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:
$900,000-$100,000=$800,000

$800,000 free and clear, right?!

NO

Tax exemption 2 people $500,000

$800,000-$500,000=$300,000

You LOVE the Tiny House Movement, so you buy that tiny house for $100,000

$300,000-$100,000(new tiny house)
=$200,000

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.

Why?

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
$800,000
Subtract the exemption for 2
-$500,000
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 🙂