Do I have to pay taxes when I sell my home?

Ralph Estep Jr.
00:00:00

Are you lying awake at night worried about a huge tax bill after selling your home? Just like my client Patrick, you might be surprised to learn there's a way to keep more money in your pocket.

So today I'm going to share how Patrick went from panic to peace when we discovered the truth about home sales taxes. So stay with me today to learn. Do I have to pay taxes when I sell my home?

Podcast Announcer
00:00:24

In a world where crushing debt keeps you trapped, where living paycheck to paycheck has become your new normal, and where the dream of retirement seems impossibly out of reach, there's hope. Join financial evangelist Ralph Estep Jr. A man who's walked through the fire of financial failure and emerged stronger on the other side.

Welcome to Ask Ralph, the show where real world experience meets biblical truth. To break the bondage of financial despair.

To get ready to take control of your money, break free from the financial stress and align your resources with God's purpose for your life. This is Ask Ralph with Ralph Estep Jr.

Ralph Estep Jr.
00:01:05

Well, hello, my friend. You're right where you need to be today.

So whether you're driving to work or you're at the gym or maybe you're even tackling those household chores, I am grateful you've chosen to spend this time with me.

As your financial evangelist and fellow Christian, I'm walking alongside you in this journey, and today I'm excited to share insights that will help you navigate one of the biggest financial decisions you might face. And I listen. I deal with this every day in my practice, and that's selling your home.

So today we're going to explore how to master your finances while staying true to your faith. Now, if you missed yesterday's show, it was all about paying down those Christmas card debts.

I'm going to encourage you to check it out because I gave you a lot of practical strategies that will help you get back on track financially. And that's really important now that you want to move forward and get past that debt burden that you may have taken on during the holidays.

All of our episodes are @ askralph.com. well, today's listener question comes to us from Ginny. And this is what Ginny said. She said, Ralph, this is Ginny.

And I'm writing with tears in my eyes. My husband passed away last year, and I finally made the heart wrenching decision to sell our family home of 23 years.

We bought it for $200,000 when our children were small, and now I've received an offer for 600,000. Well, this blessing would help secure my Future. I am terrified about taxes eating away at what could be my retirement safety net.

Every time I try to research capital gain taxes, I end up more confused and anxious. My children keep telling me different things they've heard and I don't know who to trust.

The thought of making a mistake with this money, money that represents decades of memories of my late husband, keeps me up at night. Can you please help me understand what I'm facing and if there's any way to protect this nest egg.

Listen, first thing I want to say, Ginny, thank you for your question and I am so sorry to hear about your. The loss of your spouse, your husband. It's devastating when we lose our spouses.

And now I sense that you're in this position where you're having to make major financial decisions alone when you've been doing these together for 23 years. And I know that's not easy. And I know that you have this emotional weight on you right now.

Both grief and you've got this other weight of financial responsibility. And I can sense your anxiety. You're so worried about making a costly mistake. And truth is that you're right, that money represents not just finances.

But that is decades of precious memories. And the truth is I hear what you're saying about your kids and they're well meaning.

There's so much misinformation out there and conflicting advice, and I see that so often in my practice that it leads to what I'll call decision paralysis. It manifests in sleepless nights and this fear of making the wrong decision.

And you, you nailed it, Ginny, you're really concerned about what is the tax implications of this. And I get why you're concerned about that. You're a newly widowed individual. Like I said, you've been handling this with your husband for 23 years.

And that's what I'm here for. Listen, I'm going to help you break free of that stress. And I'm going to talk to you about the tax regulations.

Because here's the thing, as you read more stuff, Ginny, and you say this in your letter and I get it, you get more confused with every attempt. I don't know how many clients have told me that they said to me, Ralph, the more I read, the more confused I get.

And I also understand, Ginny, one of the things you really need to embrace is that it's not just this financial burden that you're under. It is truly this emotional, this burden that you're suffering emotionally. Because as much as you'd like to think it's just the finances.

You're transitioning from the family home. It's filled with memories. It's filled with all those different things that happen when you were first married, perhaps, and as your kids grew up.

