In this Episode of the Secure Your Retirement Podcast, Radon and Murs discuss the often-confusing world of taxes on sale of home and how different tax rules apply when selling your home versus selling rental property investments. Joined by Director of Financial Planning and Tax Strategist Taylor Wolverton, the conversation breaks down capital gains tax explained in a simple and practical way so retirees and pre-retirees can better understand how home sale taxes may impact their financial future. Whether you are downsizing, relocating, or considering selling rental property as part of your retirement planning strategy, this episode highlights the importance of understanding real estate taxes before making a major financial move.

Listen in to learn about home sale exclusion rules, depreciation recapture, capital improvements, and how Tax on home sale calculations can dramatically affect your retirement income and long-term financial security. Taylor explains how proper tax planning retirement strategies can help reduce unnecessary taxes and support your goals for retiring comfortably and helping to secure your retirement. If you are focused on financial planning for retirement, creating a retirement checklist, or trying to plan for retirement with confidence, this episode offers valuable insights into Retirement Planning and planning retirement around real estate decisions.

In this episode, find out:

• How the IRS determines whether a property qualifies for the home sale exclusion
• The difference between home sale taxes for a primary residence versus Rental property taxes
• Why Capital improvements can help reduce your Capital gains tax when selling your home
• How Depreciation recapture works when selling rental property
• Important Retirement tax planning strategies to consider before selling real estate in Retirement

Tweetable Quotes:

“The IRS allows married couples filing jointly to exclude up to $500,000 of gain when selling a primary home if they meet the ownership and use tests.” — Radon Stancil

“Depreciation on rental property is a tremendous tax benefit while you own the property, but many people forget about depreciation recapture when they sell.” — Taylor Wolverton

Resources:

If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!

To access the course, simply visit POMWealth.net/podcast.

Here’s the full transcript:

Welcome, everyone, to Secure Your Retirement Podcast. And we are excited, as we’ve had now for the last 

couple weeks, had Taylor Wolverton on our podcast. So I’ll say welcome back for the third time in a 

row, Taylor. Thank you. We’re talking a lot about taxes here in a few episodes. 

And what I know is that in my conversations with people, people realize that taxes and how it 

affects them. And those different aspects of life can be one of the most expensive parts of their 

retirement plan. So, we are tackling some big topics right now. But what we wanted to talk about 

today that you put together some ideas on, because we have this happen very regularly in our practice, which is somebody sells a home. Now, there’s two different types of scenarios that we’re 

going to talk about. One of those is somebody sells a primary home, and then the other one is going 

to be somebody sells a… rental property, very different. And there are some benefits of having a 

home that’s my primary home. And we’re going to kind of walk through those scenarios. So again, a 

person could be selling their primary home and moving into another home. They could be downsizing. 

They could be about multiple scenarios that could come about. But let’s talk about this idea of 

selling their primary home. And if you don’t mind, just make sure that we understand when we say 

primary, like what that even means just so everybody’s real clear in their head yes okay let’s say 

that first so your primary home is there’s kind of two tests that the IRS lays out obviously you 

have to be the owner of the home and you have to have used this as your main residence for at least 

two of the last five years prior to when you sell it So that’s kind of how the IRS defines primary 

home. You’re living in it. You own it. You’ve been there for at least two years. 

It doesn’t even have to be consecutive years. But from the last five years total of two years of 

living in it, there you go. Now it’s your primary home. All right. Excellent. So now, just so 

people can understand, because sometimes, you know, people are used to what we would call a capital 

gain. And a capital gain, for reference, is somebody owns a property or they own a stock or 

something like that for at least one year. And people think, oh, it’s a long-term capital gain. 

But let’s talk about this in the context of a primary home. And maybe if you could kind of walk us 

through an example so we could maybe talk about how the gain on that home gets valued and or, 

let’s say, counted toward me for tax purposes. Yeah, so if we use an example, let’s say… 

are selling your primary home, which you originally bought for $300,000. 

