By Autumn Allen | March 20, 2024
Introduction
It’s that time - your kids are out of the nest, and that sprawling house feels a bit much these days. Maybe the upkeep is a hassle, or the property taxes are getting ridiculous. Downsizing can be a great way to free up some cash and simplify your life, but there can be tax implications to consider. Don't worry, I'll break it down and help you sell with savings in mind.
Come on a journey with me as we discuss this process, tax savings, and having fun during this transition.
Reflection
Thinking about a new chapter? Leaving a place where you have made a home for you and your family is a big deal, and deserves some time of gratitude and acknowledgement.
Lifestyle Change
If you are looking to live closer to family, travel more, or free up time for hobbies downsizing can make these desires possible.
Financial Benefits
Lower utility bills, property taxes, reduced maintenance, and freeing up your equity are big financial perks when making a move to a home that is right-size.
Where to start? Make it fun.
Host a Downsizing Party
Instead of a plain old yard sale, invite family and friends for a nostalgic gathering. Everyone can take a memento or piece of their choice, and you can declutter with a fun twist! This is also a great way to make your home more attractive to buyers.
Embrace Multifunctional Furniture
Just because you are living in a smaller space doesn’t mean sacrificing style! Invest in furniture that has multiple purposes, like ottomans with storage or a pull out queen sofa bed for guests.
Think “Experience” over “Stuff”
Right-sizing is a great opportunity to re-evaluate what brings you joy. Consider replacing some items with experiences you’ve always wanted, like a trip with loved ones.
Finances & Taxes
Capital Gains Tax During A Home Sale
What is this? Capital Gains is an IRS tax when you sell a home that can reach in the upper 30%’s. Fortunately there are many ways to be exempt if you meet the requirements.
Primary Residence
If you own and have lived in your home for at least 24 months out of the last 5 years, you can exclude up to $250,000 for single or divorced filers. If you are married and filing jointly, you can exclude up to $500,000 (but both have to meet this residency requirement even if only 1 owns the home).
This exemption can only be used every 2 years.
Pro Tip 1 - Reducing tax further
Adjustments to the “cost basis” can help reduce the capital gain. Your cost basis can be increased (a good thing) for things like the purchase price of the time, home improvements and additions. This increase will reduce the capital gains.
Pro Tip 2 - Rental Properties
You can convert a rental property into a primary residence because the 2 year (24 month) residency doesn’t need to be consecutive, but cumulative.
Pro Tip 3 - Widow Benefits
Widowed taxpayers may be also to increase the exclusion amount from $250,000 to the $500,000 when meeting all of these requirements:
Sell the home within 2 years spouse passing
They haven’t remarried at the time of sale
Neither seller nor the late spouse took this exclusion on another home sold less than 2 years before the date of the current home sale
The widow meets the residency and ownership requirements outlined above.
1031 Exchange
You have likely heard this term. This is another tax code that allows the deferral of taxes on a sale of an investment property, not for a personal one. You can defer taxes on the gain of a sale when you exchange that property for another one of like-kind or larger. The seller must identify in writing the replacement property within 45 days of the sale and must complete the exchange within 180 days from the sale. If you need a 1031 expert, reach out to me and I will connect with you a trusted expert.
*My ALL TIME FAVORITE Strategy for Selling
When taxes might be on the table, a surefire way to defer taxes is to sell your home on installment sale, aka Seller Financing. You move to the top of the totem pole in the finance world (the bank) and the buyer makes payments directly to you over time. The rate, down payment, price, and payment is all negotiated between the seller and buyer. To learn more about this tried and true technique, check out my article I wrote here.
At the end of the day, downsizing and starting a new chapter is very exciting, and ultimately a personal decision. Speak with your loved ones to weigh the pros and cons. It can be a change to simplify, embrace new experiences, and live the life you want.
Cheers, Autumn
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About the Author:
Autumn Allen
Hey Pierce County, I’m Autumn Allen! I'm a creative realtor here to challenge the norm of how we are taught about real estate, wealth, and financial freedom. I also like to share handcrafted information about the best selling strategies, home programs, and eateries around the Pierce and Thurston County WA area.
Links: Capital Gains. Disclaimer: I am not a CPA or attorney, information is solely for educational purposes.