Selling the family home (the fourth color of money)
Before you list the house, find out what the sale does to your taxes, your income, and your Medicare premium two years out.
Kyle JacobsDavid Schaeffer built the Three Colors of Money to sort savings into safe money, income money, and growth money. There is a fourth color now. Purple is the house, and it earned its own color because on a great many of the balance sheets we see, it is the largest line.
It is also the strangest thing you own. You cannot spend a room or sell a third of it, and it carries decades of family history plus a tax bill nobody has calculated. Selling, downsizing, and leaving it to your children are three different events with three different outcomes.
Kyle Jacobs runs this conversation at American Retirement Advisors. He is a Certified Medicare Planner® and a retirement income planner, not a tax advisor, so every tax point below is a question for your tax professional. We will sit in the room with them while you ask it.
What selling the family home (the fourth color of money) actually means
The meeting happens before you call a realtor. We put the house on one page with everything else you own, and run the sale as a number instead of a feeling.
The rule almost everyone relies on without having read it is the home sale exclusion. If you or your spouse owned the home for at least 24 months out of the 5 years leading up to the sale, and you lived in it as your residence for at least 24 months of those same 5 years, you may qualify to exclude up to $250,000 of the gain from your income. For the $500,000 on a joint return, both spouses have to meet that use test. There are limits on how often you can use it and relief for people who fall just short. Ask before assuming.
Gain above what you exclude is income on that year's return. Medicare adds an extra amount to your monthly premium when the modified adjusted gross income on your tax return from 2 years ago is above a certain amount, whether you carry a supplement or an Advantage plan. Seen in advance, a sale year is a timing decision. Seen in the mail, it is just a bill.
Selling is not the only path. Property inherited from a decedent generally takes a new basis equal to its fair market value at the date of death. That is why sell now versus leave it to the kids is a real question, and why we ask it out loud.
Then the part that is squarely ours: where the money lands. Proceeds from a house are not a plan. They become safe, income, or growth money, and how you divide them sets your paycheck for the rest of retirement.
Sound familiar?
- You bought the house decades ago, it is worth many times what you paid, and nobody has shown you what a sale looks like on a tax return.
- You want to downsize, and are not sure whether the proceeds are income, savings, or a problem.
- You own a rental or a second property you keep not selling, because of a tax bill nobody has calculated.
- You are staying put and assuming the kids will sort out the house later.
- Your Medicare premium jumped after one good income year, and you never want that again.
What happens when you sit down with us
or call any office
What to bring
- What you paid for the house, and roughly when you bought it.
- Records of the improvements you made, with receipts if you kept them.
- Your most recent tax return.
- Your honest guess at what it would sell for.
- The name of your tax professional.
Who does this all day
Your Discovery Day
Takes about a minute. Adam from our office calls you back to set the time with the right advisor, in the office nearest you or on Zoom, whichever you prefer.
- About an hour with an advisor.
- Bring whatever is keeping you up at night. That is the agenda.
- Discovery Day, not decision day. You decide when you are ready.
Rather talk now? (602) 281-3898
Request your Discovery Day
We will call you to set the time.
Got it. Adam will call you.
Usually within one business day, to set up your Discovery Day with the right advisor. Would you rather pick a time yourself right now?
Choose a time on the calendarStraight answers
How much of the gain can we keep?
If you meet both tests, you may qualify to exclude up to $250,000 of that gain from your income. On a joint return it can be up to $500,000, and both spouses have to meet the use test. The tests are 24 months of ownership and 24 months of use as a residence, each within the 5 years leading up to the date of sale.
We have not lived there the whole time. Do we lose the exclusion?
Not necessarily. The IRS allows a reduced exclusion when the sale was caused by a work location change, by health reasons, or by certain unforeseeable events such as a home destroyed or condemned. It is a calculation, not a yes or no.
Can we do this again on the next house?
Generally not right away. You are usually not eligible if you excluded the gain from the sale of another home during the two-year period before this sale. If you are moving twice inside a short window, have the conversation before the first sale.
Is it better to sell now or leave the house to our children?
Property inherited from a decedent generally takes a basis equal to its fair market value at the date of death, which changes what a later sale looks like for your heirs. Your tax professional compares the two paths on your numbers. Our job is making sure somebody asks in time.
Will selling raise what I pay for Medicare?
It can. Medicare adds an extra amount to your monthly premium when the modified adjusted gross income on your tax return from 2 years ago is above a certain amount, so a large gain shows up two years after the sale. That is true whether you carry a supplement or an Advantage plan.
What about a rental or a vacation home?
The home sale exclusion applies to a main home, so other property is a different conversation with a different tax answer. Bring it anyway. It usually changes the order we would do things in, and the order is where the money is.