Capital gain tax exemption from selling primary residence

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blackwhisker
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Capital gain tax exemption from selling primary residence

Post by blackwhisker »

I understand there is a 250k capital gain tax exemption for single filer (or 500k for married couple) when someone sells their primary residence. I read that this dollar amount was set back in 1997. It has not been changed to reflect inflation in the last 2 decades.

I live in a very high-cost area. I am single. I would like to move to a different house in my area, but I am not able to move due to the capital gain tax when I sell my house. (The price of the house I want to buy costs about the same as my current house. So the buying and selling would just be a wash after realtor fee. But I need to cough up the money to pay capital gain tax. The capital gain tax if i sell now would be in the low six digits or more)

Here are my questions about possible solutions I have in mind:

[Comments speculating on legislation removed by moderator oldcomputerguy]

3. Can I add an adult child to the title of the house. and then sell it after my adult child owns the house with me for 2-3 years? at that point, would we get $500k as the exemption amount? Are there gifting tax I need to worry about?

4. Because the increasing interest rate, home price might go down. Should I wait for while to move? If the housing price come down in my area, I will sell my house for less, but I will also pay less for the new house, and I will end up paying less on capital gain tax.

5. because the future is uncertain, should I just liquidate part of my IRA to pay for the capital gain tax now and move now? (I understand this is a hard question to answer, because I didn't give you much info about the whole picture of my financial situation).

Thank you for reading!
TheLuckBox
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Re: Capital gain tax exemption from selling primary residence

Post by TheLuckBox »

What are the numbers? That might help in answering the Q's.

What did you pay for the home?
How much do you expect to sell it?
What will the selling fees be?
Did you put any improvements into the home over the years? That can be added to the cost basis.
Luckywon
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Re: Capital gain tax exemption from selling primary residence

Post by Luckywon »

Do you have much in capital loss carryovers? Those will count against capital gains if you sell your house. Might add to those with some TLH now given the current market downturn. :shock:
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CAsage
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Re: Capital gain tax exemption from selling primary residence

Post by CAsage »

blackwhisker wrote: Sun Jun 19, 2022 6:13 pm [Comments speculating on legislation removed by moderator oldcomputerguy]

3. Can I add an adult child to the title of the house. and then sell it after my adult child owns the house with me for 2-3 years? at that point, would we get $500k as the exemption amount? Are there gifting tax I need to worry about?
Answer: Probably won't help. Their cost basis will be the same as yours so they will get hit capital gains taxes, and WILL NOT get an exemption at all unless they live there with you for 2/5 years. And they will own the house, it's a gift. And you have to report it. Otherwise, looks like tax fraud maybe?

4. Because the increasing interest rate, home price might go down. Should I wait for while to move? If the housing price come down in my area, I will sell my house for less, but I will also pay less for the new house, and I will end up paying less on capital gain tax.
Answer: Houses may move in step with inflation/demand, but maybe your future house is more desirable and will go up faster? Your property taxes will be higher the longer you wait. Rent out your house and rent the one you want?

5. because the future is uncertain, should I just liquidate part of my IRA to pay for the capital gain tax now and move now? (I understand this is a hard question to answer, because I didn't give you much info about the whole picture of my financial situation).
Answer: Life is short, can you possibly pull the money from somewhere, or just take a bigger mortgage on the newer house?
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goingup
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Re: Capital gain tax exemption from selling primary residence

Post by goingup »

Maybe post your actual numbers. Are you saying the tax you’ll owe is low 6 figures? Or the capital gain beyond the $250K exemption will be low 6 figures?

We own a CA home bought in the 90’s and will, like you, have a big appreciation to reckon with. (Not complaining :D). I’ve kept good record of all improvements to add to basis. I’ve also been piling up capital losses over the years. It all helps!
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blackwhisker
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Re: Capital gain tax exemption from selling primary residence

Post by blackwhisker »

CAsage wrote: Sun Jun 19, 2022 6:32 pm
blackwhisker wrote: Sun Jun 19, 2022 6:13 pm [Comments speculating on legislation removed by moderator oldcomputerguy]

3. Can I add an adult child to the title of the house. and then sell it after my adult child owns the house with me for 2-3 years? at that point, would we get $500k as the exemption amount? Are there gifting tax I need to worry about?
Answer: Probably won't help. Their cost basis will be the same as yours so they will get hit capital gains taxes, and WILL NOT get an exemption at all unless they live there with you for 2/5 years. And they will own the house, it's a gift. And you have to report it. Otherwise, looks like tax fraud maybe?

