World Stock Watch

Downsizing in Retirement: Navigating Capital Gains Taxes

When considering downsizing in retirement, selling your longtime home can be a lucrative option. However, it’s essential to understand the implications of capital gains taxes on your windfall.

Understanding Capital Gains Taxes

Capital gains taxes are levied on profits from the sale of assets, such as stocks, bonds, collectibles, and real estate, including your primary residence. The IRS applies long-term capital gains rates of 0%, 15%, or 20% depending on your income and filing status.

Excluding Gains on Primary Home Sales

You can exclude some or all of the gain from taxation if you lived in the home for at least two of the last five years. The IRS allows married couples filing jointly to exclude up to $500,000 in home sale profits, while single filers can exclude up to $250,000.

Calculating Your Capital Gains Tax Bill

Using our example, if you net $640,000 from the sale of your longtime home, your capital gains tax bill will depend on your filing status and income. Assuming a 15% capital gains tax rate, a married couple filing jointly would owe $21,000 in federal taxes, while a single filer would owe $58,500.

Mitigating Capital Gains Taxes

While there are limited options for avoiding capital gains tax after applying the principal residence exclusion, there are some available techniques:

• Accurately Calculating Your Cost Basis: Include eligible improvements in your cost basis to reduce your taxable gain.
• Offsetting Investment Gains with Losses: Harvest investment losses to reduce taxable capital gains.
• Using a Like-Kind Exchange: Delay taxes by using a 1031 exchange to purchase another residence.

Consulting a Financial Advisor

A financial advisor can help you navigate these strategies and develop a plan to minimize your capital gains tax bill. They can also assist with other aspects of your financial plan, such as creating an emergency fund and optimizing your investments.

SmartAsset’s Resources

Use SmartAsset’s free tool to find a financial advisor in your area and estimate your capital gains tax liability with our Capital Gains Tax Calculator.