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I FOUND OUT A YEAR ago that my Aunt Ina Lou, then aged 95, had designated me as her agent in her financial and medical powers of attorney. She also named me as executor of her estate and the trustee for her trust.
She wasn’t well and needed more help than her thoughtful neighbors could provide. Within months, my brother, my wife and I had our aunt settled in an assisted living facility near her townhome in Burke, Virginia, about a six-hour drive from our homes in North Carolina.
The next big task I faced: deciding what to do with her townhome. She bought it new in 1980. The furnace, roof, washer and dryer were fairly new, but the carpet, vinyl flooring and kitchen cabinets were all original, and they looked it. It’s in a desirable planned community, not far from Washington, D.C., with easy access to the city by commuter train. There are lots of walking and biking trails through protected wooded areas within the community, and houses there sell at a premium.
I knew that eventually I’d have to get the house ready to sell, but when should I sell it? The answer depended on taxes, the cost of maintaining the house until it was sold, and how long my aunt might live. Aunt Ina Lou bought the house for about $67,000. The tax value was now $460,000, yielding a capital gain of $393,000—assuming it sold for the tax value.
While houses often sell for a bit more than their assessed value, I guessed that would not be the case here, given the age of the kitchen and bathrooms, and since the house had just one-and-a-half bathrooms and an unfinished basement. Most other similar-size homes in the local market had two full baths and a finished basement.
That $393,000 is a hefty capital gain. There’s special tax treatment for gains on the sale of your home, however. If you live in the house for two of the five years before you sell it, you can exclude $250,000 of the profit from capital gains taxes if you’re single and $500,000 if you’re married. That meant that, if I sold my aunt’s house within three years of her moving out, she would qualify for the $250,000 exclusion.
Here’s the math on that: She’d have to pay capital gains tax on $393,000 minus $250,000, or $143,000. At her income level, she’d pay a maximum of 15% on the gain, or $21,450 total.
I’m one of six beneficiaries of my aunt’s estate. If I waited until Aunt Ina Lou died to sell her house, there’d be little or no capital gains tax to pay. The tax basis of inherited property is stepped up to the property’s value on the date of death. We would only pay tax on any appreciation between her death and the sale of the house.
There is, however, the cost of maintaining the house to consider. Everything in Burke, Virginia, is more expensive than where I live. Between property taxes, homeowners’ association fees, insurance, electricity bills, water bills and yard maintenance, it was going to cost about $12,000 a year to keep the home. Thus, it would take about 21 months for the cost of maintaining the house to exceed the capital gains tax if I sold the house immediately.
While she has a decent amount of savings, the cost of Aunt Ina Lou’s assisted living facility exceeds her state pension and Social Security. If she lives long enough, I’d have to sell the house to pay for her care. If that occurred after she had been out of her house for more than three years, the tax exclusion would no longer be available. That would cost her $37,500 more in capital gains taxes.
I wasn’t interested in being a remote landlord, though I know I could pay someone to handle that. Also, I have no idea how long Aunt Ina Lou will live. Another important consideration: I wanted to simplify this part of my life. Besides, there’s always the possibility that something bad would happen at the house: fire, water leak, squatters—you name it. I decided to proceed with selling the house.
Before I could sell, we had to get the house ready. It was a team effort, with much help and hard work from my brother and my wife. We cleared out everything from the house, and made many trips in my brother’s truck to Goodwill, the county dump and the recycling center. We ripped out the old carpets, arranged for painters to come in, and flooring people to put in new carpets and vinyl flooring. Then we made some minor and not-so-minor repairs, and spent a couple of days fixing what the painters had messed up.
There was a bit of good fortune at the end of this process. My brother knows a woman who lives in North Carolina and works remotely as the transaction coordinator for a real estate outfit near Aunt Ina Lou’s home. My brother’s friend can get a finder’s fee for referring interested sellers to her company.
She put me in touch with the realtor who owns the company. My wife and I met with the realtor on the afternoon that the flooring was completed. The realtor was knowledgeable and energetic, and she was quite familiar with the area and the housing market. Eight days later, we had 13 offers, one of which was $68,000 over the asking price. I decided to go with that offer.
Three weeks later, we closed the deal. What a relief to have that done. While we have to pay capital gains taxes on the sale, I can be sure of getting the $250,000 exclusion, I don’t have to worry about dealing remotely with the home and we’re done with the $12,000 a year in carrying costs. I consider that a win.
Brian White is retired from the University of North Carolina, where he worked as a systems programmer and then director of information technology in the computer science department. He likes hiking with his wife in a nearby forest, dancing to rocking blues music, camping with friends and stamp collecting. He also enjoys doing Volunteer Income Tax Assistance (VITA) work at the Chapel Hill senior center. Check out Brian’s earlier articles.
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Seems like a good decision. About the only change that I would suggest is that, rather than making numerous trips to Goodwill, I would check with Habitat Restore, DAV, Epilepsy Foundation, and/or others, as they will come out and pickup your stuff, plus’s there may be charitable tax deductions.
What an interesting piece. I loved the way you walked us through your thought process. Very well written.