And there was those Christmas dinners and there was those Easter things and all those things that, that are just those pieces of that house that weren't just the physical pieces, they were those memories. And Ginny, you're also feeling this uncertainty. You don't know what the future brings. And it's complicated by tax concerns.

And I sense the urgency of you needing clear, trustworthy guidance. And guess what? I'm going to get that for you because I've heard you loud and clear today.

And I'm going to help you and anyone else that's facing this situation because listen, these issues are complex and as the Bible says, and we'll talk about the verse in a few minutes, wise counsel is the key.

Now, if you're like Ginny and you've got one of these burdensome questions, one of the things I'm going to encourage you to do is go right to askralph.com you can click on the search button there and do a search and see if I've done a show about this in the past. And maybe that would be a good launching point for you to find out how to move forward.

You know, when we face important financial decisions like selling a home, we should remember that Scripture teaches us about seeking wisdom. And that's what I'm going to talk about today in the Bible verse. And it comes to us from Proverbs chapter 15, verse 22.

And I've used this repeatedly on the show because it is pointed in where it's going. So let's read that verse together. And it says, plans fail for lack of counsel, but with many advisors, they succeed.

They might be saying, Ralph, how does that directly speak to Ginny's situation? And Ginny, here's why I think it does, because the first thing it talks about is the power of breaking free of isolation.

You're tempted to figure this all out on your own after losing your spouse. And that isolation can lead to anxiety and confusion. Ginny, I hear that in what you're writing to me.

That's exactly what you're experiencing right now. So that's the first part of this. It's that power of breaking that isolation.

And Ginny, the other thing I hear you doing is you're moving beyond well meaning advice. Your children love you and they want to help you. I get it.

And if you read this verse again it's telling us this is the good book saying the Lord himself saying to us, seek multiple advisors, not just any advisors, but those who have true wisdom and experience and expertise in this area. It's about finding counsel that combines both professional knowledge and spiritual understanding. And I'm so glad you reached out to me.

It's the whole point of my show. And we're going to talk today about God's pattern for decision making.

And Ginny, one of the most beautiful things you're doing here today is you're recognizing that wise counsel isn't a sign of weakness.

A lot of people think it's weak when you've got to reach out to somebody and ask for help and people are willing to help you, but a lot of people are afraid to take that step. But here's Ralph's truth. I believe that reaching out for assistance and seeking that wise counsel is exactly what God intended.

That's what he wants us to do when we're making important decisions. And let's go back to that verse again. What does that promise us? It promises success when we have many advisors.

And listen, it's a practical pathway for handling major life transitions. And Ginny, that's exactly what I'm going to do today. I'm going to help you navigate this practical pathway.

But before we get started, I want to talk about my gratitude statement today.

And today I'm grateful for the opportunity to serve as a counselor and a guide to help others just like you, Ginny, navigate complex financial decisions with biblical wisdom. So I pray that God will give me the ability to reach Eugenie and to reach other people who are battling the same situation.

So let me tell you about my client, Patrick. And I will never forget that Tuesday morning when he stumbled into my office, him and his wife, Beth. And they were. Beth wife was clutching his arm.

And I looked at the two of them and I said, there is something going on here.

And I had done their taxes from time to time, and they weren't one of these clients that came in every year, but they would come in when there was a complication. And I could tell they had a complication. That's why they'd come in. So they sat down, Patrick and Beth. And I could see that Beth was.

He was very concerned about the situation. And she's the one actually spoke first. She said, Ralph, guess what?

She says, we just received an offer on our home we've been living in for 27 years of $600,000. And I said, well, that's fantastic. And anybody would have said, hey, this is a moment of celebration, right?

But I could tell there was something bigger going on here. And I looked at Beth, I said, what's going on?

And she says, Ralph, we are terrified of losing nearly everything that we put away to pay taxes on this. We've heard that there's taxes when you sell your home.

And it was those raw numbers that kept them awake at night because they had this belief that they were going to have to pay $400,000. They would have to pay taxes, excuse me, on $400,000.

Which they were thinking, well, listen, our tax guy, or when you do our taxes, you always tell us, you know, we owe about 25% in tax. So Ralph, we're expecting a hundred thousand dollars in tax. And I said, okay, let's get into that.

