Sell Now to Avoid Future Capital Gains Taxes?

 February 19, 2007, Revised May 21, 2007, November 18, 2008

"My wife and I own a home which we bought years ago at $200, 000 and which is worth about $700,000 today. If we stay in the house for another 10 years and then sell, and the value then is $1.2 million, we will be liable for a capital gains tax on $500,000. This is the total capital gain of $1 million less the capital gain exclusion for a couple of $500,000.

If we sell now, on the other hand, and immediately purchase a similar house, we pay no capital gains taxes. The $500,000 gain exclusion would be applied when we sell now, and it would be applied again when we sell after 10 years.
Question: should we sell now to avoid the future tax?"

This question comes down to a comparison of the value of the tax avoided 10 years down the road with the cost of moving now from one house to another.

This is far from an exact science because, among other things, we don’t know what the capital gains tax rate will be 10 years from now. The best we can do right now is use the current rate of 15%, but it could be higher or lower.

At 15%, the tax on $500,000 would be $75,000, but that is 10 years in the future. What it is worth today depends on the interest rate. At 6%, for example, $75,000 10 years in the future is worth about $42,000 today. [Note: That is another way of saying that $42,000 invested at 6% would be worth $75,000 in 10 years.]

What is the cost of selling one $700,000 home and buying another one? The financial cost will almost certainly be higher than $42,000. A 6% sales commission is, by coincidence, exactly $42,000. Commissions can be lower, of course, but there are other costs on both the sale and the purchase which can be steep, including transactions taxes, settlement costs on a new mortgage, and moving costs.

In some states, the property tax system favors homeowners who stay put. In California, for example, a property cannot be reassessed for tax purposes as long as the owner resides there. A move into another house of the same value can trigger a large tax increase.

And then there is the pain and the hassle. If the two transactions can’t be perfectly synchronized, which is seldom possible, you have to find temporary housing if you sell first, or perhaps a source of temporary financing if you buy first. See Buying a New House Before Selling the Old One. There is also the pain of moving all your possessions out of one house and into another. The list goes on and on. Everyone must call their own shots on something like this, but to me it is a no-brainer. I would stay put.

Want to shop for a mortgage on a level playing field?

Why Shop for a Mortgage with the Professor?

  1. Receive His Help in Finding the Type of Mortgage That Best Meets Your Needs
  2. Shop Prices Posted Directly by His Certified Lenders
  3. Shop Prices Fully Adjusted to Your Deal
  4. Shop Prices That Are Always Current
  5. Get Him as Your Ombudsman Just in Case

Read More About the Support and Protections Listed Above

Sign up with your email address to receive new article notifications