4. Because the increasing interest rate, home price might go down. Should I wait for while to move? If the housing price come down in my area, I will sell my house for less, but I will also pay less for the new house, and I will end up paying less on capital gain tax.
Answer: Houses may move in step with inflation/demand, but maybe your future house is more desirable and will go up faster? Your property taxes will be higher the longer you wait. Rent out your house and rent the one you want?

5. because the future is uncertain, should I just liquidate part of my IRA to pay for the capital gain tax now and move now? (I understand this is a hard question to answer, because I didn't give you much info about the whole picture of my financial situation).
Answer: Life is short, can you possibly pull the money from somewhere, or just take a bigger mortgage on the newer house?
Thank you for the "sage" advice! I appreciate it.
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Re: Capital gain tax exemption from selling primary residence

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heikejohn1
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Re: Capital gain tax exemption from selling primary residence

Post by heikejohn1 »

Way back when.... I remember that you could postpone the capital gain from a home sale by purchasing a new one.
Is that not allowed any more?
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Re: Capital gain tax exemption from selling primary residence

Post by Nate79 »

heikejohn1 wrote: Mon Jun 20, 2022 6:22 am Way back when.... I remember that you could postpone the capital gain from a home sale by purchasing a new one.
Is that not allowed any more?
No.
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Re: Capital gain tax exemption from selling primary residence

Post by rkhusky »

heikejohn1 wrote: Mon Jun 20, 2022 6:22 am Way back when.... I remember that you could postpone the capital gain from a home sale by purchasing a new one.
Is that not allowed any more?
Only if it is a investment property (business).
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Re: Capital gain tax exemption from selling primary residence

Post by SuzBanyan »

rkhusky wrote: Mon Jun 20, 2022 7:19 am
heikejohn1 wrote: Mon Jun 20, 2022 6:22 am Way back when.... I remember that you could postpone the capital gain from a home sale by purchasing a new one.
Is that not allowed any more?
Only if it is a investment property (business).
But that is entirely separate. If you are under the personal residence exemption, you are extremely unlikely to be allowed to do a 1031 exchange. And if you meet the tests for a 1031 exchange, you would lose the personal residence exemption.
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Re: Capital gain tax exemption from selling primary residence

Post by InMyDreams »

OP, it's probably not that much help for your tax situation, but - besides subtracting the $250k from the proceeds of the house sale, I believe you can also take off the costs of selling (e.g., realtor's fees), the amount you paid for the house, and any improvements (not repairs) that you've made to the house. The last would include the installation of a new roof, a new furnace (even if those are replacing existing ones - but only once each).
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Re: Capital gain tax exemption from selling primary residence

Post by increment »

heikejohn1 wrote: Mon Jun 20, 2022 6:22 am Way back when.... I remember that you could postpone the capital gain from a home sale by purchasing a new one.
Is that not allowed any more?
That was replaced by the $250k exemption.
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Re: Capital gain tax exemption from selling primary residence

Post by heikejohn1 »

increment wrote: Mon Jun 20, 2022 10:14 am
heikejohn1 wrote: Mon Jun 20, 2022 6:22 am Way back when.... I remember that you could postpone the capital gain from a home sale by purchasing a new one.
Is that not allowed any more?
That was replaced by the $250k exemption.
Thank you!
It has been several decades since our last home sale
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Re: Capital gain tax exemption from selling primary residence

Post by TropikThunder »

heikejohn1 wrote: Mon Jun 20, 2022 6:22 am Way back when.... I remember that you could postpone the capital gain from a home sale by purchasing a new one.
Is that not allowed any more?
That’s only for investment properties (1031 exchange).
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Re: Capital gain tax exemption from selling primary residence

