Yeah, I just did the tax return for such a lady a couple of weeks ago. I think she sold the house 2 years and 5 months after her husband died. Bought it for like $30,000 in the 1970s and sold it for $425,000. She no longer had the transaction costs from when she bought (it was tough to get the purchase price) but she had like $30,000 of transaction costs on the sale so her gain ended up being around $365,000 of which $115,000 was taxable. She was on like a $40,000 income and had reinvested her proceeds in buying into a retirement community. So she’s going to be on a payment plan with the IRS to cover the tax liability.
I really felt like she should’ve been allowed to not pay capital gains tax on any of it.
Wait, I’m forgetting something. The taxable gain was $115,000 but it was more complicated than that because she was entitled to a step-up in basis on her husband’s half when he died. She must’ve sold it for more than that. I can’t remember exactly.
Just seems kinda silly we’re focused on capital gains on a house worth < 1m owned for > 10 years by an old person whose spouse has died.
I can see if the house was expensive (> 1m), they didn’t own it very long or the person isn’t old. But this situation sounds like it’s begging to be a political ad. Alas turbotax would probably be happy for the added complexity.
For years and years you paid capital gains tax on the full amount of the gain, but there was a one-time exclusion for people over… I dunno… 60 or 65 or something. Idea being that they weren’t going to penalize old people for selling the family home and downsizing. I don’t think there was any cap on the amount.
Putting an exclusion on the first $250K certainly lessens the IRS’s workload in that there are now tons of transactions that don’t even get reported. And it makes the workforce more mobile as the guy from California with the massive gain on his home isn’t penalized so severely for taking that great job opportunity in Florida or Illinois.
But maybe they needed to keep the one time exclusion for old folks. Or even just get rid of the 2 year requirement on widows/widowers. If it’s the house the spouse lived in when he/she died then the widow(er) gets the full $500,000 irrespective of the length of time to sell. Maybe some provision around remarriage… or not. No strong feelings either way there, other than not allowing all 3 parties a $250,000 exclusion.
That’s simpler than my earlier solution and wouldn’t really pick up many “unsympathetic” folks.
Agreed, 2 year limit until you lose grandpa’s part of the deduction just seems a lot like a countdown relative to an old man/woman’s ability to move on.
My other option was just going Wheel of Fortune style to pick one. The good news is it’s free to exchange from one coin to another on CoinBase, so I can always switch doors here.
