As you consider downsizing or moving closer to family, understanding the capital gains rules associated with selling your home is essential. Many senior citizens find themselves in situations similar to Mark and Cheryl Johnson, a hypothetical couple who bought their home in 1985 for $72,000. After years of raising children and creating countless memories, they now face the physical challenges of maintaining a large home and the desire to be nearer to their grandchildren.

The Johnsons’ home, like many others, has appreciated significantly, with comparable homes in their area now valued at over $650,000. While the thought of tapping into that equity for retirement comforts, such as travel or a more suitable living arrangement, is appealing, the prospect of hefty taxes and the hassle of moving can be daunting.

Fortunately, there are favorable tax rules that might help. For instance, there’s a $500,000 capital gains exclusion for married couples on the sale of a primary residence, which could significantly reduce any potential tax bill. In the case of the Johnsons, their anticipated net gain after selling expenses would be around $580,000. This gain might seem like it would lead to a large tax liability, but with proper documentation of home improvements—such as the addition of central air, roof and siding replacements, and a kitchen remodel—their tax basis increases, thereby reducing the taxable amount.

For seniors, it’s also important to document any major home improvements, as these can adjust your tax basis and potentially eliminate the capital gains tax. IRS Publication 523, “Selling Your Home,” provides detailed guidance on what costs are deductible and how to properly document them.

Remember, you don’t need to be a tax expert to navigate these discussions, but having a basic understanding and being prepared to direct clients to qualified tax professionals for personalized advice is invaluable. The Internal Revenue Service offers authoritative, free guidance on this topic, which can be a great resource for seniors looking to make informed decisions about selling their homes.