Ask the Advisor: February 2021

Ask the Advisor: February 2021

Would My Mother’s Social Security or Medicare Benefits Be Affected If Her Home is Sold?

Q:  At age 87, my mom, who was widowed several years ago, is in need of assisted living and we are thinking of selling her home to finance her care.  The house is worth about $525,000 according to Zillow.  She has no mortgage and has lived in this residence for about 20 years.  Would income from the sale of the home affect her Social Security or Medicare benefits?

 A:  The proceeds from the sale of a home would not reduce or restrict your mother’s Social Security benefits, but capital gains generated from the sale could potentially mean that a portion of her Social Security benefits would be subject to taxation (or a higher level of taxation).  In addition, capital gains could potentially result in higher Medicare Part B and Part D premiums.  But chances are that your mom may be able to exclude most, if not all, of the capital gain from the sale of the home.

A portion of your Mom’s Social Security benefits would become taxable if she exceeds certain income thresholds.  If she files as an individual, with an income between $25,000 and $34,000 up to 50% of Social Security benefits are taxable, and with an income of more than $34,000, up to 85% of her Social Security benefits may be taxable.  To determine income thresholds, add one half of her Social Security benefits to her adjusted gross income (including the capital gains), plus nontaxable interest, if any.

Medicare premiums might be affected if her modified adjusted gross income exceeds the income threshold, which in 2021 is 88,000 and up for individuals.  If her home were to sell in 2021, any excess capital gains would not affect what she pays for premiums until 2023.  In addition, there are provisions that would allow your mom to appeal the higher Part B premiums if she can show that she would be receiving a lower income than previously reported.

Put simply, capital gains are the difference between what the owner paid for an asset such as a home, known as the cost basis, and what it is sold for.  Taxpayers filing as individuals would not pay tax on the first $250,000 in capital gains.  Married couples would be able to exempt $500,000.

To determine the amount of capital gains subject to taxation, the cost basis is adjusted.  The adjusted cost basis is calculated starting with the price paid for the home, then adding purchase costs, such as closing costs, title insurance, and settlement fees.  To this figure you can add the cost of any additions and improvements made, and selling costs, such as real estate agent commissions and attorney fees as well as transfer taxes.

We urge you to get help from a tax professional.  Figuring the adjusted cost basis of a home for capital gains can involve numerous expenses, as well as items that decrease cost basis such as allowable depreciation, and insurance reimbursements for casualty and theft losses.

To see whether your mom qualifies for the capital gains exemption, check IRS Publication 523 for details.