And Patrick said, he said it was almost a whisper and his voice was breaking. And he said to me, Ralph, he said, that hundred thousand dollars, that's our retirement, that's our grandkids college fund. So I knew had work to do.

I had to break this down and explain to them how we could improve upon this situation. Because here's the facts. They purchased this house back in 1996 and they paid $200,000 for it. And yes, they had been offered 600,000.

So if you do the simple math, 600,000, that's the sales price minus 200,000, which is what we call the adjusted basis, means they had a potential profit of $400,000. Like he said, 25% tax bracket doesn't take a rocket scientist. It's $100,000 in tax. But then I said, hey, let's dig a little deeper here.

Someone asks you a question, if you're listening right now, you remember those shoeboxes receipts most people toss away? Well, that hasn't how Beth worked. Now, Beth, his wife, was a meticulous record keeping person. She kept records of everything.

But one of the things I do when I meet with clients that talk about potential capital gains on the sale of their home is we start to build what I'll call a financial history of the house. So they already gave me the first piece of information. They already told me, Ralph, we bought this house back in 1996 and we paid $200,000 for it.

I said, that is fantastic. I said, but here's my next question for you. What improvements have you made to it over those 27 years? And Patrick's like, Ralph, I don't know.

And all of a sudden Beth says, I know the answer to that, Ralph. And again, this is where her meticulous record keeping was their financial salvation. Because here's the deal.

I could take that original purchase price and I can add to it all the improvements that were made over 27 years. So the Beth pulled out her paperwork. She says, Ralph, in 2005, we had a new roof put on that was $15,000.

We also did a kitchen renovation that was $25,000. We did a master bath upgrade that was $10,000. She said, Ralph, so as well as I can figure it, we did $50,000 in improvements.

And I was like, yes, now we're getting somewhere. And that's where this gets exciting. Because their adjusted basis wasn't just that $200,000 purchase price.

It was actually $250,000 when we added those improvements. So now all of a sudden, you know, we weren't starting with a $400,000 capital gain. We were now at a $350,000 capital gain because we added $50,000.

I don't want to bore you with math, but that's what we did. But that wasn't a real game changer.

What I said to them next was the absolute game changer for that situation, because I said to them, they qualified for a married filing joint exclusion of up to a half a million dollars of that profit.

So let's talk about that process works, we'll talk about how it works, and then we'll get back to Patrick and Beth, because I want to share with you how that all turned out. So here's the basic capital gains concepts. So capital gains occurs when selling a home for more than a purchase price. Pretty simple math here.

It's a simple equation of the sales price minus the acquisition or the purchase price. And there's really two types. There's a short term and a long term. Don't get hung up on that. Short term's less than a year.

Long term greater than a year. Now, here's the thing that's important.

In general, short term gains are taxed as ordinary income, and that could be up to whatever the highest tax rate is. For sake of argument, let's say that's 37% right now. Well, long term capital gains are taxed at a lower rate based on your income tax bracket.

So that was the first piece of the puzzle. So even though they were thinking, oh, Ralph, we're going to pay tax of $100,000, I'm going to get to the best part here in a second.

But it would have been long term, so it would not have been at that highest tax rate. But here's the beauty of this situation. A lot of people don't know about this. And that's where they come in to see me. They come see a professional.

There's this thing called a home sale exclusion. So if this is your primary residence, you can exclude from capital gains up to $250,000 in profit.

Now you think about it, Ralph, that doesn't help Patrick and Beth, but it did. Here's why. Because for married couples, that jumps to $500,000.

So even as they came in the door before we even talked about those improvements, I was able to say to them, you're going to pay zero capital gains because your capital gain is only $400,000. Now, we made it 350 after we did the improvements. So they paid nothing.

Now, this was a policy that was established back in 1997 as part of the Tax Fair Relief Act. And the reason that they put that into place was, was to really give people the opportunity to not pay taxes on what is most people's biggest asset.

And that's their home. Now the problem is what we're seeing right now is home prices are rising and that might push more sellers over the exclusion limits.

Now let's talk about how you qualify for that exclusion. So here's the deal. You must own the home for two plus years within the past five years.

