A Tax Rule from 1997 Could Cost a Retiree $90K on Home Sale
A 74-year-old widow who bought her home in 1988 for $140,000 is facing an unexpected tax bill of around $90,000 after planning to sell it for about $750,000. The issue stems from a U.S. tax rule established in the Taxpayer Relief Act of 1997 that allows single filers to exclude up to $250,000 in gains on home sales—without adjusting this threshold for inflation over nearly three decades. The exclusion limit has remained unchanged despite significant increases in housing prices and appreciation. The S&P CoreLogic Case-Shiller index shows a long-term rise in U.S. home values, meaning many homeowners who bought before 2000 now face taxable gains far exceeding the $250,000 cap. Gains beyond this amount are taxed at rates including up to 15% for capital gains and an additional 3.8% net investment income tax. The article highlights how documenting past home improvements—such as roof replacements or kitchen remodels—can increase the cost basis of a property, thereby reducing taxable gain. A $60,000 in documented improvements could save over $10,000 in taxes at current rates.
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Topics: federal_taxes inflation real_estate retirement_planning