Attorney & Mediator
Attorney & Mediator

Real Estate – Downsizing and Taxes


Real Estate – Downsizing and taxes.

In the ordinary course of our lives, we purchase homes, outgrow them and move into bigger, more expensive dwellings.  Since the new home is usually more expensive than the one that we sold, there is no problem for us with a capital gain on the sale of the home.

What happens when we downsize?  When many of us approach retirement, with the kids gone, we don’t need or want all of that square footage.  The new home or condominium that we purchase might be less expensive than the house that we are selling.  Will we owe capital gains?

It will depend on how long you owned the home and how much profit you made.  For a single person, if you owned and lived in the home for at least two of the last five years, and if the profit is less than $250,000, then you will not owe any capital gain.

For a couple filing a joint return, the tax free amount will double to $500,000.  You will still have to have owned and resided in the home for the last two of five years.

The two years is a cumulative amount, does not need to be concurrent, nor does it need to be the last two years preceding the sale.  It only has to have been your principal residence for two years within the last five years prior to sale.

Also, unlike the law in the past required, this is not a one- time only exclusion.  You may use this exclusion multiple times, provided that you have owned and lived in the home for at least two years.  Therefore, you could be eligible to do this every two years.

This exclusion is enhanced for members of the military who serve “qualified official extended duty”.  In such a case, the five year period of time is extended to ten; therefore, two years of living in the home within the prior ten years.

This is good news for people who want to downsize their housing and not have to share their savings with the IRS.