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Closing the Door

Brian White

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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