We talked a little about this in our last video, but today, I’d like to go into more detail on how to avoid paying capital gains taxes when selling a property.
Let me start by saying that I’m a Realtor, not an accountant. This is a fairly common scenario, though, so I am able to give you some direction.
Let’s say that your grandparents owned a property and your grandfather passed away a few years ago. Your grandmother needs care, so she has moved into an assisted living facility. Bills are starting to pile up and you need money to pay for her care. However, she’s afraid to sell her property because of the impact of capital gains taxes.
Now, say the property is worth $1 million in the current market and that your grandparents purchased the home for $10,000. Closing costs on a $1 million property would add up to about $70,000, which means that $920,000 would be subject to capital gains taxes. Your grandmother has lived in the house for two of the last five years, which means she gets to subtract $250,000 from that amount. Still, you would be looking at $670,000 worth of taxable net gain.
This is where the step up in value comes into play. You can either step up or step down in value depending on the real estate market when the spouse passed away.
For example, let’s say the house was worth $800,000 when grandfather passed away. Have an appraiser do a date of death valuation. You would then get to step down from $1 million to $800,000, giving you a net gain of $200,000 from your grandfather’s time of death. If your grandmother has lived there for the last 10 years, she gets the $250,000, meaning your net gain would be -$50,000. In short, you would not have to pay any capital gains taxes.
This is really important to know because there are many people out there who need to free up some money but are afraid to sell the property due to capital gains taxes. The step up or down in value can be very helpful. If you’re in a situation like this, check in with your accountant to formulate a plan. If you don’t have one, reach out to us and we’d be more than happy to recommend an accountant to you.
As always, if you have any other real estate questions, don’t hesitate to reach out to me. I would be happy to help you!