So you look at a five year period, you had to have owned that home for at least two or more years and it had to have been your primary residence for two or more years within those past five years. Now look, the ownership years don't need to be consecutive and residency years generally must be consecutive.

So the ownership doesn't have to be consecutive, but the residency must be consecutive. So here's, here's the deal. Change the scenario around a little bit.

So let's say in that situation that they sold the house for $800,000 and their basis was $200,000. Then they would have a $600,000 capital gain. Now you might say, oh, that stinks. Now they're going to pay tax on 600,000.

You would be wrong because you still get the benefit of exclusion. So even if their situation had been different and they had a $600,000 capital gain, they would still only pay tax on 100,000.

That's that 600 minus the 500. And again, because it's, they've owned the home for more than a year, which they have to up, they'll qualify for this.

Then they're going to pay a much lower long term Capital gains tax. Now, there are some special circumstances.

There's partial exclusions available if you have a job relocation or if you have a health related move, or maybe you've had some unforeseen circumstances like a disaster or a divorce. I've handled this with clients who have been through both of those things.

And as we talked about the home improvements, those records that Beth kept just absolutely helped the situation. So if you don't listen to anything else I'm saying today, keep track of those improvements.

And there's also some investment property considerations I'm not going to get into. There's also a thing called a 1031 exchange.

Well, that is really not relevant to a primary residence, but that's where you can do what's called a 1031 exchange, allows you to invest in a similar property and not pay capital gains tax. And that's something that a lot of real estate investors do. And maybe I'll do a show about that. Now, that's the federal side of this.

But here's the thing you need to understand. There could still be state level capital gains taxes. And those rates and rules, you know, vary by the states.

Now in some states, they will actually withhold when you go to settlement. The settlement attorney will actually have a mandate from the state to withhold those taxes.

So if you find yourself in that situation, make sure you file a tax return in that state. I see this a lot of times with clients who have vacation homes.

Let's say they live in Delaware, where I'm at here, and they have a vacation home in Ocean City, Maryland, not that far from us. A lot of clients do that. And then when they sell that vacation home, it's not a first time home exclusion.

I'm blurring the lines here a little bit, but let's just say they have a sale in another state. Well, those states have gotten wise and they start collecting that tax at the time of the sale.

So if you find yourself in that situation, make sure you work with a tax professional to get that tax return file. Because a lot of times there won't be any capital gain tax at all or it'll be a lot less.

Well, let me get back to that story of Patrick and Beth because I really want to talk about the impact of this. So they're sitting there, we went through this calculation and when I said to them, here's my final numbers. Sales price $600,000.

Adjusted basis $250,000. Capital gains 350. And guess what? Drum roll please. You owe nothing.

And let me Just tell you, Patrick literally fell back in his chair when I showed him this information. And that was amazing. He said, Ralph, you don't understand the relief you're giving us today. It was huge for them.

Well, our discussion didn't just end there because now, remember, they're at the beginning of this process. They're just starting out. How do I navigate this?

So we figured out there's no capital gains tax, but then we started getting into a discussion about some of the things that they can negotiate as part of the selling process. Like those surprise pre listing home staging expenses when your realtor says, ah, you guys have a lot of clutter in your house. Why don't we do this?

Why don't we stage the home? We're going to move some stuff off site, we're going to take down things, we're going to paint walls. You can negotiate those things.

Or buying closing credits. A lot of people don't know about those. And they catch sellers off guard. So we were able to talk about everything.

They actually did a conference call with me and their realtor and I was able to help them navigate so there weren't any more financial surprises to keep them up at night.

You know, if they're going to get this money from selling this house that they had for 27 years, I wanted to help them make sure they could maximize what they were going to get from that. And that's important. And that money they thought they'd lose, the taxes. This is the best part of the whole thing.

It's now funding their retirement dreams. And it's also, like Patrick said, it's helping build their grandchildren's education fund.

But bigger than that, the big takeaway from this, it's giving them peace of mind. So you might be asking, Rob, what are the lessons that we learned here? And these apply to not just homes. But listen, here's number one thing.

