Uncle Sam will try to take your money at every opportunity.
Enter Capital Gains tax (15%) on your house.
Each person gets a $250,000 exemption every 2 years.
The one-time big chunk law went away in the 90s.
Let’s say that in CA you bought a big house for $100,000 waay back in the day (humor me to make the math easy).
Now it’s worth $900,000 #because CArealestate.
But now you want to sell and downsize to a tiny house valued at $100,000.
If you did this in a single transaction:
Market value- orig cost basis:
$800,000 free and clear, right?!
Tax exemption 2 people $500,000
You LOVE the Tiny House Movement, so you buy that tiny house for $100,000
$300,000-$100,000(new tiny house)
Tax 15% on $200,000=$30,000
Ouch! $30,000 goes to the govt- known for its ability to handle money so well.
The better bet?
Stage your downsizing every 2 years.
That’s when you can get the $500,000 exemption again as a couple.
In this case:
Sell the $900,000 home
Subtract the cost basis of $100,000
Subtract the exemption for 2
That leaves $300,000 to buy real estate.
Maybe you buy a condo in Bakersfield or move out of state entirely.
Then, in 2 years, you can easily “go tiny” if you want, though it’s not proven that tiny properties hold their value.
And now you know 🙂