The Following Article is from the Spring 2006 Newsletter
- Our kids have gone off to college and we don’t really need such a large home any more but don’t think we can afford all the taxes associated with “trading down.” How do other “empty nesters” typically handle this?
Most sellers pay the taxes on the profit or gain that exceeds $500,000 (for a married couple). Many have been confused about this tax consequences of “trading down” or scaling down from a larger home to a smaller home.
Since May 1997 the old “Rollover Residence Replacement Rule” (Internal Revenue Code No. 1034) has been repealed.
Based on the new Internal Revenue Code No. 121, married couples who file jointly can claim tax exemption on real estate sales profits of up to $500,000 provided that they have owned and occupied the principal residence for at least 24 months prior to sale. In other words, the taxable profits from the sale of the principal residence, up to $500,000 are tax-free. Qualified individual taxpayers can claim up to $250,000 tax free sales profits. Any taxable profit in excess of the $500,000 or $250,000, respectively, will be taxable.
To defer the taxes one could “convert’ the property to a rental property, then at a later date, sell the property and purchase another rental property (apartment building?) and defer paying taxes based on the “Starker tax-deferred exchange”. There are strict rules and guidelines governing this type of deferral. For more information on the tax deferrals, please see your tax advisor.