Post by TropikThunder »

blackwhisker wrote: Sun Jun 19, 2022 6:13 pm
The capital gain tax if i sell now would be in the low six digits or more.
$250,000 is “low six digits”. You’d only owe taxes on the amount above that.
I misread that as the *gain* would be low six digits, not the tax itself.
blackwhisker wrote: Sun Jun 19, 2022 6:13 pm
3. Can I add an adult child to the title of the house. and then sell it after my adult child owns the house with me for 2-3 years? at that point, would we get $500k as the exemption amount? Are there gifting tax I need to worry about?
You’d have to file a gift return for the portion of the house you gift to your adult child (that wouldn’t create a gift tax bill now but you would have to account for it).

For a married couple, only one needs to meet the ownership test but they both need to meet the residence test to get the full $500,000 exclusion. But unmarried individuals would both need to meet the ownership and residence tests, so unless that child lived with you for >2 years they wouldn’t help exclude any of the gains.
Last edited by TropikThunder on Tue Jun 21, 2022 1:02 am, edited 1 time in total.
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Re: Capital gain tax exemption from selling primary residence

Post by gwe67 »

If your taxable income is low enough, you can be in the zero percent capital gains bracket.

https://finance.yahoo.com/news/2022-cap ... 41395.html
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Topic Author
blackwhisker
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Re: Capital gain tax exemption from selling primary residence

Post by blackwhisker »

InMyDreams wrote: Mon Jun 20, 2022 9:54 am OP, it's probably not that much help for your tax situation, but - besides subtracting the $250k from the proceeds of the house sale, I believe you can also take off the costs of selling (e.g., realtor's fees), the amount you paid for the house, and any improvements (not repairs) that you've made to the house. The last would include the installation of a new roof, a new furnace (even if those are replacing existing ones - but only once each).
Thank you for the reply. The realtor's fee and improvement cost would not help enough much in my case. Unfortunately, I live in an area that has one of the most competitive/expensive real estate markets.
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Re: Capital gain tax exemption from selling primary residence

Post by Artsdoctor »

blackwhisker wrote: Mon Jun 20, 2022 5:05 pm
InMyDreams wrote: Mon Jun 20, 2022 9:54 am OP, it's probably not that much help for your tax situation, but - besides subtracting the $250k from the proceeds of the house sale, I believe you can also take off the costs of selling (e.g., realtor's fees), the amount you paid for the house, and any improvements (not repairs) that you've made to the house. The last would include the installation of a new roof, a new furnace (even if those are replacing existing ones - but only once each).
Thank you for the reply. The realtor's fee and improvement cost would not help enough much in my case. Unfortunately, I live in an area that has one of the most competitive/expensive real estate markets.
You're right to factor in your capital gains taxes when making these decisions. I've had colleagues sell their houses and only later find out what a significant tax hit they've sustained after the sale. For a single person living in a highly appreciated house in a high cost of living area, your federal/state taxes could easily be in the six digits.

Make sure you factor in all of your home improvements you've done over the years. An extensive remodel can help increase the cost basis of your house.

Tax-loss harvesting in your taxable account can help although I realize that might be a stretch depending on your financial situation. I gather from reading in between the lines of your post that this is not going to make much of a difference.

And don't forget to take into consideration what might happen with your property taxes. Depending on your location, you may find that your taxes now cannot be replicated with your new house and sometimes the differences can be significant.
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Re: Capital gain tax exemption from selling primary residence

Post by Keith5337 »

If I am understanding the OP correctly, he will owe low 6 figures in taxes.

What is the tax rate for a home sale, your marginal rate?

If you are in the top tax bracket, 37%, that would put the sale price $271,000 above the purchase price + $250,000 exemption. At a $100,000 tax bill.

If I did the math right, that is $521,000 above the purchase price.

Correct my math if I am wrong.
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Re: Capital gain tax exemption from selling primary residence

Post by secondcor521 »

Keith5337 wrote: Mon Jun 20, 2022 8:14 pm If I am understanding the OP correctly, he will owe low 6 figures in taxes.

What is the tax rate for a home sale, your marginal rate?

