We’re working with a CA couple in their mid-80s who bought their $1.3 million home in the early 1970s for about $57,000.
They want to sell and move to Idaho – and their capital gains taxes will be $121,000.
But, $44,000 of that $121,000 are CA’s taxes – to pay for pretend bullet trains and more homelessness (because you can never have too much).
So, the federal portion is only $77,000 – in what is an extreme case.
In most cases, capital gains taxes will be much less.
Here are the assumptions and the math.
The gain:
- Sale price: $1,300,000
- Less selling costs (6%): –$78,000
- Amount realized: $1,222,000
- Less cost basis ($57K + $100K of improvements): –$157,000
- Realized gain: $1,065,000
- Less §121 exclusion (married): –$500,000
- Taxable gain: $565,000
Federal: ~$76,600
- Long-term cap gains (0% / 15% bands — still under the 20% threshold): ~$64,600
- NIIT (3.8% on income over $250K): ~$12,000
California: ~$44,400 — full $565K taxed as ordinary income, 9.3% marginal bracket.
Total: roughly $121,000, an effective rate of about 11.4% on the gain.
NOTE/REMINDER: The clients owe $300,000 on their home, so their take-home cash will be much less than their actual gains. But mortgage amounts are irrelevant. Cost basis is ALL that matters when it comes to taxes.
There Are Multiple Bills Before Congress Right Now to Eliminate Capital Gains
The one most likely to pass (H.R. 1340) is a proposal to simply increase the capital gains exclusion to $1,000,000 – up from its current $500,000.
The $500,000 exclusion was passed in 1997 – when the median home price was $127,000.
Today’s median home price is almost $430,000, over three times the median price in 1997.
So yeah – an increase in the exclusion is LONG overdue. It should actually be increased to $1,500,000 if we want to even come close to matching inflation.
Will It Increase Inventory?
Yes.
Because all too many boomers think their capital gains hit will be much larger than it actually is.
So, before the above-referenced bill passes, agents might want to explain to potential sellers how much lower their capital gains will be than they expect…
And, after the bill passes, agents might want to remind potential sellers how much capital gains taxes they will be able to avoid. 😊