My husband is trustee/executor/has POAs for his mom and stepdad, who are in their 80s. She has Alzheimer’s. My husband could be deciding what to do with their house, too, depending on how things go in the future. I’m bookmarking this for future reference. Thanks so much.
Your aunt is a pretty shrewd woman. Your tale tells us why. She knew exactly whom to choose for her executor, trustee and attorney-in-fact! Good article.
Thanks. Now if she had just mentioned it to me eight years ago when she did the paperwork, that could have avoided some problems.
A very good article. Also, having the cash available is probably a good idea in case she ends up needing more than assisted living. The risk of dememtia or long term skilled nursing care is another reason you made a good decision since those costs would be even higher than the assisted living costs and could happen with little warning.
She already has dementia, but fortunately she should be able to stay where she is. It is not cheap, though, and it is sure to get more expensive. However, the cost increase this year was surprisingly small, given inflation.
I admire your willingness to put in the hard work and effort necessary to reap a larger gain on the sale of that townhome.
Personally, I wouldn’t have spent a minute emptying it out or fixing it up.
What I did in somewhat similar circumstances – for my last surviving parent – is go around looking for personal/family items with one of my siblings.
Then we hired someone to do an ‘estate sale’. We netted a few Thousand from it.
Then we hired junk dealer to clean out what was left.
The property was bought by a developer who tore it down and put up a fancier home.
All proceeds were split among us kids per my Father’s wishes.
COULD we have netted more if I put in the effort? Probably.
But for me, and my Siblings, it just didn’t seem worthwhile.
Obviously … YMMV
Fortunately she was not a real pack rat. It was a relatively small townhome. I considered paying someone to just cart off everything in the house, but my brother was determined that we should do it, using his (large) Dodge Ram truck. Ten or 20 trips to the dump later the house was cleared out. Fortunately we are both retired.
We went through a similar process some years ago with my mom. A lot of people don’t realize, carrying costs for a (vacant) home can be quite steep. Insurance, if you can get it, isn’t your garden-variety homeowner’s policy, but a special–and quite expensive–affair. Also, in our case, the house was about 60 years old, and the house’s galvanized-pipe plumbing has a life expectancy of about 50 years or so–so yet another ticking time bomb. Toss in the ever present threat of squatters, vandals, natural disasters, and a host of other uncontrollable risks, and the decision to sell was a foregone conclusion. Not an easy one, mind you, but the only reasonable course under the circumstances. Your article is a good summary of the process, and I commend your thoroughness on a job well-done.
Thanks. I was not aware of the special insurance required. Another bullet dodged.
A home can be vacant for 30-60 days under a standard homeowners policy. After that you would need a vacant insurance policy.
Great article Brian. You carefully considered your options and made a good decision. Your aunt was blessed to have you handle her affairs and estate.
Thanks. There is still work to do, but it is greatly simplified now.
Please read IRS’s Publication 523 on home sales. Great job on the family’s effort to help your aunt!
This link should take you there:
https://www.irs.gov/forms-pubs/about-publication-523
Thanks. I am familiar with it. I’ve been doing volunteer income tax assistance (VITA) since I retired from paid work nine years ago, and occasionally we get someone in there who has sold a home. (A lot of the folks are not so lucky, however.)
Some people are geared for remote real estate management. Like you, it’s not for me. It’s great that you had a capital gains tax problem. It’s the kind of problem I like to have. You balanced the needs of all parties concerned and that’s about as good as it gets. Nice job.
Very insightful article. Thank you. I can appreciate the balancing act of factors that are not necessarily in your control in trying to make the best decision overall.
Brian, my wife and I are familiar with those calculations. Her brother moved from California to Georgia in 2018 for us to help him deal with a debilitating disease. We sold his house long distance, and managed his money until his death this year. A pension and the money from the house sale were his only assets, and we weren’t sure there would be enough to cover expenses before he moved to indigent care status. He died before that happened. I commend your brother, wife and you for helping Aunt Ina Lou.
I’m sorry to hear about your brother-in-law, and I commend you for helping him.
In addition to being a beneficiary I expect you are also entitled to compensation as executor and trustee. I hope you paid yourself.
Many people serve without taking any payment. My sister in law has been managing her aunt’s 30 million dollar trust for years and is not a beneficiary of her estate. She is aware of how much is reasonable compensation in her state but just considers it an honor to help her aunt.
Yes, I did. I googled trustee compensation in Virginia and found something from the Circuit Court of Fairfax County, where my aunt lives. They consider reasonable compensation to be 1% on the first $500,000 and 0.75% on the next $500,000. I think that was for bank trustees and does not include manual labor and driving back and forth from North Carolina, but it seems reasonable to me. I was happy to do it for her.
You should also look into the cost of any improvements she made to the home as then you can exclude those costs from the gains (and don’t forget to subtract the closing costs to further reduce your tax liability).
I was able to almost get rid of all taxes I owed on our first house. (and if I had known about the two/five year rule, we could have skipped all of the tax, but I was just months late..)
Unfortunately, my aunt apparently made no improvements. If she did, there are no records, and she has advanced dementia and is unable to provide the details.
Yes, I was surprised by how much you can deduct. IRS Publication 523 has quite a list.