The Tax Bill Hiding in Your House: Capital Gains on a Home Sale After 65
July 4, 2026
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Show Notes
Eddie and Betty's Conversation
Welcome back to The American Retirement Advisor. I'm Betty, and Eddie's here with me in the studio today, and we are diving into something that I think is going to genuinely surprise a lot of people who are either getting close to retirement or already in it. We're talking about real estate, specifically what happens when you sell it, and the tax surprises that are waiting at that door. This is part two of a series we've been walking through based on a piece written by Ian Schaeffer, our company's COO, and Eddie, I have to say, when I read through this article, there were a couple of moments where I just stopped and thought, I did not know that.
And those are the best moments, honestly, because if you didn't know it, there are probably a lot of listeners who didn't know it either. Ian Schaeffer frames it really well in the piece. He calls these the three surprises waiting at the first exit, meaning the sale, and I think that framing is right because people plan for the big number, the sale price, but they don't always plan for what comes out of it.
So let's start at the very beginning of what Ian Schaeffer lays out, because the first thing he addresses is a belief that I think is really widespread. A lot of people believe that once you turn sixty-five, you get some kind of special break on capital gains when you sell your home. Where does that come from?
It comes from a rule that used to exist. Before 1997, there was a one-time exclusion specifically for home sellers who were fifty-five or older. So the memory is not invented. People who were paying attention to tax law in the eighties and early nineties, or who had parents who used that rule, they carry it forward. And then it never quite got corrected in the cultural conversation.
So it got repealed?
The Taxpayer Relief Act of 1997 repealed it, and what replaced it is more generous in most ways. The current rule is age-neutral, meaning it applies at any age. You can generally exclude up to two hundred and fifty thousand dollars of gain on the sale of a primary residence, or five hundred thousand for a married couple filing jointly, as long as you owned and lived in the home for at least two of the last five years. And unlike the old rule, you can use it more than once in your lifetime.
So in some ways it's a better deal, it's just not tied to age anymore.
Right. But what Ian Schaeffer points out in the article is that the stubborn belief that age is what earns you the break is still alive and well almost thirty years later. People search for it, they plan around it, some of them delay a sale waiting for a birthday that changes absolutely nothing.
That's a real cost. If someone holds off selling for two years waiting for a birthday that doesn't matter, that's two years of decisions made on a false premise.
And that's why this conversation matters before the sale, not after. Because once you close, the tax is what it is.
Okay so now let's say someone does know the current rule and they think, I'm fine, I have a two hundred and fifty thousand or five hundred thousand dollar exclusion. Ian Schaeffer says that can still feel smaller than people expect, and I want you to explain why.
So those exclusion amounts, the two-fifty and the five hundred, were set in 1997 and they have never been adjusted for inflation. Not once. Home prices have obviously not stood still for thirty years. So a couple who bought a home decades ago in a neighborhood that took off can be sitting on a gain that blows right past five hundred thousand dollars, and every dollar above that exclusion is a taxable long-term capital gain in the year of the sale.
It's a number that made a lot of sense in 1997 and just hasn't kept up.
Not even a little. And the tax on what's above it can hit at multiple rates depending on your income. For 2026, long-term capital gains are taxed at zero, fifteen, or twenty percent. For a married couple filing jointly, the fifteen percent rate generally applies to taxable income between roughly ninety-eight thousand nine hundred and six hundred thirteen thousand seven hundred dollars. Above that you're at twenty percent.
And then there's a layer on top of that, right? Ian Schaeffer mentions a surcharge that I had not heard of before.
The net investment income tax, which is an additional three point eight percent, and it generally kicks in once your modified adjusted gross income passes two hundred and fifty thousand dollars for a joint return, or two hundred thousand for a single filer. And what the article points out is that those thresholds have not moved since 2013. So a home sale with a large gain can push someone who is otherwise a pretty modest-income retiree through several of these lines in a single tax year.
