Written by Today we answer the question: what is the tax impact of selling your home in retirement? When deciding whether or not to sell your home in retirement, you’re usually thinking from a lifestyle perspective—do I still want to live in this house? Maybe the house is too big, or you don’t want to deal with stairs anymore. Or, perhaps you want to move somewhere with better weather.
However, one consideration we often overlook is the tax implications of selling a home in retirement.
Seven Key Tax Considerations
1. Capital Gains Tax
One of the advantages of selling your primary residence is the primary residence exclusion. This allows you to exclude up to $250,000 of your net proceeds (profit) if you’ve lived in the home for two of the last five years. If you’re married, the exclusion doubles to $500,000.
For example, if you’re single and sell your home for a $200,000 profit, you wouldn’t pay any capital gains taxes as long as it’s been your primary residence for two of the last five years. If you’re married, you could sell your home for a $500,000 profit and not owe any capital gains taxes.
If you make more than the exclusion amount, you would still benefit from a more favorable capital gains tax rate, usually 0%, 15%, or 20%, depending on your tax bracket—much lower than the maximum individual tax rate of 37%.
2. Medicare Premiums
Medicare premiums are another important factor to consider. Medicare Part B covers doctor visits, outpatient care, and durable medical equipment, while Part D covers prescription drugs. Both come with monthly premiums that could increase if your income exceeds a certain threshold.
In 2024, if you’re single and make more than $103,000, or married with income above $206,000, you’ll face a surcharge on your Medicare premiums. Even if you don’t owe capital gains tax, selling your home could push your income over this threshold, raising your premiums for the rest of your life.
Medicare uses a two-year lookback period to calculate premiums, meaning the income from your home sale could impact you long after the sale.
3. State Taxes
While the federal government offers a primary residence exclusion, your state might not. Some states exclude the sale of a primary residence from state taxes, while others don’t. Living in Florida, for example, we don’t have state taxes, but if you live elsewhere, check your state’s rules to see if they align with federal exclusions.
4. Property Tax Adjustments
Selling your home could also lead to changes in your property taxes. Depending on your state, the assessed value of your new home might reset to current market values, resulting in higher property taxes. For instance, in Florida, long-time homeowners benefit from laws that limit property tax increases, but when the home is sold, the new owner might face significantly higher taxes.
5. Reporting the Sale of Your Home
Even if you don’t owe capital gains tax, you may need to report the sale of your home to the IRS using Form 8949 and Schedule D. If you received a 1099-S form from your real estate agent or title company, you’ll need to include this information on your tax return.
6. Impact on Retirement Income
Selling your home can affect how much of your retirement income is taxed, including Social Security. If you exceed certain income thresholds, up to 85% of your Social Security benefits may be taxable. Additionally, selling your home could push you into a higher tax bracket, impacting taxes on other retirement accounts like your 401(k) or 403(b). This could result in paying more in taxes during retirement than you anticipated.
7. Deductions for Selling Expenses
In some cases, you can deduct expenses related to selling your home, such as real estate agent commissions, legal fees, and home improvements. These deductions could reduce the amount of taxable capital gains.
For example, let’s say John and Mary sold their home for $700,000 after buying it for $300,000 and making $50,000 in improvements. Their capital gain would be $350,000, but because they’re married, they can exclude up to $500,000—meaning they owe no capital gains taxes. If they sold their home for $1 million, they would owe capital gains taxes on $150,000 ($1 million minus $350,000, minus the $500,000 exclusion).
Final Thoughts
Selling your home during retirement can trigger a range of tax implications, including capital gains taxes, Medicare surcharges, state taxes, and the impact on your retirement income. That’s why having a comprehensive retirement plan is essential—not only to understand the tax consequences but also to ensure you’re optimizing all aspects of your financial future.
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