Selling Your Home or Land: Legal Ways to Minimize (or Eliminate) Capital Gains Taxes

In my last post  I referenced the role that capital gains can impact how many baby boomers plan for the future.  Obviously, maximizing the net profit is the ultimate goal whether it’s for your inherited land sale, selling your home when you downsize, or executing estate sales. I’ve been asked about capital gains repeatedly over the past 12 months, so I consulted Steve Withers, a Partner and Estate Planning expert at Coogan, Smith, LLP in Attleboro, MA, to consult in providing a short summary of the strategic tax options available for any seller to consider. The good news is that there appear to be a couple of options that could significantly reduce or even eliminate any tax obligations if planning is done correctly.

One of the more well-known IRS exemptions is the one-time, $250,000 ($500,000 for joint filers) exemption all taxpayers receive for the sale of a home. This exemption allows up to these amounts in capital gains to be tax exempt.  But taxpayers can use it only once. So what other strategies exist that can also help to minimize or eliminate capital gains?

Your Current Income (Tax Bracket) Matters
One of the easiest strategies to consider in the planning phase is the timing of a sale with respect you your (or perhaps your parents) current income. The IRS exempts those individuals from any capital gains tax at the Federal level, which would save sellers between 15% and 23% of the net sale price if long-term assets are sold (ie home, land, personal property held for more than 1 year). In Massachusetts. It is more difficult to avoid state long-term capital gains taxes (5.1%), but as always consulting with a tax professional to confirm your specific situation is always a good idea.

Property Basis Step Ups for Trusts and Inherited Property
There is a second, slightly more complicated option that might allow you to avoid Long Term Capital Gains tax at both the Federal and State level.  This provision in the tax code allows inherited property to "Step Up" the basis (the value of the land) to the current market value upon the date of inheritance when it occurs.  This means that instead of showing that your home, land, etc was acquired for $10,000 40 years ago (as an example), when it passes to a trust or through inheritance, the new value would be listed at current appraised market value.  Let's say $500,000 for easy math. This way, if you sold the land for $500,000, and it is valued at $500,000, your net gain is 0. There would be no tax required. It should be noted that Stocks and Bonds transferred in inheritance are treated by the IRS the same way as real-estate, but that holdings in retirement accounts (IRA, 401k), are not.

There are some additional steps to the second option above that require more detailed questions to be asked and a review of the history of the prior property transfers, such as the creation of living trusts, credit trusts, or whether property is held jointly, but both options above can be viable and should be explored sooner rather than later.  

For real estate deals in Massachusetts, where the average real-estate sale can easily fall between $500,000 and $1,000,000, the potential tax savings could be in the five or six digit range.

With the uncertainty of long-term rates, and reports that the housing market is showing some weakness, there is no better time than now to create the plan that maximizes both the sale price and profits of what is most likely your largest personal asset.

About Kelly Crowley  (www.kellycrowleyrealtor.com)
Kelly Crowley is a Licensed Real Estate agent for Keller Williams Realty. Kelly has lifelong ties to the area and a keen understanding of the marketplace through her personal history and extensive knowledge of the varied communities she serves. Kelly invests her passion for the area by serving her clients with the utmost integrity, honesty and expert guidance in their real estate endeavors. When you’re seeking an agent who will put your goals first, call on Kelly Crowley.  kellycrowley@kw.com c. 734.274.0707

About Steve Withers
STEPHEN K. WITHERS, JR., is a partner with the firm, whose practice covers a wide-range of legal fields, and focuses primarily in Estate Planning and Administration, Probate Law, Real Estate, and Small Business and Non-Profit Organizations. Steve  is actively involved in serving the Greater Attleboro Area as a member and present chairman of the Attleboro School Committee, Rotary Club of Attleboro, Massachusetts (President, 2011-2012), a Director of the United Way of Greater Attleboro/Taunton, and as a member of the Sturdy Memorial Foundation, Inc.  He is a member of the Attleboro Area, Bristol County, and Massachusetts Bar Associations.