Never assume the worst without consulting an expert. Ginny, like we talked about the beginning, find those wise counselors. Don't just rely on what you read online or what your kids tell you.

I'm not picking on your kids. I think they had good intentions. But never assume the worst until you understand and talk to an expert.

Another thing, and Beth was the golden, you know, person that did this. Keep those improvement receipts, they're worth their weight in gold.

Make sure you maintain what I call like that, that financial history of your home and keep those receipts.

Because here's the deal, like a lot of times a client will come in and we'll be going through this and they'll say, Ralph, you know, I think we put a deck on. And that was around 10,000. And we did renovate the kitchen, and that was around 8,000. And then we did this. And I said, okay, well, it's fine.

Well, do you have any receipts? Well, Ralph, that was years ago. Yeah, here's the problem. Now, we can take those to increase that basis.

But like I tell them, if you're the unlucky winner of audit lottery, the IRS may disallow those.

Now, you may be able to prove it because you've got pictures, like I've had clients that have done pictures where they can show, well, here's what the kitchen like, like before, here's what it looked like after. And then they look at what's a reasonable amount. The IRS will give you some reasonability on it.

But the other big lesson is you got to understand the tax advantages that you may have or the tax cost.

Before you make any major decision, make sure you reach out and find those counselors and see Patrick and Beth's story reminds us of what seems like a financial nightmare. That's what they thought it was. They came in here like they were going to a funeral.

But that story reminded us that that nightmare can transform itself into a blessing. When you have the right guidance and you surround yourself with the right people and you understand the situation and listen.

It truly was a journey from paddock to peace for them. And it showcases why proper planning and professional counsel aren't just good ideas. Yes, they're good ideas, but they're not just good ideas.

They're essential for protecting your financial future. Now, if you want to get deeper into today's discussion, I write a blog post every day with the show. You can get that at askralphpodcast.com/blog.

That's where I go a little deeper and talk more about some particular instances that you can look in. There's a bunch of resources out there. Now, maybe you find yourself in the same position. You're selling your home.

Maybe you're thinking about selling your home. Don't let capital gains tax take your hard earned profits.

Because did you know a simple mistake in calculating capital gains could cost you thousands in unnecessary taxes?

Think about if you didn't have those receipts, if you didn't have somebody to guide you through this process, you would have just put it on your tax return and assumed you owed the worst. Assume the worst, because here's the deal.

As your home's value has increased over the years, so have the tax implications of selling it But I hope you hear this. There's good news. With proper planning, you could potentially save tens of thousand dollars of taxes.

And listen, I know because I deal with this every day. There are many homeowners just like you, Ginny, who are lying awake at night wondering, will I owe 15, 20% or even more in capital gains tax?

Can I still claim that $250,000 or $500,000 married tax exemption? What improvements can I include in my home's cost basis? How do I document everything to satisfy the IRS? Should I sell now or wait until next year?

Those are all the questions that people are asking. And listen, don't risk making costly mistakes because here's the truth.

Every year, homeowners overpay on capital gains tax because they, number one, they miss crucial deductions. They incorrectly calculate their cost basis. That's the big one. They fail to document improvement expenses.

They don't understand the primary residence rules, and they miss timing opportunities for tax advantages. So what am I asking you to do? Let me help you keep more of your home's profits.

Because as your financial evangelist, I'm going to be able to help you calculate your exact capital gains exposure. We're going to put it in writing. We're going to do just like I did with Patrick and Beth.

We're going to identify all the eligible deductions and exemptions. We're going to review those home improvements because those increase your cost basis. We'll talk about timing strategies to minimize tax impact.

If you're going to have one, I'm going to give you clear documentation for tax reporting. And best of all, I'm going to create a customized plan to maximize your after tax profits. Here's what I provide.

I provide real results for homeowners. Just listen to this. This one, one of my clients said this.

She said Ralph helped us identify over $45,000 in home improvements we could add to our cost basis. That saved us nearly $9,000 in capital gains tax. That's the Johnson's. So be like the Johnsons. Don't leave money on the table.

Your home is likely your biggest investment. I talked about that a few minutes ago. Doesn't it make Sense to spend 60 minutes with an expert to potentially save thousands in taxes?

