Have all your children grown up and moved on? Are you considering downsizing? If you are approaching retirement with a lot of equity in a big home that can help fund your retirement plans when you sell, you might want to first consider the tax aspects of such a move. Under the current tax rules, you may no longer defer the gain into your next home. Instead, assuming you qualify, you can exclude $250,000 of gain ($500,000 for married couples) and anything in excess of that becomes taxable.

Many also overlook the fact that they had previously deferred a gain from a prior home or homes under the home sale rules in effect before May 7, 1997. Under those rules, gains from previous home sales generally rolled over into the tax basis of the replacement home. Thus, your current home’s gain may be much more than you thought once the gains deferred from prior homes are taken into consideration. Suppose your current home cost $225,000, but you had deferred (rolled) a gain of $110,000 from a prior home sold before May 7, 1997 into your current home. As a result, your tax basis in your current home is only $115,000 ($225,000 - $110,000), and you would measure your gain from that value.

Whatever your reason for selling your home, be aware that Uncle Sam is standing in line waiting for his share if your gain exceeds the exclusion limits. However, there are things you can do to soften the tax bite:

Home Improvements - First and foremost, keep records of any home improvements, including the receipts. Examples of home improvements include remodeling, landscaping, room additions, etc.

Utilize Capital Losses – If you have capital loss carryovers, they will offset your home sale gain. If you don’t, or if they are not enough, you should sift through your capital-asset portfolio to determine if you have stock, bonds, or depreciated assets that can be sold in the same year to generate offsetting capital losses.

Time the Sale – Time the sale to be in a year where some portion of your income is in the 10% or 15% tax bracket, thus achieving the 5% capital gain tax rate for part of the gain. For one year — 2008 — the 5% rate actually goes down to 0%. However, absent Congressional action, these preferential capital gain rates expire after 2008.

Utilize an Installment Sale – If you can afford to, you might also consider carrying the first trust deed or a second trust deed yourself, thus deferring some portion of the gain to another year where it may be taxed more favorably. The risk in an installment note is that property values might decline and you might get your home back, which is why commercial lenders require a large down payment. Another issue is interest rates. If they climb, the note on your home might not be earning as much as the banks will be paying; that is why it is sometimes important to limit the note’s term to 5 to 10 years. If interest rates were to drop or property values were to rise substantially, the buyer might refinance for lower rates or cash out and pay you off sooner than you planned.

Wait for a Step-Up in Basis – If you are not in need of the cash that selling your house would bring, are comfortable in your home, and are getting on in years, then postponing the sale of your home until after you’ve passed away might be the best way to prevent Uncle Sam from sharing in the gain. This is because the survivor or beneficiary who inherits the home does so at its fair market value as of your date of death. Selling the home soon thereafter would probably result in no gain. This option could have estate tax consequences, however.

All of these issues can be complex and may require substantial prequalification and tax planning before execution. Please call this office for assistance.