What Is Your Capital Gains Tax Liability When You Sell Your Home?

First, a disclaimer. I am not a tax professional, financial planner, or accountant. I sell real estate, not tax advice.  However, I can tell you what I know about the above topic and urge you to verify what I say with a tax professional.

The inspiration for this column was a phone call I received from a reader who wanted to confirm that she has to buy a new house within two years in order to avoid paying capital gains on the sale of her primary residence.

Although this hasn’t been the case since the Taxpayer Relief Act of 1997, many homeowners appear to be unaware that the rules have changed, given how often I get this question. Nowadays no capital gains tax is due on the sale of your primary residence unless your gain exceeds $250,000 for an individual or $500,000 for a married couple. (Note: It must have been your primary residence for 2 of the 5 years prior to closing.)

 

That exemption has been in place now for 20 years. Prior to that, homeowners were required to reinvest in another primary residence in order to defer their capital gains tax until they finally sold without buying a new home. 

 

Your “gain” is calculated from a combination of your purchase price plus any capital improvements you made, plus the cost of selling the house. That’s called your “basis.”

 

So, let’s say that you bought a home 40 years ago for $50,000, and you’ve made another $50,000 of capital improvements (new garage, new kitchen, new bathrooms, etc.).  You just sold the house for $500,000, with a total cost of selling (commissions plus title insurance and other fees) of $25,000. Your “basis” is $125,000, so your gain would be $375,000.  If you’re married, you have a $500,000 exemption, so you owe no capital gains tax at all. If you’re single, you have a $250,000 exemption, so you’d pay long-term capital gains tax on $175,000 of your net gain. That computes to a tax liability of about $35,000. You probably had no mortgage, so your proceeds from the sale was about $470,000, and paying $35,000 in capital gains tax is definitely doable. Yes, I realize you’d prefer to pay nothing, so go ahead and marry that cute 75-year-old you’ve been dating before you sell!

 

If you sell a second home or an investment property, you do pay a tax on your full capital gain, but you can defer that tax liability by purchasing a replacement property under Sec. 1031 of the IRS Code. But this is only a deferral. Your “basis” in your current property becomes the basis for the replacement property, so you do eventually have to pay the tax (unless the tax law changes). Meanwhile, a 1031 exchange allows you to re-invest pre-tax dollars in a new piece of real estate.

 

Your purchase under Sec. 1031 does have to be for real estate, but it can be any kind of real estate.  I once had an $800,000 capital gain on the sale of an office building in Denver.  Using a 1031 exchange, I invested $600,000 of that gain in a residential rental property and paid capital gains on only $200,000.  However, when I sold that rental several years later without doing another 1031 exchange, I had to pay tax on that deferred gain, although it was reduced by the additional investment and cost of sale.

 

To do a 1031 exchange, you need to hire a “qualified intermediary,” who holds the proceeds from the sale of your “relinquished” property until you purchase your “replacement” property. This service costs upwards of $1,000, but without it, you can’t do a 1031 exchange, so it’s probably worth it. I would be happy to recommend the company I used for that process.

 

On a related matter, let me share some tax advice I received regarding passing your property on to a child or other beneficiary. (Again, I’m not a tax advisor, so confirm this with yours.) I was told you should not put your child or beneficiary on the title of your home as a “joint tenant with right of survivorship.”  Rather, you should will the home to that beneficiary. Why? Because when real estate is inherited, the basis is “stepped up” to the current market value at the time of your death. If the beneficiary is a joint tenant, he inherits your much lower basis and could owe significant capital gains tax when it comes time for him or her to sell it.

Published June 8, 2017, in the Denver Post's YourHub section and in four Jefferson County weekly newspapers.

How to Respond to Agents Who Send You Letters or Ring Your Doorbell

[Published Mar. 22, 2012, in the Denver Post]

There is a such a shortage of listings on the MLS right now that many agents (not mine) are flooding neighborhoods with letters claiming to have a buyer looking for a home there. Should you believe such letters, and how should you respond?

I know this is happening because recently I listed several homes (two of which sold in a few days for full price or higher), and the sellers told me about the letters they had received.  I was given one of those letters, and it turned out to be valid.  (The agent sold a nearby listing of mine to her reported buyer.)

I realize, however, (and so should you) that sometimes this approach is used by agents as a technique to get in your door and list your home.  The agent can always explain that the buyer they spoke of bought another house.

So what is a good way to respond when you get such a letter (or visit) from an agent?

If you are thinking of selling, I recommend that you call the agent and invite him or her over. The more agents the better, because they will then have seen your house if you end up putting it on the market.