Because here's the deal. The best time to plan for capital gains tax is before you list your home so you know what you're dealing with.

Once you've signed a sales contract, many tax saving opportunities are gone forever. So take control over your home sale today. Visit askralph.com when you get there, click on that button at the top says book a call with Ralph.

And don't let uncertainty paralyze you like it did Patrick and Beth. Don't let that uncertainty about capital gains tax hold you back from your next chapter. Yes, it's both Ginny and I feel you saying this.

It's a financial and it's an emotional situation. But if you work with me, together we'll create a clear strategy, protect your home's equity and and maximize your profits.

So book that consultation now. Your future self will thank you.

And again, you do that at askralph.com well, let's get to our reflection questions because we've got a lot that we handle today. Number one reflection question. I always like to end the show with these and this is my tribute to Beth.

Number one question, have you kept records of all major improvements to your home? If you're not, if you haven't done it so far, start doing it now.

Go back and try to recreate what you can recreate because chances are at some point you're probably going to sell that home. Number two, do you understand the difference between repairs and improvements for tax purpose?

I'm not going to talk about that today, but you really do need to understand that. And number three, are you planning ahead for potential home sales in your future?

Most of us are going to have that situation unless we're in the home we plan to die in. You're probably going to sell that house at one point.

So maybe it makes sense to book a consultation with me and let's talk about how to prepare for that. Well, you know, I always like to give you action steps.

I'm going to give you four critical action steps you should take right now to protect your financial future when selling your home. Ginny, here is what you need to consider. Number one, talked about this a couple times. Create your home's financial story.

Start gathering every receipt and document related to your home. The initial purchase contract, if you can find that settlement sheet. I know it's 20 some years ago, but see if you can find it.

Find those receipts for that new water heater you installed last summer, that H Vac. Why? Because just like I talked about with Patrick and Beth, those improvements boost your adjusted basis and could save you thousands in taxes.

Second thing, review your tax qualifications. Check to see if you meet the ownership and use test for capital gains exclusion. Have you lived in your home for at least two of the last five years?

Because, see, look, knowing these rules before you sell can mean the difference between owing Nothing and, and owing thousands because maybe you're in a situation where, you know what, Ralph? We really want to sell, but if we wait another six months, we'll have met that two year period. Well, that's huge.

But you have to understand the tax qualifications in order to get there. Number three thing, a lot of people don't think about this.

You got to plan your investment strategy because once you sell, you're going to need to understand where to put those proceeds.

Now maybe you're going to buy another home or downsize, but this is the time to start thinking about those tax efficient strategies for those proceeds. You know, maybe you allocate these between taxable and tax advantaged funds because this isn't just about today.

Ginny, I hear you loud and clear with this because you've said it. Patrick and Beth said the same thing. It's about building long term financial security while minimizing future tax burdens.

That's what we're really talking about here. And number four, last piece of action today. Build your advisor team.

Build what you I call the dream team because remember that powerful verse from Proverbs about many advisors. Put it in the practice, connect with qualified professionals, financial advisors who both understand the technical aspects and your values.

Because again, this is not a journey you should walk alone. Because in the end, this is the truth. These steps aren't just about protecting your wealth. That's part of it.

But they're truly about being a good steward of the resources God has blessed you with. Now tomorrow's show I'm going to discuss another important topic and that's how to teach your children about biblical money principles.

Little spoiler alert, I'm going to let you know how I feel. Like in this country we do a horrible job of teaching our kids biblical money principles in this materialistic society.

So tomorrow I'm going to break it down for you what you can do. So I'm going to encourage you to check it out.

If you know somebody that's got children, I don't care what age they are, they're thinking about having children. Tomorrow's episode is going to be one that's going to help get them set up, moving in the right direction.

So as I close today, remember this, my passion is to help you achieve financial success. I want to see you live out your dreams and I want to see you grow in your faith.

And I know together, working together as I did with Patrick and Beth and Ginny, I encourage you to reach out to me as well. We can master your finances from a Christian perspective. So as always on this show, stay financially savvy out there and God bless you.

Surround yourself with many advisors.

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