As we approach retirement age, many of us have thought about selling our home and simplifying our life. But selling brings up a few questions. Are you ready to invest the proceeds made from the sale of one home into another?
Truth: There are additional costs that go into homeownership beyond mortgage payments and annual property taxes. You may have HOA fees, maintenance and repair costs, high insurance premiums, and more.
You can see a rundown of the major costs of home ownership here.
But if a higher tax bracket is one of the contributing factors in whether you rent or buy your next home, remember this: Just because you sell your home doesn’t mean you’re on the hook for capital gains tax. In fact, the tax code is actually favorable to those who profit from the sale of a home, especially if the home is their primary residence.
Most importantly, you’ll want to consult your tax professional to see exactly what tax laws apply to your situation.
Let’s take a look at some of the ways your home sale profits can enter your pocket tax-free.
Most Home Sales Do Not Trigger Capital Gains Tax
The IRS typically allows you to exclude up to $250,000 of real estate profit if you are single. That number goes up to $500,000 for married couples. Of course, this means that, unless you trigger one of the exclusions to this rule of thumb, that you can deposit between $250,000-$500,000 in the bank—that’s profit—on the sale of your home and have that cash at your disposal without tax or penalty. It’s just one of the reasons why retired residents view home sales as beneficial as their retirement accounts.
Now there are some exceptions to the above standard, so we’ll look at a few here.
The House Must Have Been Your Primary Residence
If the home you sell is an investment property or a second/vacation home and you spent less than 6 months of the year there, you may be subject to capital gains taxes.
How Long Did You Own the House?
Other factors include the length of ownership. To avoid paying capital gains tax on the sale of the property, you must have owned the property for two years in the five-year period before you sold it. It’s also important that you lived in the house as your primary residence for two years in the five-year period within which you sold it.
Have You Already Claimed an Exclusion?
The “two-year rule” seems to be a constant theme in these capital gains tax exclusions. You can’t claim the $250,000—$500,000 exclusion is you’ve already done so within the last two years.
Now remember, even with these exceptions there are… exceptions. Being in the military, being disabled, or other factors can give you a break even if any of the above are true in your case.
What To Do With Your Money?
Now, let’s say you do plan to sell your home and you qualify for the capital gains tax exclusion. Congratulations you are about to pocket some tax-free money!
Now it’s time to decide what to do with it.
What stage of life are you in?
Individuals or couples in their 20s, 30s, and 40s may want to consider purchasing another home. It’s a great way to continue to build equity and to plan for a retired future.
But if you’re currently 55+, investing in additional real estate may be less desirable. Rather than have your money tied up in property ownership, you may want to enjoy new hobbies or even travel.
So if you’re not buying, where do you live?
Have you thought about renting? Today’s rental options are very different than your first apartment. With single-story apartment rental neighborhoods such as Redwood homes, residents are living in spacious open floor plans with upgraded amenities, maintenance, and repair cost-free. No HOA fees, less investment risk, and more money on hand.
Obviously, not every decision is a financial one, even if you’re considering a 55+ community. It’s important to ask, “What qualities make your home a happy place?”
But the truth is, renting no longer has to be a compromise.
Some people insist on homeownership because they want the guarantee of single-story living, an attached and private 2-car garage, private entrance, and their own mailbox.
Now, those are all things you can have even when you rent. For instance, Redwood offers all of these.
From property concierges onsite and attached private garages to spacious open floor plans and private patio space, discover Redwood’s 2 Bedrooms / 2 Bath layouts with eat-in kitchens and modern appliances.