If you are in the top tax bracket, 37%, that would put the sale price $271,000 above the purchase price + $250,000 exemption. At a $100,000 tax bill.

If I did the math right, that is $521,000 above the purchase price.

Correct my math if I am wrong.
Your math may be right, but your premise isn't accurate. The sale of a primary residence, above the exclusion, is normally taxed at capital gains rates (unless business or rental use, in which case the rules are complicated and I don't know them.)

Related to the idea of sharing ownership with a kid, I didn't think that two unmarried parties could claim a $250K exemption each as is being suggested. I can't find a reason why it couldn't be done, but I would think that at least the kid would have to be on the title. And of course the gift aspect would need to be addressed. I'd also wonder how a 1099-S might be completed, and how the sale would be reported on both tax returns.
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Re: Capital gain tax exemption from selling primary residence

Post by cchrissyy »

The idea of adding anyone else to title is a nonstarter unless they actually move in to the house.
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Re: Capital gain tax exemption from selling primary residence

Post by Keith5337 »

secondcor521 wrote: Mon Jun 20, 2022 8:32 pm
Keith5337 wrote: Mon Jun 20, 2022 8:14 pm If I am understanding the OP correctly, he will owe low 6 figures in taxes.

What is the tax rate for a home sale, your marginal rate?

If you are in the top tax bracket, 37%, that would put the sale price $271,000 above the purchase price + $250,000 exemption. At a $100,000 tax bill.

If I did the math right, that is $521,000 above the purchase price.

Correct my math if I am wrong.
Your math may be right, but your premise isn't accurate. The sale of a primary residence, above the exclusion, is normally taxed at capital gains rates (unless business or rental use, in which case the rules are complicated and I don't know them.)

Related to the idea of sharing ownership with a kid, I didn't think that two unmarried parties could claim a $250K exemption each as is being suggested. I can't find a reason why it couldn't be done, but I would think that at least the kid would have to be on the title. And of course the gift aspect would need to be addressed. I'd also wonder how a 1099-S might be completed, and how the sale would be reported on both tax returns.
Ok, likely it is long term capital gains,. 15% instead of 37%. On the federal level. That makes the spread even greater.
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Re: Capital gain tax exemption from selling primary residence

Post by Artsdoctor »

^ A lot will depend on his other earned income. The federal capital gains rate may be as high as 20% although there are tiers, and if he's filing as a single person he'd probably have the 3.8% NIIT. If he lives in a high tax state like California, capital gains would be counted as income which would probably be in the 9-10% range.

So if he bought the home several years ago for $400,000 and would be selling it for $1,000,000, there would be a $600,000 gain. As an individual, $250,000 would not be counted and he'd be left with a taxable gain of $350,000. If he'd pay 1/3 in federal and state tax, he'd owe roughly "low six digits." Obviously a lot of moving pieces but the back-of-the-envelope calculations wouldn't be unheard of in places where real estate prices are so high.
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Re: Capital gain tax exemption from selling primary residence

Post by Keith5337 »

∆. My off the cuff calculation is, this is a 10% of the 1st world population problem.

Death and taxes are unavoidable.
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Re: Capital gain tax exemption from selling primary residence

Post by DSInvestor »

OP, Are you in California? If so, California Prop 13 keeps property tax increases low for existing homes. The longer you have owned your home, the lower your property tax that you pay vs what your neighbor who just bought will pay. This means that if you sell your current home and buy a new home, you may have much higher property tax every year on the new home as the property tax will be based on the new purchase price.
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Re: Capital gain tax exemption from selling primary residence

Post by ryman554 »

gwe67 wrote: Mon Jun 20, 2022 5:02 pm If your taxable income is low enough, you can be in the zero percent capital gains bracket.

https://finance.yahoo.com/news/2022-cap ... 41395.html
If the person is owing >$100k in taxes, even if it is all LTCG, it implies over $666k in actual gains. It's California. Having >$1M in profit is not unheard of these days. That's well beyond the 0% LTCG bracket, regardless of other income.
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Re: Capital gain tax exemption from selling primary residence

Post by gips »

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The problem with withdrawing from your ira is a) you’ll have to pay taxes on the withdrawal amount b) loss of investment return c) depending on your age, you may have to pay a penalty.
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Re: Capital gain tax exemption from selling primary residence

Post by Artsdoctor »

Keith5337 wrote: Tue Jun 21, 2022 10:01 pm ∆. My off the cuff calculation is, this is a 10% of the 1st world population problem.

