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Post: The Big Move: My wife and I need to sell our ‘starter home’ of 40 years because we can’t handle stairs. When is a good time to buy a new one?

Dear MarketWatch,

My wife and I have been living in our “starter home” for over 40 years. We are now to the point that we will shortly need a home with minimal stairs.

I understand that, as joint tax filers, a portion of the profits from the sale of our home will be exempt.  I have also heard that there is a separate rule about purchasing a new home, within two years of the sale, which could also save taxes.

We were told using an offer on a new home with a contingency regarding the sale of our current home would result in any offer being rejected. For a number of reasons, what we would probably do is to purchase a new home before even offering our current home for sale. 

What really are the rules for this type of transaction? How does one best proceed with this kind of big move? 

Any advice would be appreciated.  Thank you.

Confused in Illinois

The Big Move’ is a MarketWatch column looking at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage.

Do you have a question about buying or selling a home? Do you want to know where your next move should be? Email Jacob Passy at TheBigMove@marketwatch.com.

Dear Confused,

I’m sure the prospect of moving after living in the same home for decades is daunting — and a competitive real-estate market like the one we’re in today makes things all the more challenging.

But I think you both should applaud yourselves for being proactive, rather than waiting until you’re far less mobile to make such a big change. It’s always better to be acting from a place of strength rather than desperation in financial transactions as major as buying or selling a house.

I want to address your questions regarding taxes quickly before I delve into how you might consider going about buying and selling a home simultaneously (or in quick succession).

As joint tax filers, up to $500,000 in capital gains on the sale of your home will be exempt. That’s because this is your primary home — if it wasn’t your main residence, it would be treated differently for tax purposes.

To calculate your eventual capital gain, you would take the sales price of the home and subtract the original price you paid (also known as the cost basis). According to the IRS, there are other costs you can deduct, including some closing costs from selling the home or the cost of home improvements such as adding a bedroom or swimming pool. Of course, you’ll need to collect your receipts for those expenses as proof of what you paid.

Whatever is remaining after those expenses and the cost basis is your capital gain — if it’s higher than $500,000, then you will pay taxes on it. How much you pay in taxes will depend on your income.

The second approach to avoiding or reducing capital gains tax you described is called a Section 1031 exchange, which applies to investment properties. Because this is your primary residence, you wouldn’t be eligible to take advantage of that tax workaround unless you converted the home into an investment property.

As for how to go about buying a new home and selling your current one, that is indeed a major challenge — one that loads of buyers face. In today’s market where there’s a serious shortage of homes for sale, many would-be sellers have opted to stay put because of the difficulty they anticipate facing in finding a new home to buy.

The advice you received regarding contingencies was right on the money. Bill Gassett, owner of real-estate marketing website Maximum Real Estate Exposure, compared adding a home-sale contingency to any offer to “the kiss of death” in a market where most listings attract bidding wars.

“The real-estate agent would likely throw it into the pile of offers not worth considering,” said Gassett, who also works as a real-estate agent with Re/Max Executive Realty in Hopkinton, Mass.

But as Gassett and other financial experts I heard from noted, you don’t need to worry about selling your home. Even though rising mortgage rates may cut into demand somewhat, it’s still very much a seller’s market.

‘You can pretty easily put in terms to lease back the house you live in for 30 to 60 days.’

— Matthew Aaron Benson, owner of Sonmore Financial

So while you’re at the whims of other sellers as a home buyer, you’re in the driver’s seat when it comes to the home you already own. That gives you a great deal of flexibility, which could even help you make more attractive offers for other homes.

“You can pretty easily put in terms to lease back the house you live in for 30 to 60 days,” said Matthew Aaron Benson, owner of Sonmore Financial, a financial advisory firm based in Arizona. As Benson noted, this will help you avoid needing a bridge loan between the two properties, allow you to maximize the down payment you pay for your new home or even enable you to make a coveted all-cash offer. Plus this would give you more time to deal with moving your possessions between houses.

You could also draw on other sources of savings, such as borrowing against a non-IRA or non-401(k) investment portfolio, to make a down payment if you don’t want to sell right away, and then replenish those funds with the money you earn from your home’s sale. Indeed, if money’s not an issue, then buying your new home first could make for a less stressful move. It would also give you time to get your current home into a more sellable state.

At the same time, if you buy your next home before you sell your current one, you want to be careful about not getting in over your head. Sometimes, people make the mistake of overestimating how much they will earn from the sale of their home, which can leave them with a larger debt burden than they wanted in the end. Consult with a financial adviser to get a sense of how much home you can afford as a starting point, and then be sure to cast as wide a net as possible to increase your chances of locking in a deal.

It’s certainly a tough market out there right now, but taking this sort of measured approach will ensure that your next home will be a source of comfort in your golden years — and not another headache.

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