[Traci]

We’ve been in our home long enough that it’s appreciated around $500K. I’m considering just selling and buying a new home in the same neighborhood to avoid the 15% hit on anything over that amount.

[Matthew]

My question to you is this: why worry about the 15% capital gain rate over your exemption? That’s a fabulous position to be in! You get the first $500k tax free and only pay tax on anything over it? It’s an insane deal.

I say this as an actual tax professional.

Even if you ended up with a $750k capital gain, you’d only pay tax on the $250k above it. $37,500 tax on a total gain of $750k? That’s a great position to be in.

Contrast that with selling the home and calculating the cost of buying a new one. If you’re pulling out a mortgage, then you contend with the costs of higher interest rates, and all other costs associated.

[Tony]

I’m assuming you mean sell this home, pocket $500k tax free, then buy a new home at market price, which will be a whole new capital gains set amount.

Are you taking into account all the dollars you’ve spent previously, as somebody said, to lower said capital gains? How about the dollars you’d spend to sell and then closing costs to buy? It seems like a lot of effort to go through to avoid long term capital gains over $500k appreciation.

If anything, you’d probably need about $700k appreciation to make this worth your while, as all that selling and buying would surely cost more than 15% capital gains tax on $200k.

[Elizabeth]

Make sure you’re tracking any improvements you’ve done over the years! My understanding is that those should raise your basis (and thus lower your gains) so you might still be comfortably under the $500k limit for couples.

[Brian]

I think you are misunderstanding. Once you cross the $500k gain threshold you will only pay taxes on the amount above that. So if your home sells for $600k above your basis (and be sure to include all improvements and real estate commissions and other closing costs in your basis) you’ll only pay taxes on the $100k excess gain.
Once you factor in 7 to 10 % sale costs on the entire amount, you have a long way to go until this plan makes sense.

Not to mention interest rates are higher now if you need a mortgage.

[Andrew]

The transactional costs associated with buying, selling, moving and new mortgage interest rate increase should all be considered if you are just trying to reduce taxable rate against any amount greater than the $500k tax free primary residence rule.

[Author]

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