Death and taxes are unavoidable.
Absolutely. Like any accountant will tell you, if you want to pay less tax, make less money.

Here, the OP is wise to consider the tax ramifications of selling his house. The way I'm interpreting his post is not so much one of complaint, as it is the realization that he actually cannot afford to sell his current house and buy one of similar value. Many would assume that making such a "lateral move" wouldn't be so hard but here, it won't be possible.
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Re: Capital gain tax exemption from selling primary residence

Post by goingup »

DSInvestor wrote: Tue Jun 21, 2022 10:23 pm OP, Are you in California? If so, California Prop 13 keeps property tax increases low for existing homes. The longer you have owned your home, the lower your property tax that you pay vs what your neighbor who just bought will pay. This means that if you sell your current home and buy a new home, you may have much higher property tax every year on the new home as the property tax will be based on the new purchase price.
The recently passed Prop 19 provides some help. I think it was passed to allow CA homeowners to move and not experience the full brunt of the property tax increase with the new home. You are permitted to tax the tax basis of your old home with you and pay the new tax rate on the difference between market values of new and old home. (That's a poor explanation maybe someone can explain it more clearly. )
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Re: Capital gain tax exemption from selling primary residence

Post by Luckywon »

goingup wrote: Wed Jun 22, 2022 9:04 am
DSInvestor wrote: Tue Jun 21, 2022 10:23 pm OP, Are you in California? If so, California Prop 13 keeps property tax increases low for existing homes. The longer you have owned your home, the lower your property tax that you pay vs what your neighbor who just bought will pay. This means that if you sell your current home and buy a new home, you may have much higher property tax every year on the new home as the property tax will be based on the new purchase price.
The recently passed Prop 19 provides some help. I think it was passed to allow CA homeowners to move and not experience the full brunt of the property tax increase with the new home. You are permitted to tax the tax basis of your old home with you and pay the new tax rate on the difference between market values of new and old home. (That's a poor explanation maybe someone can explain it more clearly. )
One must be age 55 or severely disabled or home destroyed in a disaster for it to apply.
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Re: Capital gain tax exemption from selling primary residence

Post by gwe67 »

ryman554 wrote: Wed Jun 22, 2022 2:01 am
gwe67 wrote: Mon Jun 20, 2022 5:02 pm If your taxable income is low enough, you can be in the zero percent capital gains bracket.

https://finance.yahoo.com/news/2022-cap ... 41395.html
If the person is owing >$100k in taxes, even if it is all LTCG, it implies over $666k in actual gains. It's California. Having >$1M in profit is not unheard of these days. That's well beyond the 0% LTCG bracket, regardless of other income.
My point was: maybe take a year away from work and sell the house.
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Re: Capital gain tax exemption from selling primary residence

Post by Luckywon »

gwe67 wrote: Wed Jun 22, 2022 9:41 am
ryman554 wrote: Wed Jun 22, 2022 2:01 am
gwe67 wrote: Mon Jun 20, 2022 5:02 pm If your taxable income is low enough, you can be in the zero percent capital gains bracket.

https://finance.yahoo.com/news/2022-cap ... 41395.html
If the person is owing >$100k in taxes, even if it is all LTCG, it implies over $666k in actual gains. It's California. Having >$1M in profit is not unheard of these days. That's well beyond the 0% LTCG bracket, regardless of other income.
My point was: maybe take a year away from work and sell the house.
Even if his earned income was zero the capital gain itself would start the 15% capital gains tax rate quickly. Earning less would save a bit on taxes but certainly not save money.
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Re: Capital gain tax exemption from selling primary residence

