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Let's say that the value of your house has increased by more than the amount of the capital gains exclusion ($500k for married and $250k for single), and you otherwise meet all the criteria to exclude the capital gains.

In this situation, does it make sense to sell your house and buy a new one so that you can continue to exclude capital gains on your new house? I realize there are significant transaction costs in selling your home, but would the tax advantage ever outweigh the transaction costs?

To simplify the question, let's assume that I want to minimize taxes in my lifetime, and that the house won't be inherited by anyone.

EDIT: Let me add that I don't plan to stay in the house until I die. I'll sell the house at some point so should I should I sell now and buy a new house to reduce capital gains taxes?

JTP's comment is on point: "It seemed to me that OP was asking if there's a breakeven point to be aware of, regarding selling each time the $500K gain is reached."

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    I'm afraid I don't understand the question. You don't pay capital gains tax on your house until you sell it, so if your goal is to minimize taxes in your lifetime, simply don't sell it. Just stay in the house until you die. Do you have other unstated goals, like wanting a new house? – Charles E. Grant Jan 1 at 23:18
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Let's make some simplifying assumptions.

  1. House prices appreciate uniformly. That is, we don't need to model whether the house you'd buy next appreciates faster or slower than the one you're thinking of selling.

  2. For this exercise, call the capital gains exclusion amount $E and your resulting tax benefit $B. You can use the $500k figure or $250k figure or any other figure that suits your situation.

  3. Call the transaction costs $C. This includes agents' fees etc from both ends of owning a property - fees and so on for when you bought it, plus fees and so on for when you eventually sell it. Assume that $C is a fixed price regardless of the price of the property (unlikely, I know, but these are all simplifying assumptions to help us get a handle on things).

Scenario 1: serial purchase - that is, buy at $X, sell at $X+$E, buy another house at $X+$E and sell at $X+$2E. Gross capital gain is $2E. You get 2 lots of tax benefits (+$2B) and lose 2 lots of transaction costs (-$2C).

Scenario 2: single purchase - that is, buy at $X, sell at $X+$2E. Gross capital gain is still $2E, but now you get 1 lot of tax benefits (+$B) and lose 1 lot of transaction costs (-$C).

So the maths says that the difference is (2B-2C) - (B-C) = $B-$C. That is, if your transactions costs are lower than the tax benefit you get from the capital gains exclusion, then you're better off changing as soon as your capital gains hits the threshold. Otherwise, hold off for as long as you can.

We can extend the scenarios to higher capital gains ($3E or $4E etc, instead of $2E), and the basic premise still holds: you're still better off with multiple trades so long as the tax benefit is greater than the transaction costs.

The rationale is that since you're 'earning' more than the 'cost of trade', maximising inventory 'turnover' makes sense. At some point, though, realistic transaction costs will likely exceed your tax benefit.

Suppose your capital gains are taxed at 20%. Then a $500k gain would equate to a $100k tax. Or putting it the other way, the $500k capital gain exclusion could be considered a $100k tax benefit. Assuming a 6% transaction cost (inclusive of both buy and sell, which you'll need to do anyway), transaction costs exceed $100k at about $1.7M, which isn't very many rounds of buying and selling. If you have other costs each time (stamp duty etc), that just makes it worse.

So to answer your question - the maths says that you can benefit from the capital gains exclusion up to a point.

Disclaimer: the above is not to be construed as financial advice, especially since many factors have been ignored. Please consult appropriate legal and financial professionals before committing to any course of action on the basis of the above.

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In this situation, does it make sense to sell your house and buy a new one so that you can continue to exclude capital gains on your new house?

The best, simplest and most obvious way to minimize CG taxes is to stay in your home.

That way you pay zero taxes.

When you die, the house becomes part of your estate (even if no one inherits the house), which has an $11M/$22M exclusion, which means that your estate pays zero taxes.

Is there something prompting this (like wanting to downsize) that you didn't mention in your question?

  • Respectfully, you ignored the OP third paragraph. No, I didn’t DV, because you wrote what I thought, mostly. – JTP - Apologise to Monica Jan 2 at 0:45
  • @JTP I am baffled by your comment "ignored the 3rd paragraph". – ab2 MonicaNotForgotten Jan 2 at 1:29
  • OP wrote ‘assume the house won’t be inherited’, and Ron’s (good) advice was to keep it until death, for stepped up basis. – JTP - Apologise to Monica Jan 2 at 1:35
  • @JTP-ApologisetoMonica the estate is going to get the house, and -- unless OP is very wealthy, the estate won't have to pay taxes, no matter what happens to the house. – RonJohn Jan 2 at 1:38
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    Yes. 100% correct. It seemed to me that OP was asking if there's a breakeven point to be aware of, regarding selling each time the $500K gain is reached. We are on the same page, but neither of us addressed his actual question. I thought along the lines of 6% on a million dollar home is $60K and a move to start the clock again, so a 12% cost on that $500K (gain). But my thought wasn't fleshed out enough to post an answer. Dying is the best strategy. Really. – JTP - Apologise to Monica Jan 2 at 2:07
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It seemed to me that OP was asking if there's a breakeven point to be aware of, regarding selling each time the $500K gain is reached.

It all depends on the sale price of your house and the purchase price of your new home, since you pay half the 6% commission on selling your home, and half the 6% commission on purchasing your new home (which is an expense you need to add into the calculation). Unless of course you sell-by-owner, and then buy directly from an owner.

Plus the cost of sprucing it up for sale, moving to the new house and decorating/fixing up the new house.

Only you can develop a spreadsheet which takes those things into account.

  • Ok, a +1 from me. If only for the sage advice of 'spreadsheet'. That's the answer to many questions here, when there's too much guessing (the variables involved). – JTP - Apologise to Monica Jan 2 at 9:45

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