Many people remain in the community where they've been living when they retire, though not necessarily at the same address. Others think of retirement as the time to move to the mountains, the desert, the beach, or anyplace other than where they live now.
Whichever way you're leaning, you may decide it's time to sell one home and buy another. If you do, you should be prepared for the emotional consequences of making such a change, and an even larger financial impact.
In most cases, there are substantial costs in selling real estate that reduce the amount you realize on the sale. If you use a real estate broker, as many sellers do, you'll owe a commission on the sale price. Rates vary by geography and the state of the economy, so you'll want to contact a number of brokers in your area to be sure you're not overpaying. You may also be responsible for certain closing costs, depending on the terms of the sales contract. There's not a consistent rule about who pays for specific expenses, such as termite inspection or title searches.
There's more flexibility in how much work to do on your home once you've decided to sell. There are two schools of thought. One says that the better a property looks, the more attractive it is to buyers. So some new paint and a general fix-up will probably pay for themselves with quicker sales and higher prices. The opposing view is that most buyers will have their own ideas about how they want the home to look, so anything more than ensuring the home is clean and uncluttered isn't worth the bother or the cost.
If there are major problems, though, like a bad roof or an aging furnace, you may have to pay for the repair or lower the sales price in negotiating the final contract. It's hard to tell which way you'll come out ahead.
When you sell a home you've owned for a long time or during a period of rising home prices, you may have a capital gain. In other cases, you may have a capital loss. You calculate the gain or loss in several steps:
You should be aware, though, that you may have to make an adjustment to the total basis if you sold one or more homes before 1997 but none since. Prior to that date, if you reinvested in a more expensive home within two years of selling your home, there was no tax on any capital gain you realized. However, when you sell this time, you'll have to subtract the accumulated profit on which you deferred paying taxes in determining the adjusted total basis.
The law provides a tax break on the sale of your primary residence if you've lived in the home for at least two of the five years before you sell and pass the other qualifying tests. Specifically, if you're single, the first $250,000 of capital gains is excluded from tax. That number doubles to $500,000 if you're married and filing a joint return. You may qualify for the larger exemption if your spouse has died within the two years prior to the sale.
If you used part of your home for business or rental you usually don't qualify for the full exclusion. The same applies if you haven't occupied your home for the required two-year period and don't meet one of the allowable reasons for not doing so. Even in these cases, however, a portion of your gain may still qualify for tax exemption, though determining that number requires a detailed calculation.
In most cases, if you have a taxable gain that is less than the exempted amount, you don't have to report the sale of your home on your tax return, though you may choose to do so. Other income from the sale such as the sale of personal property that will remain in the home may have to be reported, though, so you should always work with your tax advisor to ensure you're reporting the correct amount.