Q. I paid $ 141,000 for my house in 1987. It is now worth over $ 700,000. What taxes do I owe if I sell now versus the taxes my kids owe if they inherit the house when I leave? I’m not married.
– Not clear
A. At first glance, this looks like a relatively simple question.
But the details determine how much tax you end up paying.
As part of this answer, we’ll assume that you were married once and your spouse passed away.
The first thing you need to do is determine your cost base, said Altair Gobo, a certified financial planner with US Financial Services in Fairfield.
The cost base is the original value, or purchase price, of your home for tax purposes, plus any capital improvements made over the years, minus the amounts reimbursed, Gobo said.
“If you sell the home within two years of your spouse’s death, you can get $ 500,000 in tax exemption from home sales,” he said. “If more than two years have passed, no more than $ 250,000 of profit is tax-free.”
Assuming you and your spouse owned the house together when they died, Gobo said at least half of the property was “upgraded” to its value on the day your spouse died.
“So if you jointly bought the house for $ 141,000 in 1987 and it was worth $ 500,000 when your spouse died, your base would be $ 320,500 – $ 70,500 plus $ 250,000, which is your half the original $ 141,000 plus half your spouse’s death date is worth, ”he said. “Remember, you need to add in all of the capital improvements made over the years.”
Now let’s say you’ve made $ 100,000 in capital improvements over the years.
Your new cost base would be $ 420,500. Then $ 700,000 minus $ 420,500 results in $ 279,500).
“You are entitled to a $ 250,000 exemption, which is $ 279,500 minus $ 250,000 for a capital gain of $ 29,500,” he said.
Under current tax law, Gobo said, if you inherit the house after you die, your children will receive a top-up on the date of death, in your case the full $ 700,000.
It is important to note that we are using assumptions here. For accurate information about your situation, speak to a tax advisor who can go over your specific numbers.
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Karin Price Mueller writes the Bamboozled column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com’s weekly e-newsletter.