Upon sale, let’s say you’re closing costs are $30,000. Closing costs also are part of the 

calculation when determining how much of your taxable or how much of your gain you will pay tax on. 

So that is an important note there. Another element is… 

improvements that you’ve made to your primary home as you have lived in it over time we refer to 

those as capital improvements we can talk a little bit more in detail a bit later of what qualifies 

as a capital improvement some examples there but let’s say you put in seventy thousand dollars of 

capital improvements that during the time that you’ve lived in the home and now you’re going to 

sell the home for one million dollars so you originally bought it for three hundred thousand let’s 

say 30 years have passed now you’re selling it for a million dollars, so you’ve definitely lived 

there you’ve met the tests for it being your primary home and now the question is how much tax am I 

going to have to pay on this sale obviously there’s been significant appreciation over the 30 years 

that you’ve owned and lived in the home so that’s kind of what we want to dive into and talk about 

in more detail All right, excellent. So, at this point, if I had, let’s say, 

the same thing with, let’s say, a stock or something like that, I’m going to owe tax on all of the 

gain off of that original investment of the $300,000. Now I’ll sell it for a million, 

so now I owe tax on the $700,000. So, what’s different here, and what does the IRS code provide for 

us when it comes to this primary home? Yeah, so the benefit when it comes to your… home. 

These rules are specific and unique to the primary home. The IRS allows you to exclude a certain 

amount of the gain upon the sale of your home. The amount depends on your filing status. 

So, if you’re filing single, your exclusion is $250,000. 

And if you’re married filing jointly, your exclusion is $500,000. 

So, in our example, if you go back to the original purchase was $300,000, 

the closing costs and the capital improvements get added to our original purchase price to be 

what’s called the basis. So, $300,000 plus $30,000 in closing costs and $70,000 in capital 

improvements. That’s $100,000 more. So, our adjusted basis, the starting point is going to be $400,000. thousand dollars now if we go back to the sale of a million dollars minus our adjusted basis 

of four hundred thousand dollars we’re talking about a six-hundred-thousand-dollar capital gain the 

exclusion let’s say in this example you’re married filing jointly so we’re going to use five 

hundred thousand dollars as the exclusion five hundred thousand dollars of the capital gain is 

completely tax-free to you So our $600,000 gain minus our $500,000 exclusion leaves $100,000. 

That is going to be a taxable capital gain. $100,000 is what will show up on your tax return and 

that you will pay tax on according to the capital gains rates that apply to you. All right. 

So that sounds like a pretty good deal. Now, sometimes I’m – and we’re just going to – 

just on this point, is there any requirement that I go buy another house with that money? in order 

to get that exclusion no the exclusion is free and clear just by selling the home and having it be 

your primary home and having that tax filing status those are really the only qualifications you 

there are no requirements as far as what you go do with the proceeds or anything like that at all 

to qualify all right so very nice benefit so let’s talk about a couple different uh scenarios here 

There is a thing where we could have a partial exclusion. Could you kind of give us a reason why we 

might have a partial exclusion? Yeah, so there may be some circumstances where you don’t qualify 

for the entire $500,000 or $250,000. exclusion there could be things like if you had to sell your 

home sooner than the two-year requirement after living there because your workplace changed 

location or maybe there was a health issue for you or a family member living in the home or maybe 

there was like a natural disaster that destroyed a part of your home and made it so that you had to 

move out or unemployment, things like that kind of unforeseen circumstances. The IRS does allow you 

to at least use a partial exclusion when you sell your home under that type of event. 