So you could have a year where your regular income is totally normal but this one sale event just launches you into a completely different tax picture.
That's the scenario. And it's a one-year spike, but it can be a significant one if you're not anticipating it.
Before we get people too worried about this, there is some good news tucked in here about how your gain is calculated, and I think this part is important.
Yes, and this is worth slowing down on. Your taxable gain is not the sale price. It's the sale price minus what you originally paid, and importantly, minus the cost of improvements you made over the years. So the addition you put on the back of the house, the new roof, the kitchen remodel, all of that raises your basis and shrinks the taxable gain. Ian Schaeffer makes the point that this is why advisors encourage people to keep home improvement records for decades. The shoebox of receipts in the garage can be worth real money.
I love thinking about it that way. A shoebox of receipts being worth real money. So if you tossed all that paperwork over the years, you may be paying tax on a gain that's bigger than it legally needs to be.
Exactly. You paid for those improvements, you should get credit for them. But if you can't document them, it's very hard to claim them.
So the takeaway there is, going forward, if you haven't been keeping those records, start now.
Immediately. Any receipt, any contractor invoice, any permit cost, it all matters. Keep it somewhere you can find it.
Now this next part of the article is where my jaw dropped. Because we've been talking about the capital gains tax, which people at least know exists in theory. But then Ian Schaeffer brings in Medicare, and I did not see that connection coming.
This is one of the biggest blindspots he identifies, and I think it catches people off guard because it doesn't arrive right away. Here's how it works. Medicare premiums for higher-income retirees include a surcharge called IRMAA, the Income-Related Monthly Adjustment Amount. And the key detail is what IRMAA is based on: it's calculated from your tax return two years earlier.
Two years earlier. So if you sell in 2026, Medicare is looking at that return in 2028.
Right. And capital gains count toward that income calculation. The taxable portion of your home sale lands in your modified adjusted gross income, which is what IRMAA runs on. So someone has a big sale year, income spikes, and then two years later they open a Medicare bill that's much higher than expected and they have no idea why.
And they've probably forgotten about the sale by then, at least in terms of connecting it to their Medicare premium.
Totally. And what makes it more acute is that IRMAA operates on a cliff. Crossing a threshold by a single dollar triggers the full higher premium tier. In 2026, the first threshold sits at two hundred and eighteen thousand dollars of income for a joint return, one hundred and nine thousand for a single filer. A big sale year can vault a couple several tiers up at once, and it hits both spouses.
Both spouses. So it's not just one Medicare bill going up, it's two.
For the full year. Which is real money. The good news Ian Schaeffer gives us is that it's generally a one-year visit. Your premium is recalculated each year based on that two-year look-back, so when your income goes back to normal, the premium follows. But as he puts it in the article, it's far better to know the bill is coming than to open the letter two years later and wonder what happened.
And knowing it's coming means you can plan the timing of the sale around it.
That's the lever. Choosing which year you sell, looking at what your other income looks like in that year, all of that affects both your capital gains rate and your Medicare picture two years out. These things are connected, and you want someone modeling them together before you make the decision.
Okay, let's shift to rental properties, because this is where Ian Schaeffer says the rules get noticeably harsher. And he references a couple, sort of a scenario from part one of this series, who had a cabin and a rental portfolio, and they were smart to ask questions before selling.
So with a rental, the first thing to understand is that the home-sale exclusion we've been talking about, the two-fifty and the five hundred, generally does not apply. There's no cushion. The gain is on the table from the first dollar.
Which is already a significant difference. But then there's something else he brings up, the depreciation piece, and I think this catches a lot of people completely off guard.
It really does. One of the great tax benefits of owning a rental property is the depreciation deduction you can take each year. But here's the catch: when you sell, the IRS recaptures some of that. The portion of your gain that came from depreciation deductions is taxed at a higher rate than the rest of the gain, up to twenty-five percent.
So all those years of deductions, you sort of pay them back at the sale.
