you are a married couple and have lived in your home for two of the past five years as your principal residence. There is currently no limit to the number of uses of this exemption, though it cannot be used more frequently than every two years (with certain limited exceptions for partial exemptions). There are also no age restrictions.
The I.R.S. also allows a few partial exemptions for less than the required 24 months of occupancy, which include: change of employment location qualifying for a moving expense tax deduction, health reasons, and unforeseen circumstances such as a death in the immediate family or divorce or serious damage to the residence.
If a homeowner sells due to one of these reasons, that seller may qualify for a partial exemption based on how much less time they have owned and lived in the principal residence.
You might also wish to reconsider your position about the amount of taxes that would be due, especially considering how reduced the capital gains rates are today. Take into consideration the additions to the cost basis from home improvements over the years, the deductibility of costs of sale, and the enormous equity build-up that one has enjoyed over years.
Although few people enjoy paying taxes, if you take the “glass half full” perspective you may feel quite differently, then if your focus is on the taxes due.
For example, if your home was worth $1.8 million in 2011, today it may well be worth more than $3 million.
If your original cost was $400,000 and you added $100,000 in improvements, your approximate capital gains would be $2.5 million. After deducting the $500,000 exemption and perhaps $200,000 total costs of sale, you might have total taxes of about $500,000 on the approximate net gains of $1,8 million.
If those rough figures are even somewhat close, and if you own your home free of loans, after all costs of sale and capital gains taxes are paid you could take with you $2.3 million. That’s a lot of cash equity for buying a new home, paying for retirement community or senior housing and more left over to invest or for other things such as helping family members or traveling.
Again, please check with your accountant or tax advisor about any and all such matters. Your situation may vary substantially, and many alternatives may be advisable for you to consider.
Michael Edlen provides complimentary real estate counseling services. Call (310) 230-7373, email Michael@MichaelEdlen.com or visit MichaelEdlen.com for more information.
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