Would you rather DIE than sell your home?

It's true. Some people would rather DIE than sell their home.

Blame this strange preference on the difference between selling when one is alive and having to pay a LOT of capital gains tax, vs. leaving a property to heirs, and allowing them to inherit the property at the "stepped up" basis--possibly avoiding capital gains tax. For homeowners trying to leave a legacy to children or grandchildren, keeping a property vacant and waiting to sell until after death is an unfortunate strategy many families prefer, instead of paying a large tax bill when the home is sold.

Here's an example:

Couple John and Joan purchased a home decades ago for $100,000. They have raised their family in the home, done some modest upgrades (about $100k over the years), and find themselves owning a home worth $3,000,000. The current tax code allows them to sell the home and exclude the first $500k of gains from taxes:

Sale price: $2,900,000
original price of home: $100,000
commissions: $150,000
Upgrades (capital improvements added to basis): $100,000
Preparation for sale (painting, repairs, staging): $50,000

In this case, the sale price minus the cost basis (purchase + upgrades), minus sales expenses (repairs, staging, commissions) = $2,500,000.
A married couple who occupied the home for 2 of the last 5 years would be able to exclude the first $500,000 of gains from tax.
$2,000,000 would be taxable gain. At 15% long term federal capital gains rate, plus the maximum California capital gains rate of 14.4%, the total capital gains tax could be 29.4%, or $588,000!

Let's continue this scenario. Let's say that John and Joan move to assisted living for health reasons and leave the home. They decide not to rent or sell for the time being. If neither one of them has occupied the home for 2 out of the last 5 years, they would owe capital gains tax on the entire $2,500,000, which would be $747,500 of tax.

If they transfer the home to a child while they are alive, they may suffer estate tax consequences, and the gift to the child may be considered taxable. 

However, if they wait until both have passed away and leave the home to their child, the child would inherit the property at the value on the date of the death of the last owner. If the child then sold the home at the same value, there would be $0 capital gains tax liability. 

Alternate strategies:

Refinance the home to pull out equity while the owners are still alive, allowing them to pay for living expenses, medical expenses, travel or other lifestyle needs or wants. 

Convert the home to a rental property, and perform a 1031 exchange into a cash-flow positive rental property which can then be left to heirs, who could inherit the property at its "stepped up" basis. This property can be refinanced after purchase to "harvest" equity without creating a taxable event.

Potential changes to the tax code to eliminate capital gains on primary residence sales:

In late July of 2025, the Trump administration is reportedly contemplating eliminating capital gains tax on the sale of primary residences. If this change to the tax code is passed, it will likely have a limited effective window (potentially 2 years), but could be a tremendous opportunity for owners of highly appreciated real estate to cash out and diversify the equity in their former residence into other investments, which could generate income during the owners' lifetime, and still be passed to heirs later. Holding too much equity in one property, or in Real Estate as a sector, is something most financial planners would recommend avoiding. 

Do you have questions about how to refinance a highly appreciated home to tap equity instead of selling? Contact us for a consultation. 

* refer to the IRS website for current tax information, or consult your CPA, financial advisor, attorney or tax preparer for additional information. The information included in this article is meant to prompt discussion and is not meant to be a substitute for the advice of a licensed, experienced legal, tax, or financial professional.