Remember when "downsizing" was something you did with your closet each spring? It's become a catchphrase for a significant financial decision: selling the huge family home to reduce expenditures, make additional money, or finance that dream RV trip. Downsizing, particularly for Baby Boomers and Gen Xers approaching retirement, is about selecting how you want to live the next chapter of your life.
However, there is a caveat. Before you put that "For Sale" sign in the ground, you should become tax-savvy. Why the IRS? They never pass up a chance to tag along.
Capital Gains Taxes: The Big Kahuna
Let's get right down to business: capital gains taxes. Consider selling your long-term house for more than you bought for it—yay, profit! However, such profit can be taxed. There is some good news: if the property was your principal home for at least two of the past five years, the IRS provides a generous exclusion—up to $250,000 for single taxpayers and $500,000 for married filing jointly.
Doesn't this seem too wonderful to be true? However, there are a couple catches:
- Short Occupancy: If you haven't resided in the home for two years or utilized it for a rental or company, you may incur higher taxes.
- Multiple properties: You cannot claim this exclusion twice during the same two-year period.
Essentially, do not expect that your sales earnings is immediately tax-free. You may need to manage your timing or use to take advantage of the biggest tax advantages.
Tapping Into Sneaky Deductions
Yes, deductionsmay still be found, but they are difficult. Recent legislation (looking at you, Tax Cuts and Jobs Act of 2017) limited state and local tax (SALT) deductions to $10,000 . If you reside in a high-tax state, this may limit your options.The relocating deduction is no longer permitted, save for the military.
Leveraging the Sale for Retirement Funding
Downsizing may do more than just lower your monthly expenditures; it can also improve your elder years. Transform your home's equity into rocket fuel for retirement:
1.Time Your Sale Wisely: A well-structured sale may reduce your tax burden, and selling in a robust market can result in higher proceeds.
2.Park Funds in Tax-Advantaged Accounts: You may lessen the impact of your post-paycheck life by rolling over a portion of your new nest fund into an IRA or 401(k) (up to the contribution limitations).
3.Diversify, Diversify, Diversify: Discuss with a financial adviser the possibility of allocating your gains across a variety of stocks, bonds, or even real estate investment trusts (REITs). Because "one basket" and "eggs" never work out.
Carrying Over Your Property Tax Basis (Sometimes)
Have you heard that you may be able to transmit your previous property's tax base to a new one? In certain regions, particularly California, this is more than a myth. Laws such as Proposition 13 enable qualifying homeowners to move their property tax base to a new residence.
However, the regulations are notoriously fussy. If you do not strictly adhere to age restrictions, property valuations, and county rules, your chances of success will be dashed. This intricacy may either save or lose money if not done correctly.
Don’t Wing It
Let's face it: the money you've worked for your whole life is at stake here. You want to retain as much of it as possible, especially for pleasurable activities like pampering grandchildren or touring the globe, rather than giving it to Uncle Sam.
That's why some strategic preparation goes a long way. You don't have to be the tax code's best buddy to do it correctly. You just need the proper people in your corner.
Next Step: Dial Our Office for Tailored Tax Smarts
Ready to turn your downsizing dreams into a fully informed reality? We’ve got you.
Call or contact our office now to discuss your situation—no generic, one-size-fits-all counsel here. We will assist you:
- Identify property-specific tax pitfalls.
- Identify potential deductions and exclusions.
- Develop retirement savings plans.
Don't allow uncertainty about capital gains or intricate tax regulations spoil your next life adventure. Get clarity now and prepare for a smoother, more lucrative transition into your well-earned elder years.
Remember to make informed decisions and have a sound tax strategy.
