My wife and I have to sell our 40 year old “starter house” because we can’t manage the stairs. When is the right time to buy a new one?

My wife and I have lived in our “first home” for over 40 years. We are now at the point that we will soon need a house with minimal stairs.

I understand that as co-registrants, a portion of the profits from the sale of our home will be tax exempt. I’ve also heard that there is a separate rule about buying a new house, within two years of selling, which could also save tax.

We were told that using an offer on a new home with a contingency regarding the sale of our current home would result in any offer being rejected. For a number of reasons, what we would probably do would be to buy a new home before even offering our current home for sale.

What are the rules for this type of transaction? How best to proceed with this kind of big move?

Any opinions will be welcome. Thank you.

Confused in Illinois

“The Big Move” is a MarketWatch column examining the ins and outs of real estate, from navigating the hunt for a new home to applying for a mortgage.

Do you have a question about buying or selling a home? Do you want to know where your next move should be? Email Jacob Passy at [email protected]

Dear confused,

I’m sure the prospect of moving after living in the same house for decades is daunting – and a competitive real estate market like the one we find ourselves in today makes it that much harder.

But I think you should both congratulate yourself on being proactive, rather than waiting until you’re much less mobile to make such a big change. It is always better to act from a place of strength rather than desperation in such important financial transactions as buying or selling a home.

I want to quickly answer your questions about taxes before discussing how you might consider buying and selling a home simultaneously (or in quick succession).

As joint filers, up to $500,000 of capital gains on the sale of your home will be exempt. That’s because it’s your primary residence — if it wasn’t your primary residence, it would be treated differently for tax purposes.

To calculate your potential capital gain, you need to take the sale price of the house and subtract the original price you paid (also called cost base). According to the IRS, there are other costs you can deduct, including certain closing costs related to the sale of the home or the cost of improvements to the home, such as adding a bedroom or living room. swimming pool. Of course, you will need to retrieve your receipts for these expenses as proof of what you paid.

What’s left after these expenses and the cost base is your capital gain – if it’s over $500,000, you’ll pay taxes on it. The amount you pay in taxes will depend on your income.

The second approach to avoiding or reducing capital gains tax that you described is called a Section 1031 exchange, which applies to investment property. As this is your primary residence, you will not be able to take advantage of this tax workaround unless you convert the house into an investment property.

As to how to buy a new home and sell your current home, this is indeed a major challenge that many buyers face. In today’s market where there is a severe shortage of homes for sale, many potential sellers have chosen to stay put due to the difficulty they expect to find a new home to buy.

The contingency advice you received was fair on the money. Bill Gassett, owner of the real estate marketing website Maximum Real Estate Exposure, likened adding a possible home sale to any offer to the “kiss of death” in a market where most listings attract wars of ‘auction.

“The realtor would probably throw it in the pile of deals not worth considering,” said Gassett, who also works as a realtor at Re/Max Executive Realty in Hopkinton, Mass.

But like Gassett and other financial experts I’ve heard of, you don’t have to worry about selling your home. Although rising mortgage rates may reduce demand somewhat, this is still a seller’s market.

“You can quite easily rent out the house you live in for 30 to 60 days.”

— Matthew Aaron Benson, owner of Sonmore Financial

So while you’re at the whim of other sellers as a home buyer, you’re in control when it comes to the home you already own. This gives you great flexibility, which might even help you make better offers for other houses.

“You can pretty easily rent out the house you live in for 30 to 60 days,” said Matthew Aaron Benson, owner of Sonmore Financial, an Arizona-based financial advisory firm. As Benson noted, this will help you avoid needing a bridge loan between the two properties, allow you to maximize the down payment you pay for your new home, or even allow you to make a coveted offer. cash. Plus, it would give you more time to take care of moving your belongings between houses.

You can also tap into other sources of savings, like borrowing from a non-IRA or non-401(k) investment portfolio, to make a down payment if you don’t want to sell right away, then replenish those funds with the money. money you make from the sale of your home. Indeed, if money is no object, buying your new home first could make your move less stressful. It would also give you time to bring your current home into a more salable condition.

At the same time, if you’re buying your next home before selling your current home, you have to be careful not to get carried away. Sometimes people make the mistake of overestimating how much they will earn from selling their home, which can leave them with more debt than they ultimately wanted. Consult a financial adviser to get an idea of ​​how much home you can afford as a starting point, then be sure to cast as wide a net as possible to increase your chances of closing a deal.

It’s certainly a tough market right now, but taking this kind of measured approach will ensure that your next home will be a source of comfort in your golden years – not another headache.

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