Post by TropikThunder »

goingup wrote: Wed Jun 22, 2022 9:04 am
DSInvestor wrote: Tue Jun 21, 2022 10:23 pm OP, Are you in California? If so, California Prop 13 keeps property tax increases low for existing homes. The longer you have owned your home, the lower your property tax that you pay vs what your neighbor who just bought will pay. This means that if you sell your current home and buy a new home, you may have much higher property tax every year on the new home as the property tax will be based on the new purchase price.
The recently passed Prop 19 provides some help. I think it was passed to allow CA homeowners to move and not experience the full brunt of the property tax increase with the new home. You are permitted to tax the tax basis of your old home with you and pay the new tax rate on the difference between market values of new and old home. (That's a poor explanation maybe someone can explain it more clearly. )
I don’t see how a state law like Prop 19 would help with federal taxes.
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Re: Capital gain tax exemption from selling primary residence

Post by Luckywon »

TropikThunder wrote: Wed Jun 22, 2022 1:55 pm
goingup wrote: Wed Jun 22, 2022 9:04 am
DSInvestor wrote: Tue Jun 21, 2022 10:23 pm OP, Are you in California? If so, California Prop 13 keeps property tax increases low for existing homes. The longer you have owned your home, the lower your property tax that you pay vs what your neighbor who just bought will pay. This means that if you sell your current home and buy a new home, you may have much higher property tax every year on the new home as the property tax will be based on the new purchase price.
The recently passed Prop 19 provides some help. I think it was passed to allow CA homeowners to move and not experience the full brunt of the property tax increase with the new home. You are permitted to tax the tax basis of your old home with you and pay the new tax rate on the difference between market values of new and old home. (That's a poor explanation maybe someone can explain it more clearly. )
I don’t see how a state law like Prop 19 would help with federal taxes.

I don't think anyone in this thread has suggested Prop 19 helps with federal taxes. In California, a primary residence that has large capital gains also has a low property tax basis locked in. If a person sells the home and buys another in California, there are two potential tax hits: Capital gains and the loss of the low property tax basis. Prop 19, subject to conditions, can mitigate the latter.
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Re: Capital gain tax exemption from selling primary residence

Post by goingup »

Luckywon wrote: Wed Jun 22, 2022 2:05 pm
TropikThunder wrote: Wed Jun 22, 2022 1:55 pm
goingup wrote: Wed Jun 22, 2022 9:04 am
DSInvestor wrote: Tue Jun 21, 2022 10:23 pm OP, Are you in California? If so, California Prop 13 keeps property tax increases low for existing homes. The longer you have owned your home, the lower your property tax that you pay vs what your neighbor who just bought will pay. This means that if you sell your current home and buy a new home, you may have much higher property tax every year on the new home as the property tax will be based on the new purchase price.
The recently passed Prop 19 provides some help. I think it was passed to allow CA homeowners to move and not experience the full brunt of the property tax increase with the new home. You are permitted to tax the tax basis of your old home with you and pay the new tax rate on the difference between market values of new and old home. (That's a poor explanation maybe someone can explain it more clearly. )
I don’t see how a state law like Prop 19 would help with federal taxes.

I don't think anyone in this thread has suggested Prop 19 helps with federal taxes. In California, a primary residence that has large capital gains also has a low property tax basis locked in. If a person sells the home and buys another in California, there are two potential tax hits: Capital gains and the loss of the low property tax basis. Prop 19, subject to conditions, can mitigate the latter.
Nicely stated, Luckywon.
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Re: Capital gain tax exemption from selling primary residence

Post by Artsdoctor »

^ Yes, Proposition 19 made it far easier to take your assessed value with you when moving within the state. That would make it easier for the OP in the long run (and it looks like he lives in California based on previous threads), although he'll still have to deal with the capital gains taxes.
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Re: Capital gain tax exemption from selling primary residence

Post by 123 »

Why not get a (larger) mortgage to cover the cash shortfall that will result from capital gains taxes? Should your cash situation change over time you can pay off the mortgage early.
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carmine72
Posts: 6
Joined: Fri Dec 31, 2021 3:43 pm

Re: Capital gain tax exemption from selling primary residence

Post by carmine72 »

Consider an installment sale. That way you can spread the gain over several years.
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