By: Martin M. Shenkman, CPA, MBA, JD
When your client wishes to down scale to a less costly home to free up cash to finance retirement, assuming a reverse mortgage is not a viable option, he or she may sell his or her principal residence. In many cases, no income tax gain will be triggered on the sale as a result of the home sale exclusion rules. The $250,000/$500,000 exclusion has a number of requirements and restrictions however, so ignoring tax planning for a home sale remains dangerous. For wealthier clients with more valuable homes, these rules can result in substantial capital gains tax costs when compared to the prior rules of permitting unlimited rollover of gain into a replacement home. Although recent tax legislation has reduced the maximum federal tax rate on capital gains, it is possible that future legislation will raise rates on wealthier clients. Further, if taxable gain will be realized by wealthier clients, it might be feasible for the taxable portion of the home sale to be coordinated with charitable contributions, the funding of a charitable remainder trust, otherwise unusable capital losses (e.g., stemming from the stock market meltdown), or other planning to offset the gain. For medium and lower income homeowners, it is likely that either the current low federal capital gains tax rates, or at least a relatively comparable regime, may be enacted. New more restrictive rules may prevent the exclusion of gain on some vacation and second homes. New rules may make it easier for a surviving spouse to realize these benefits.
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