Dear Liz: We are in our 70s and have owned a home in the San Francisco Bay Area for 30 years, so as you might imagine we have a sizable capital gains issue. We are starting to think about a “next step.” While I understand we would have a $500,000 exclusion and can “back out” any improvements, we would still be looking at a pretty hefty number.
We’ve had some people tell us that we would be able to take advantage of a one-time exclusion for the whole gain, but I certainly haven’t been able to find anything about this. I know if we purchase another home in California, we can keep our existing property tax basis, but in the scheme of things, that’s not a major benefit.
Any idea what these folks might be talking about?
Answer: They’re talking about an option that disappeared not long after you purchased your home. Some people are under the illusion that the old tax break still exists, because versions of this question seem to hit my inbox at least once a year.
Before Congress changed the law in 1997, homeowners could defer taxes on home sales by purchasing another house of equal or greater value. Those 55 and older could take a one-time exemption of $125,000.
That was replaced by rules allowing homeowners to exempt up to $250,000 each (or $500,000 for a married couple), limits that haven’t been updated since.
When the law was passed, few home sellers had enough capital gains to worry about exceeding the exemptions. Consider that the median home sale price in the Bay Area was just under $300,000 in 1997. Last year, the median was about $1.2 million.
A sizable capital gain doesn’t just deliver a painful tax bill. Your Medicare premiums may also temporarily increase, thanks to IRMAA, the income-related monthly adjustment amounts.
One more thing: please don’t dismiss the value of California’s Proposition 19, which allows homeowners aged 55 and over to transfer their property tax basis to a new home.
Your property tax bill is dramatically lower than what you’d pay if you were buying into your neighborhood today. That’s thanks to California’s earlier Proposition 13, which limits annual property tax increases.
A home purchased for $300,000 30 years ago probably has an annual property tax bill today of around $7,000. That same house, if purchased now for $1.2 million, would generate a tax bill of around $15,000.
Your ability to transfer your tax basis means you can save thousands of dollars annually for the rest of your life. That would be a huge benefit in most people’s scheme of things.
Dear Liz: Just moving your holdings from one broker to another should not trigger any capital gains implications if you journal over your stocks, bonds and mutual fund holdings without liquidating anything. Right?
Answer: Right, unless you’ve been sold a proprietary investment that can’t be moved to a competitor. Some brokerages create their own funds that have to be liquidated before the money can be transferred.
Dear Liz: I read in a recent column that you mentioned qualified longevity annuity contracts (QLAC). I have heard about them before but don’t know the pros and cons about them. Is that something that you could write about in a future column?
Answer: QLACs are complicated enough to be beyond the scope of this column, but you can read an excellent summary by Morningstar’s Christine Benz at https://www.morningstar.com/personal-finance/can-qualified-longevity-annuity-contract-aid-your-retirement-plan.
QLACs are deferred, fixed-income annuities that pay out guaranteed income once you’ve reached a certain age (up to age 85). You can buy them with IRA money, up to a certain lifetime limit ($210,000 per individual in 2026). The amount you put into the annuity is excluded from required minimum distribution calculations until payouts begin.
Guaranteed income and reduced RMDs are definite “pros,” but buying one of these annuities is typically an irrevocable decision — you can’t get your money back if you need it for something else. Fixed-income annuities are also vulnerable to inflation, and it’s important to find a strong insurer, since you’re essentially buying a promise of future payments. Ideally, you’d hire a fiduciary, fee-only advisor to review the contract and your situation to make sure it’s a good fit before you buy.
Liz Weston, Certified Financial Planner, is a personal finance columnist. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.
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