Couple seeks to avoid frightful capital gains tax after selling house

The information in this column is intended to provide a general understanding of the law, not as legal advice. Readers with legal problems, including those whose questions are addressed here, should consult attorneys for advice on their particular circumstances.

Q: We are about to sell our home after 49 years. Our daughter has lived there since 1990, and we have lived in a townhome. I’m appalled to find out we must pay capital gains tax since it’s not our primary residence. Is there any way to reduce this ridiculous tax?

A: If you have treated your home of 49 years as an investment property — in other words, your daughter has been paying rent to live in the home — you may be able to avoid capital gains taxes by reinvesting the proceeds of sale in a new property that is of the same nature and character as the old property.

This is called a 1031 exchange. Generally, you would need to select the new property within 45 days of selling the old property and then close on the purchase within six months. You also need to have a qualified intermediary to hold the sales proceeds used to purchase the replacement property.

However, doing a like-kind exchange may not be a good option for you, especially if you are selling your home because you want the money for retirement.

Another option is to sell your townhome, and since it’s your primary residence, you can exclude up to $500,000 of any gain. Then you could move back into your other home and live there for some time before selling it. You would then be able to exclude some of the gain, but how much would depend on a number of factors, including how long you live there before you sell.

If either you or your spouse is ill and has a shortened life expectancy, you should consider waiting until after that spouse dies to sell. Upon the death of one spouse, the other spouse will have a cost basis in both houses equal to the fair market value of the properties on the spouse’s date of death. The stepped-up cost basis will essentially eliminate all capital gains taxes.

You should talk to an accountant before selling either property.

Q: My husband and I had our wills written by an attorney in 1983. We now want to delete a bequest made in our wills. Can I just retype our wills, delete that bequest, and have the new wills witnessed and notarized? We cannot afford an attorney.

A: You could do that, but there were different laws in effect 33 years ago, and it is possible that you might be creating problems when those wills need to be probated. Also, there are new provisions you might want to add that weren’t available back then.

And of course, there may be cost-saving alternatives to probate that are available now that weren’t available decades ago.

Without seeing the old wills, it’s not possible to say for sure whether your plan would work.