It is more often than not ... inevitable. Your parents (or surviving parent) is still living in a home that has outgrown them. What may be perfect for a growing family with children in the home, may be more than a chore to maintain for your senior parents.
So, what do you do?
For starters, I would recommend clicking over to a recent articke in The LA Times titled “Consider tax implications when downsizing."
Depending on where they live (remember the fundamental law of real estate values - location, location, location?), the value of their home may be considerable.
Fortunately, federal law permits $250,000 per person to be excluded from capital gains upon the sale of a primary residence. However, anything above that exclusion is subject to capital gains taxation.
How is the capital gain determined?
Generally speaking, the capital gain is the difference between the home’s sale proceeds and the seller’s tax basis in the home. If one spouse has died, then this is where "location" is also important.
In a separate property or common law property state (e.g., Kansas and Missouri) at least half of the home receives a "step up" in basis to the then-current market value when the first spouse dies. However, in a community property state (e.g., California), the entire property would have received this step up at the first death. Thus, location can make a big difference on the potential capital gains depending on where the widow or widower resides.
Keep in mind, that if the widow or widower dies while still owning their home, then the heirs would get a tax basis equal to the property's value at that parent's death. Regardless the "location" where he or she resides, none of the home's appreciation during his or her lifetime would be subject to tax up to that date of death value.
Tax issues alone should not dictate what your senior parents decide. After all, it is first and foremost a quality of life and even a safety matter.
Before making this major life decision, consult with an experienced estate planning attorney to help your parents explore their options.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri) and to download free tools to help you organize your estate, visit my estate planning website.
Reference: LA Times (December 28, 2014) “Consider tax implications when downsizing”