The agents will probably come to “preview” the listing for their buyer, which is fine.  If they bring the buyer, all the better. Regardless, you should not list your home in order to sell it to their buyer. Rather, tell the agent that you won’t list with anyone until they have a chance to submit a for-sale-by-owner contract at a 2.8% commission.  If they can’t produce a contract under that arrangement, then I wouldn’t recommend listing with that agent, because they may have been bluffing about the buyer, and you want to demand complete integrity from any agent you end up hiring.

Since your visit from each agent will, in effect, prove to be a listing presentation, you need to be prepared to interview them and not just listen to their presentation.    To assist you with that process, I wrote a column in 2010 listing 18 questions to ask a potential listing agent.  That column was so popular that I gave it a URL of its own, www.The18Questions.com.  Use that column in your interview, and feel free to call me to verify any statistics agents provide about their own success as a listing agent, since doing so requires MLS access.

Believe it or not, we are in a sellers’ market right now, with listings — if they are priced right — going under contract very quickly. I urge you to subscribe to my blog (www.JimSmithBlog. com) where you will not only get this column before it is printed, but also get my monthly market activity reports.

Yes, It's a Hot Market, But Your Home Isn't Selling. So What Can You Do?

[My "Real Estate Today" column published Dec. 1, 2011 in the Denver Post]
By JIM SMITH, Realtor

This column is for those who have had their home on the market for months, but haven’t had many showings and have received no offers. Is it the market, is it the house, is it the location? Is the agent to blame?  You don’t know. You’re just frustrated.

Yes, homes are selling now, but yours isn’t. In Jefferson County, as I write this column on Monday evening, over 35% of the homes for sale are under contract, not counting the foothills areas.  That’s a lot of buyers buying homes — but not yours.  So, what can you do?

Your listing contract binds you to work exclusively through your agent. You are to refer all brokers, buyers and other interested parties to him or her and not speak with them directly.  And your listing agreement doesn’t expire for a month.  But you want action NOW!

Well, there are things you can do to get things moving. Here are some suggestions.

1) You can hold your own house open more often than a busy agent can.  Borrow his/her signs.  You may not negotiate with anyone, but you can provide access and answer questions. You can collect names and contact information to give your agent.  Unless the visitor knows you, I suggest you say you’re helping the agent without revealing that you’re the owner.  If the person wants to talk price and terms, give them the agent’s cell number and card.

 2) Google your home’s full address, including ZIP.  There should be at least one or two pages of results, including realtor.com, Zillow, Trulia, and broker websites which contain your listing. Are the pictures good and plentiful?  How’s the description?  Are there any errors that need correcting? Do you get any ideas from the way other homes are portrayed that could be used on your house?  Give this feedback to your agent.  Ask him/her to do more, but be specific. If you have good pictures (flowers in summer, etc.), give them to him/her to use.

3) If you are unhappy with your agent, you aren’t stuck with him. If he’s an associate in a big firm, you can talk to the managing broker about assigning the listing to another agent, or at least coach the associate so he does a better job for you. Remember: the brokerage, not the associate, owns the listing.

4) If that doesn’t work, or if your agent is his own boss, you can ask to be released.  If he refuses, you can instruct him to remove the listing from the MLS and cease all marketing of the home, at which point he might as well release it. Instruct the broker to list it as “expired,” not “withdrawn,” because the “days on market” starts over at zero after 31 days of being “expired,” but not if it’s “withdrawn.”

5) If you’re happy with the agent and his/her marketing of your home, try calling the agents who have not seen your home yet to get them to preview it. (This is not forbidden in your listing agreement.) Tell them your listing will be expiring eventually and you’d like their opinion about the home in case you decide to change agents. Ask them for pricing, staging, and marketing feedback. Ask them what they’d do that your agent isn’t doing.  (I suggested this strategy to one of my own clients recently because it’s a great way to get agents to preview a listing they haven’t seen.  And we’ll get some genuine professional feedback.)

6)  If you have reason to think your agent may have overstated his track record, you could also ask these other agents, “Is it true that my agent sold 50 homes last year with average time on market under 30 days?”  That would be useful to know, wouldn’t it?  Only other agents can check that kind of data on the MLS.

7) Ask your agent to show you your competition.  Put yourself in the shoes of a buyer. Ask yourself, “Would I buy my house versus this house which is listed at the same price?”

8) Share these ideas with your agent and brainstorm other ways to stimulate showings and offers for your home. You could be part of that 35% that’s under contract!

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