All right. Excellent. Now, let’s say that we have another scenario, obviously. Not one that we want 

to overthink about, but it can happen. Let’s say that I am married, which gives me that big $500,000 exclusion. But now I’m in a scenario where my spouse passed away, 

and so now I’m selling my home for whatever. I decide that I want to go live somewhere else for 

that reason. What do I need to know about in that case? Am I going to lose my big $500,000 and be 

knocked down to the $250,000? How does that work? Yes, that can definitely be a concern. We have 

seen that happen, unfortunately. A spouse passes away, now you’re in this giant empty house alone 

and you want to do something different with your life and your living situation. So fortunately, 

the rule is that you have two years to apply the $500,000 exclusion after your spouse passes away. 

You’re not immediately knocked down to the $250,000 when you start filing single after your 

spouse. spouse does pass away there are also some changes to how the basis of your home is viewed 

when your spouse passes away a portion of that steps up, we say your basis increases so depending 

on your situation and what your purchase price was and what the value was when your spouse passed 

away there are some benefits to you as far as the taxable amount when you sell after a spouse does 

pass away yeah okay All right, so now let’s shift back because you talked about adjusting our basis 

based on improvements in the home. And there’s some things around what’s actually considered an 

improvement versus just maintaining the home. So could you kind of walk us through maybe what a 

person would think about as far as – because, I mean, this is important in the context that if I’m 

making home improvements, I want to make sure that I – Keep that in mind as I’m doing it, 

one, and then two, maybe keeping some kind of documentation around that. So could you kind of talk 

about what kinds of things would count toward basis or improvements? Yeah, 

so capital improvements defined as something that adds value, extends the life, 

or adapts your home to uses. So, this could be like a remodel of a kitchen or a bathroom, 

adding onto your home. getting a new roof, replacing the HVAC system, adding a water softener, 

even landscaping things outside if you put in a swimming pool, things like that that significantly 

change your home and add to the value of your home as you have been living there are considered a 

capital improvement. And yes, it is important to keep track of those capital improvements over time 

and save receipts when you add those purchases and have kind of a list of what those things are. 

because capital improvements will reduce the amount of tax that you pay when you do sell the home. 

So, you want to have a list of those for future reference that you can come back to make sure 

you’re getting the benefit of adding those to your home while you have lived there. And by the way, 

I was just going to say, do you have to report this on your tax return when you sell a home? 

Is that reportable and you’re breaking all that down? Yeah, so typically you’ll just do like one 

total value. You’ll send your tax preparer, here’s the total from my kitchen remodel that I did, 

here’s the total because we replaced the roof in this year, whatever, listing out all of your 

capital improvements, and then they’ll add together that total, report it on your tax return, 

that’ll be added to your basis, which the consequence of that is reducing the amount of taxable 

gain that you report. Okay, excellent. I’m sorry if I cut you off there. Is there anything else on 

basis? Uh, I was just going to say too, it is important to keep track of those things because a lot 

of figures that the IRS has and like exclusion amounts and contribution amounts are indexed for 

inflation. But this exclusion on the primary home has never been adjusted for inflation at all. 

Since it was introduced, it’s been $500,000 exclusion for married filing jointly, $250,000 for 

single forever. So. 

it would be nice i would love to see it adjust for inflation to keep up with the home prices 

increasing but that has not been the case, so it is something that’s just important to keep track of 

too because that is not going to adjust uh and then on capital improvements too things that don’t 

count towards capital improvements are more minor things like fixing a leak or repairing a roof or 

patching a roof replacing hardware painting walls things like that are not going to count as 

capital improvements. So, you can still like keep track of them and then your tax preparer can help 

you kind of determine which ones are capital and which ones are not. But yeah, just something else 

to keep in mind. Okay, excellent. So, let’s go back to our example that we had and talk about now 

how we are getting to these, you know, what those, how those numbers break down. Yes. 

Okay. So, let’s say, go back, our original purchase price is $300,000. Closing costs, 

we didn’t talk about in too much detail, but again, things like the commission that you pay to your 

realtor and fees and legal fees that you pay when you close on the home and you’re selling the home 

as a seller, the closing costs can be added to your basis. So, $300,000 original purchase price 

plus $30,000 in closing costs. We said in our example, we have $70,000 in capital improvements. 