In a sense. And what Ian Schaeffer highlights that I think is really striking is that the rules generally apply whether or not you actually remembered to claim the depreciation along the way. So someone who owned a rental for twenty years and maybe didn't always track the depreciation carefully, they can still face recapture at the sale.
That feels like a double hit. You didn't even get the benefit of the deduction every year, and now you still owe the recapture.
It's one of those situations where the rules are what they are, and not knowing them doesn't change them. Which is why this conversation has to happen before the sale, ideally with someone who models these scenarios every day.
Ian Schaeffer is pretty clear about that in the article. He says, and I'm paraphrasing, that figuring out which strategy fits depends on your whole picture, your income, your other accounts, your family's intentions for the property, and it deserves an afternoon with someone who does this every day, not a rule of thumb from an article, including his own.
Which I appreciate, because it's true. An article can tell you the categories. It can name the surprises. It cannot tell you which of those surprises applies to you and at what magnitude. That's a conversation.
So what are some of the legitimate strategies he mentions? He does gesture at a few.
He names several without going deep on any one of them, which is appropriate. Timing a sale for a lower-income year. Spreading gain across years in certain situations. Offsetting against other losses. Exchanging one investment property for another rather than selling outright. And he mentions something we'll get into tomorrow, which is sometimes not selling at all, and what happens when property passes to the next generation instead.
That last one, the not-selling path, I want to make sure listeners know that's where the series is going. The estate side, what happens when property passes rather than sells. Ian Schaeffer calls it the other exit, and that's tomorrow's episode.
And he teases some things in there that I think are going to surprise people just as much as today's material. The gifting rules he mentions, and the point about most families not owing federal estate tax under today's rules. There's a lot to unpack there.
Right, and that connects to a big tax law that he mentions in the opening of the piece. He notes that one year ago on July 4th, 2025, a sweeping tax law was signed that sets the rules many retirees will be living under for years, including the estate tax numbers coming in tomorrow's finale.
The specific details of how those provisions landed and what they mean for estate planning are a great question for the team at American Retirement Advisors, because there are a lot of moving parts in any major tax legislation, and you really want someone who's been tracking all of it to walk through how it applies to your situation.
Let me come back to something practical, because I think some listeners are sitting there right now doing math in their heads. They bought their home twenty or thirty years ago, they've seen a lot of appreciation, and they're wondering, how do I figure out what my gain even is before I talk to anyone?
The honest answer is you start with what you paid, then you add in every documented improvement, and then you look at what you can realistically sell for. The difference between that sale price and your adjusted cost basis, meaning what you paid plus improvements, is roughly your gain. Then you subtract the exclusion you qualify for and you have a sense of what's potentially taxable.
And that number is what then flows through all those rate brackets you described, the fifteen percent, the twenty percent, potentially the three point eight.
And potentially into the IRMAA calculation two years later. So the total tax picture on a large home sale can be layered in ways that aren't obvious from just looking at the gain number alone.
One thing I want to make sure we said clearly, because I think it's easy to miss in all the numbers: the two-of-five-year test. You mentioned it earlier, but what does someone need to know about that?
To use the exclusion, you generally need to have owned the home and lived in it as your primary residence for at least two of the five years before the sale. It doesn't have to be the most recent two years, and they don't have to be consecutive, but you need to be able to demonstrate that two-year threshold. If you don't meet it, you generally can't use the exclusion at all.
So someone who moved out of their home a few years ago and rented it and is now thinking about selling, they need to be paying attention to that timeline.
Very much so. And that's another place where the specific rules around partial exclusions and how rental use interacts with the two-of-five-year test, that's a question I'd want our advisors at American Retirement Advisors to answer rather than me trying to cover every scenario here, because there are wrinkles depending on the situation.
That's fair. The general shape of the rule is clear. The edge cases are where you really need someone who knows the details.
And those edge cases can be worth a lot of money, which is why they're worth asking about.
