Tax Help: Selling a Home

This is one in a series of tax questions from readers answered by local members of the California Society of Certified Public Accountants, to help with your 1999 and 2000 tax issues. Q: We currently own a home that has an adjacent, separately deeded lot. My husband, who is 65, will probably retire in two to three years and we are contemplating selling these properties, as values are rising.

We expect to double the price we paid for the home, but the profit will stay within the tax-free capital gains limitations for a married couple. Does the gain from the sale of the house remain tax free for the remainder of our lives even if we put it in a bank account or some type of fund? How does this get tracked and what type of income fund could be set up with the money for his retirement that would continue the tax-free status? Also, if my husband is collecting Social Security benefits the year of the sale of the house, does any portion of the gains count as “income” toward the year’s allowed limit?

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A: You and your husband may exclude the first $500,000 ($250,000 for a single individual) of profit from the sale of a primary personal residence if you have lived there for two of the last five years. The gain from the sale of the home will not affect how much your husband is entitled to receive as Social Security. Whether the lot next to your primary personal residence can qualify for your exclusion depends on its size and whether it was used as part of your primary personal residence. It may be worth consulting with a CPA for further details. Once you receive the home sale proceeds, any interest or returns from the money could be taxable, depending on the type of investment vehicle you choose. Interest from certificates of deposit, for example, would be taxed at your ordinary income rates. For tax-free returns, you could consider investing in your state’s municipal bonds or a tax-free money market fund. Tax-free options may not always be the best, however. If your tax bracket is low, you may be better off in a higher-earning investment--a taxable money market fund that pays a higher return than its tax-free counterpart, for example. Also, for 1999 a married couple, each older than 65, could have as much as $14,400 in income subject to tax and still not have any federal income tax due; a tax-free investment would not make much sense for a couple that would not owe tax anyway.

--James Counts II, CPA, Hemet, CA

Questions and answers will also be posted on The Times’ Web site at https://www.latimes.com/taxes.