So now we’re at an adjusted basis of $400,000. If we sell for a million dollars, 

the difference there in the gain is $600,000. The exclusion in this example is going to be $500 

,000 under the tax filing status married filing jointly. So now we’re left with $100,000 taxable 

capital gain. Excellent. So now just so we’re clear because we’re going to talk about the rental 

here in a second. Yeah. I don’t get to deduct anything as far as any kind of losses on my primary 

home. I’ve got a big tax benefit on this. It’s exclusion, but I don’t get both things. 

No, if you sell your home for a loss, let’s say you live there and for whatever reason the value 

goes down and you sell it for less than what you originally bought it for, you do not get to deduct 

the loss. So same benefits don’t apply if it goes the opposite direction and you are selling at a 

loss. This really only benefits you when you’re selling at a game. Excellent. All right, let’s 

transition now and talk about rental property. So do I get this nice exclusion and all these good 

benefits on my rentals? No. Unfortunately, the same rules do not apply to rental properties. 

There are other benefits that we will get into that do work for rental properties, but it’s kind of 

why we wanted to talk about both of these in the same episode so we can have a direct comparison. 

Primary home versus what to expect when you’re selling a rental property. Okay, 

so, let’s walk through an example so that people can understand the difference. Okay, 

don’t get too attached to the numbers. If you’re like listening to this in the car, don’t get too 

stressed out trying to remember all the numbers. because there’s going to be a lot going on. And I 

can also just speak on that too and let everybody know that if you are listening to this and you’re 

on a walk or in the car, you can also, we have a blog written on this as well. And in the blog 

article, it will have all these numbers broken down for you. Yes. If you find yourself in this 

situation, really, I think what’s important to take away from this episode is just the concepts. of 

the benefits that we’re going to talk through. And then if you are going to sell your rental 

property, then you can call me and we can talk through the specific numbers that are going to 

affect you as an individual. But for our example, we’re going to say, 

let’s say you bought a rental property years and years ago for $137,500. 

Sounds like a weird number, but there is a tension behind that. So, starting point, $137,500 purchase. 

From a tax perspective, we have to split that value into the value of the land and the value of the 

building. Because what we’re going to get at is depreciation. 

That’s the benefit we’re going to talk about for the rental property. And depreciation is basically 

the IRS saying your building is going to wear out over time because you’re making it available to 

renters. There’s going to be somewhere it’s here that happens with having renters occupy that 

building. So, we’re going to allow you to depreciate the value of the building, 

which gives you a tax benefit over time. And it’s also kind of a way to incentivize investors to 

rent out their property and provide housing. And it supports a broader economy as well. 

back to our starting point we have to split up our original purchase price into the land and the 

building values usually you can look at like your property tax assessment and on your property tax 

assessment we’ll say here’s the land piece here’s the building piece it’s not really something that 

you make up yourself but let’s say in our example 80 of our purchase price represents the building 

so that’s 110,000 a little more of a round number there and the other 27,500 is going to represent 

the value of the land so to start depreciation, what is going to happen on a residential property, 

you can depreciate the value of the building itself. Again, not the land. 

Land does not depreciate only, but the building does. We’re going to spread that value out over 27 and a half years. That’s just a figure that the IRS provides. That’s the rule, 27 and a half years. 

So, if we take $110,000, which again is our value on the building itself, 

And spread that out over 27 and a half years. That is our depreciation that we can report on our tax return. So that’s $4,000 of depreciation. It’s kind of like an expense. 

So, when you have your tax return, you list all of your rental income. You subtract all of your 

expenses, your property tax, and your repairs, and your maintenance, and your homeowner’s 

insurance. All that stuff gets subtracted out from your rental income. And now we’re going to add 

in $4,000 of depreciation. It’s not really an expense, but again, it’s just a way to represent 

there’s some wear and tear on this building. So, I’m going to say there’s $4,000 of quote unquote 

expenses to get that tax benefit. So that reduces the amount of rental income you actually have to 

pay tax on over time. That’s the benefit. All right, excellent. 