Let me bring it back to the big thread that Ian Schaeffer pulls through the whole piece, because I think it's the thing I want listeners to carry with them. He writes that the tax on a lifetime of appreciation is not really determined the year you sell. It's determined by what you kept records of, what year you choose, and what the rest of your income looks like when you do.
And his point is that all three of those things are steerable, but only ahead of time. Once the sale closes, the choices are made. The year is locked, the income is what it is, the records either exist or they don't.
So this is fundamentally a planning conversation, not a filing conversation.
That's the right way to put it. The planning happens before. The filing just records what you already decided.
And for the Medicare piece in particular, the two-year delay means the planning window is even earlier than people think. If you're sitting in 2026 and considering a sale, the Medicare impact lands in 2028. So you're really thinking two years ahead.
At minimum. And if you have a spouse, you're thinking about both of your Medicare bills, both of your premium tiers. It compounds quickly.
Okay, let me just do a quick recap of the three surprises Ian Schaeffer names in this piece, because I want listeners to leave with a clear mental list.
The first one is the age myth, the belief that turning sixty-five changes your tax situation on a home sale, when in fact the exclusion is age-neutral and the old rule hasn't existed since 1997. The second is that the exclusion itself, which hasn't been adjusted for inflation since 1997, may cover less of your gain than you expect if your home has appreciated significantly. And the third is IRMAA, the Medicare surcharge that arrives two years after the sale and that most people never connect to the real estate transaction that triggered it.
And then for rental properties, there's an additional layer: no exclusion at the start, and depreciation recapture at potentially a higher rate.
Which can cover a lot of territory on a property someone held for twenty years. It's not a small number.
So what's the practical first step for someone who hears all of this and thinks, I need to get my arms around this before we do anything with our property?
Start gathering. Find the original purchase documents. Find every improvement receipt you can locate. Get a rough sense of what the property would sell for today. And then bring that information into a conversation where someone can model it against your income picture, your other accounts, and your timeline. Because the right year to sell, the right structure for the sale, all of that comes out of that full picture.
And Ian Schaeffer is clear that this modeling really does need to be done before you list, not after you close.
There's very little you can do after closing. The decision points are all before.
You know, what strikes me most about this article, reading it as someone who thinks about this stuff but is not a tax professional, is how many of these surprises are completely avoidable. The IRMAA bill that arrives two years later, the basis that's smaller than it needs to be because the receipts got tossed, the sale that happened in the wrong income year. None of those are inevitable. They're just what happens when the planning doesn't come first. And I think that's really the heart of what Ian Schaeffer is trying to say.
It's one of those things where the information isn't that complicated once you have it. It's just that nobody hands it to you at the moment you need it. You're thinking about whether the offer is good, whether the timing feels right, whether you're ready to let go of a house you've lived in for thirty years. The tax questions feel like they can wait. And they really can't.
The emotional weight of selling a home is real, and it's easy for all the financial questions to get pushed aside in that moment.
Which is why you want to have those conversations in a quieter moment, not when you're in the middle of a transaction.
Tomorrow's episode, the finale of The Fourth Color series, is going to cover the other exit, the one where the property passes to the next generation. The estate side, what happens when real estate is inherited rather than sold, the gifting rules, and why Ian Schaeffer says most families will not owe a dime of federal estate tax under today's rules. So if you've been following along, do not miss that one.
And if either today's conversation or tomorrow's applies to something you've been thinking about, a home sale on the horizon, a rental you're considering letting go of, property you know will eventually pass to your kids, these are not questions that need to wait for a problem to show up. They're much better answered before anything has been decided.
If you'd like to sit down with someone and map out the whole picture before you make any moves, our team at American Retirement Advisors is there for just that. The number is 602-281-3898. You can also find us online at americanretirementadvisors.com. Bring your questions, bring your documents if you have them, and let them help you see the full shape of what you're working with before you make a decision that can't be undone. We'll see you tomorrow for the finale.