Sale of Primary Residence With over $500K in Gain

[Casey Murray]

Hi BP,

I have a question when you have over $500K in gain when selling your primary residence. Let's assume the big concern are the tax implications since the projected gain before the exclusion is $1.2M; see projected gain calculation below. The couple is MFJ and qualify for the $500K exclusion which leaves a net LTCG of $700K ($1.2M - $500K). With being in the highest tax bracket, the LTCG tax rate is 20% with a total tax of $140K ($700K X 20%).

The couple owns their current house free and clear and they're 70 years old and want to live in the new house they'll buy for the rest of their life. They don't want to do seller financing or a deferred sales trust.

The only option they will potentially consider is converting their primary to a rental for 1-2 years then selling the property as a 1031 exchange and buy another investment property in order to defer the $140K tax. Other than this approach (and no selling financing/deferred sales trust) is there any other approach to defer tax on the sale of your primary residence when your taxable gain is over $500K? Thanks in advance for the help!

Projected Gain Calc

• Cost basis = $400K
• Improvements = $100K
• Adj Basis = $500K
• Sell Price (after paying commissions, etc.) = $1.7M
• Gain before exclusion = $1.2M