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Remember when “downsizing” was just about cleaning out your closet every spring? Now, it’s a major financial decision—selling the family home to reduce expenses, free up cash, or fund that long-awaited RV adventure. For Baby Boomers and Gen Xers stepping into retirement, downsizing isn’t just about decluttering; it’s about shaping the next chapter of your life.
However, before you put that “For Sale” sign in the yard, it’s crucial to understand the tax implications. Because when it comes to financial decisions, the IRS is never far behind.
Capital Gains Taxes: The Big Kahuna
One of the biggest tax considerations when selling your home is capital gains tax. If you sell your house for more than you paid for it—congratulations, that’s a profit! But that profit might be taxable. The good news? The IRS allows a capital gains exclusion if the home was your primary residence for at least two of the last five years—up to $250,000 for single filers and $500,000 for married couples filing jointly.
However, there are a few key restrictions:
Short Occupancy: If you haven’t met the two-year residency requirement or used the property as a rental or business site, you may face a larger tax bill.
Multiple Properties: Selling more than one home? You can’t claim this exclusion on multiple properties within the same two-year period.
Timing your sale and understanding your eligibility for exclusions can make a significant difference in your tax liability.
Finding Tax Deductions in a Changing Landscape
While deductions can help offset tax burdens, recent legislation has changed the landscape. The Tax Cuts and Jobs Act of 2017 capped state and local tax (SALT) deductions at $10,000, which can be a setback for homeowners in high-tax states. Additionally, moving expense deductions have been eliminated for most taxpayers, except for active-duty military members.
Using Home Sale Proceeds for Retirement
Downsizing doesn’t just cut monthly expenses—it can also bolster your retirement savings. Here are some strategic ways to make the most of your home equity:
Time Your Sale Wisely: Selling in a strong market can maximize your proceeds while minimizing your tax burden.
Invest in Tax-Advantaged Accounts: Consider rolling a portion of your profits into IRAs or 401(k)s (within contribution limits) to strengthen your retirement nest egg.
Diversify Your Investments: Work with a financial advisor to allocate your funds across stocks, bonds, or real estate investment trusts (REITs) for a well-balanced financial strategy.
Can You Transfer Your Property Tax Basis?
Some states allow homeowners to transfer their property tax basis to a new home. In California, for example, Proposition 13 permits eligible homeowners to carry over their tax base under specific conditions. However, the requirements vary by state and county, often involving age restrictions, property value limits, and relocation guidelines.
Missteps in this area can be costly, so consulting a tax professional is essential to ensure compliance and maximize savings.
The Bottom Line: Don’t Wing It
Your financial future is too important to leave to chance. The money you’ve worked hard to build should support your retirement dreams—not disappear into unnecessary tax payments. Proper planning is key to ensuring that you maximize deductions, minimize liabilities, and keep more of your hard-earned equity.
Next Steps: Schedule a Consultation with Our Tax Experts
If you’re considering downsizing, let’s make sure you do it the right way. At TPSA CPAs, we specialize in helping homeowners navigate the tax complexities of selling their properties.
Contact our office today to:
Identify potential tax liabilities and exclusions
Uncover deductions that could lower your tax burden
Develop a personalized strategy to optimize your financial future
Don’t let capital gains taxes or confusing IRS regulations derail your next move. Call us now to schedule a consultation and secure a smoother, more profitable transition into retirement.