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Annuities: Fixed or Variable?
Dear Jeff:
I am not sure this is the right question for this site. I am ready to liquidate a large property I have lived in for 40 years. It has appreciated very much, and I wonder what is a good structure regarding the sale so that I don't have to give such a large chunk in taxes. My husband died 10 years ago, when the property was worth even more than today. Any suggestions?
Jeff Says:
Everyone wants to avoid income taxes. Who can blame them? However, it is very difficult to avoid taxes on the gains that you realize when you sell appreciated assets such as your house. However, I do have a couple of suggestions for you.
First, your tax situation may not be as bad as you think. Under the current tax law, it possible to exclude up to $250,000 ($500,000 for married taxpayers) of gain realized upon the sale of your primary residence. To qualify, you must have owned and lived in the home for at least two out of the last five years before the sale. If your gain still exceeds this amount, then it is necessary to review your records to determine how much you spent on improvements. These expenditures actually increase your cost basis and will reduce your capital gains exposure accordingly.
The second consideration for you is that the value of the home was worth more when your husband passed away. The cost basis of property that you inherit is generally the value on the date of death. If your husband was the sole owner of the house at his death, then you will actually experience a loss upon this sale.
On the other hand, if you owned the house jointly at his death, then you will only receive a "stepped-up" basis in one-half of the property. This means that one-half of the house will have the higher value determined on the date of your husband's death. Your one-half of the home will have your original cost plus any improvements, so there will not be any capital gains avoidance beyond the $250,000 exclusion mentioned above. This may still prove to be a substantial amount of tax savings for you.
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