No one wants to pay more in tax than they have to, and most would rather avoid tax altogether if possible. It’s quite common for investors to hold on to assets longer than they should simply to avoid realizing a capital gain.
Recently, we examined a scenario in which an investor was hanging on to her home because of potential capital gains taxes and was seeking a planning strategy to reduce or eliminate them. The family bought the modest home more than 50 years ago. While it was comfortable for a family of five, it’s far from the “McMansions” common today. Now a widow with grown children, she’s looking for something smaller and easier to maintain in a senior community. What the home lacks in size, it makes up for in land—located in a highly desirable area.
After adjusting for cost basis, this homeowner stands to make a $750,000 profit from the sale. As a single taxpayer, she qualifies for a $250,000 home sale exclusion but still faces capital gains on $500,000, resulting in a tax bill of roughly $101,900 across federal and state taxes.
Her and her heirs’ question was, “What financial move can we make to minimize or eliminate the tax due?”
Unfortunately, not every tax “problem” can be solved through planning.
If the goal were purely to avoid taxes, the homeowner could remain in the home until she passes away. The house would then become part of her estate, and provided the estate remains under the lifetime exemption amount—$15 million per individual in 2026—her heirs would receive a step-up in basis. If they sold the home shortly after, they might owe little or no capital gains tax. But that plan depends on current tax law, which is subject to change, and, more importantly, requires her to pass away before a sale occurs.
Another option could be a Qualified Personal Residence Trust, or QPRT. This estate planning strategy removes the house from her estate and “freezes” its value for tax purposes. She can continue living in the home for a set number of years, and when that term ends, ownership passes to her beneficiaries. The value transferred to them is calculated based on the IRS-determined value of her retained right to live in the home, not simply what’s left over. It’s important to note that a QPRT doesn’t eliminate capital gains taxes—it’s primarily intended to reduce estate taxes and facilitate the transfer of wealth to heirs.
Capital gains taxes are a side effect of success—a byproduct of an investment that appreciated substantially. While the dollar amount may seem considerable, it helps to look at it in percentage terms. In this case, her $100,000 tax bill amounts to just more than 15% of her net proceeds of $650,000. If she were to hold on and the real estate market declined, her home value could easily drop by that same amount—or more.
Ultimately, tax considerations are important, but they shouldn’t dictate life decisions. Choosing when to sell a home—or any investment—should align with your broader goals, lifestyle, and peace of mind. Sometimes, the best financial move is the one that supports how you want to live, not just how much you can save on taxes.
If you have questions on how your lifestyle decisions may affect your taxes, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the November 8, 2025 “Henssler Money Talks” episode.