So now let’s just walk and go forward and say, now I sell my home. So, I depreciated that $110,000. 

I’ve owned that for a long time. So now I’ve hit zero. I sell my home. 

Kind of walk me through the math. Yes. Okay. Fast forward, let’s say 27 and a half years plus has 

passed. You only get the depreciation for 27 and a half years. So, if you own the home longer than 

that, your depreciation is going to run out. So, let’s say in this example, our depreciation has run 

out because 27 and a half years has passed. As far as the IRS tax reporting is concerned, 

you’re building itself is now worth zero because it’s fully depreciated. We still have the land 

value, so that’s going to be part of it. But then let’s say we sell the property for $500,000. 

So, at the sale price, $500,000, we’re going to subtract out the original value, 

which right now, because the building is fully depreciated, 

is just the land of $27,500. So, our gain starting point is $472,500. 

Again, the actual numbers don’t really matter. It’s more just the concept of what we’re trying to 

get at here. So, because we’ve gotten this depreciation benefit over time, 

but now we’re selling our property at a gain, the IRS is kind of saying, 

hey, we gave you those deductions. You got that benefit. But now you just sold your property at a 

gain. We want some of that back. So, what has to happen when you sell your rental property is what 

is called depreciation recapture. If you remember back, we depreciated $110,000 of the value on 

the building from the original purchase price. So, when we sell the property, $110,000 needs to be 

reported as depreciation recapture. and is now taxable to you. 

Depreciation recapture is reported as ordinary income, subject to ordinary income rates, 

up to a maximum of 25%. So really depreciation, 

if you eventually sell your property for a gain, which ideally that’s how it goes, it’s more of a 

tax deferral than a tax avoidance. You don’t keep that depreciation benefit forever. 

you will pay tax on it later on down the line upon the sale. 

So, the rest of the capital gain, I’ll go back. We kind of split into two categories here, 

depreciation recapture and capital gain. So, starting with the total gain, 

again, the sale price minus the value of the land, $472,500. 

$110,000 of that has to be recognized as depreciation recapture and taxed as ordinary income up to 

25%. So, the other $362,500 of that gain is what’s going to be categorized as a true capital gain 

subject to capital gains rates, which are more favorable than ordinary income. It’s 15% or 20% 

depending on your total income for that year. 

I know it’s kind of a lot to keep track of, but to kind of summarize those two outcomes, 

we had $110,000 of depreciation recapture subject to ordinary income rates up to 25%. 

And then $362,500 is taxed as capital gain. 

Both of those elements will show up on your tax return. You will pay tax on both of those. The 

mistake that I see a lot of the time is someone just going, oh, I bought it for $500. Or I bought 

it for, what did we say originally? Oh, no, we bought it for $137.5. $137. 

And I sold it for $500. That entire difference is just going to be capital gain. I’ll take 15% of 

that. Pay that as my estimated tax. payment and I’m done right unfortunately with rental properties 

that’s not the case a lot of times you forget the depreciation recapture is subject to higher tax 

rates and if you don’t plan ahead for that and have an awareness of that ahead of time it’ll shock 

you on when you get your tax return back enough to pay more than anticipated yeah well very good 

well, I’m going to say yeah this was a lot of numbers I like the idea of what you said that’s the 

concepts And I will reiterate what you said. If you’re listening to this and you’re thinking, I got 

a scenario that I need to think through that’s my specific situation, the easiest thing to do is to 

go to our website, which is pomwealth.net. Go to the Contact Us page, fill out the form, 

and then we can get it set up so that Taylor could reach out to you and answer those questions. 

So, thank you very much, Taylor, for walking us through this and helping us to think through the 

difference between buying or selling my primary home versus my rental home. So, we appreciate it