24 May How much will I owe in taxes if I sell my house now?

Q. I paid $141,000 for my house in 1987. It is now worth over $700,000. What taxes will I owe if I sell now as opposed to the taxes my kids will owe when they inherit the house when I pass? I’m not married.
— Unclear

A. At first, this looks like a relatively simple question.

But the details will make a difference in how much tax you ultimately pay.

We’re going to assume, as part of this answer, that you were once married and your spouse passed away.

The first thing you need to do is to establish your cost basis, said Altair Gobo, a certified financial planner with U.S. Financial Services in Fairfield.

Cost basis is the original value or purchase price of your home for tax purposes, plus any capital improvements made throughout the years, less any reimbursed casualty loss amounts, Gobo said.

“You may exclude $500,000 of home sale profits from taxes if you are selling the house within two years of your spouse’s death,” he said. “If more than two years have passed, then no more than $250,000 of the profit is tax-free.”

Assuming you and your spouse owned the home jointly when she passed, at least half of the property’s basis was “stepped up” to its value on the date of your spouse’s death, Gobo said.

“So if you purchased the house jointly for $141,000 in 1987 and it was worth $500,000 when your spouse passed, then your basis would be $320,500 — $70,500 plus $250,000, which is your half of the original $141,000 plus your spouse’s half of the date of death value,” he said. “Remember, you need to add all capital improvements made over the years.”

Now let’s assume you have had $100,000 of capital improvements over the years.

Your new cost basis would be $420,500. Then, $700,000 minus $420,500 equals $279,500).

“You are entitled to a $250,000 exemption amount, so $279,500 minus $250,000 equals a $29,500 capital gain,” he said.

Under the current tax law, Gobo said, if your kids inherit the house upon your death, then they will receive a stepped-up basis on the date of death value, in your case the full $700,000.

It’s important to note that we’re using assumptions here, so to get accurate information on your situation, you should speak with a tax advisor who can go over your specific numbers.

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This story was originally published on May 24, 2021.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.