Protecting and Preserving Wealth – Considerations When Selling Real Estate – Selling Your Primary Residence

Speakers: Jon Gay, Bruce Hosler, & Jason Hosler.

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Jon Gay (00:09):

Welcome back to Protecting and Preserving Wealth, I’m Jon Jag Gay. I’m joined by Bruce Hosler and Jason Hosler of Hosler Wealth Management. Always good to be with both you guys.

Bruce Hosler (00:16):

Great to be with you this morning, Jon. Thank you.

Jason Hosler (00:19):

Good morning, Jon. Good to be here.

Jon Gay (00:21):

So, we’re talking about considerations when selling real estate in a two-part series. This is the first of the two parts. Next episode, we’re going to talk about selling second homes, rental properties. But today, we’re going to focus on selling your primary or principal residence.

Bruce Hosler (00:36):

Let’s just talk about titling, people hold title to their home in different ways. You can hold it inside of your revocable living trust. You might hold it joint tenants, and we don’t want you to do that with your kids. Some people will do that so that they avoid probate. That is not a good idea.

Jon Gay (00:53):

We talked about that in previous episodes, yes.

Bruce Hosler (00:56):

If you have someone you’re not related to and you want your share to go to your family and they want their share to go to their family, they may hold it in tenants in common, that’s the way of holding title. And then you can just hold it individually in your own name like that.

And a question we sometimes get Jason is, “Should I use an LLC for liability protection on my primary residence?” We’re not generally a fan on that for your primary residence, but for rental property, absolutely. But here in Arizona, we’re a community property state, so 99 and 9/10ths percent of the time we want you to own the house in your living revocable trust.

Jon Gay (01:35):

Let’s talk about cost basis, what’s included in cost basis and not included in cost basis?

Jason Hosler (01:40):

So, the purchase price of course for the home, any improvements that you make, any repairs that have gone in to that, but your ongoing utilities and things like that, that doesn’t enter into cost basis. But any of those improvements and repairs that you’ve had to do to make that place livable, that’s all part of your cost basis.

And so, your cost basis is what you’ve put in in dollars into the house in those ways. And when you sell it for your selling price, the difference either up or down is your capital gain or your capital loss.

Jon Gay (02:17):

Jason is demonstrating this with his hands for those of you on the audio podcast, just the up and down just so we’re clear on that (laughs). What about deductible expenses?

Bruce Hosler (02:27):

So, sometimes people confuse like well, I paid the landscaper all these years, do I get to deduct that? No, that’s maintenance. So, deductible expenses are only permanent improvements on the home.

Jon Gay (02:40):

Okay. Explain to me what a Section 121 exclusion is.

Jason Hosler (02:46):

So, the Section 121 exclusion is a carve out in the tax code that allows the avoidance of capital gains taxes on the sale of your primary residence. You have to have lived in it for two out of the last five years. And if you’re a single filer, you can exclude up to $250,000 of capital gain. And if you’re married, filing joint, up to $500,000 of capital gain can be excluded.

Jon Gay (03:16):

Okay, I feel like we’re going rapid fire here. Talk about, Bruce, what we would call a “gotcha” when a spouse dies.

Bruce Hosler (03:23):

This is something that a lot of people don’t really think about. That Section 121 is very helpful for people to avoid, if they’re married, the $500,000 exclusion.

So, let’s just say for example, we’re recording this in April, let’s say that he dies in April – at the end of the year, she gets to file that tax return as joint filing joint, married filing joint, even though he died back in April. In January of 2026, she starts a new tax year, and she’s filing single. So, now, normally, she would only be able to file that for $250,000 exclusion, not the $500,000.

Now, the IRS has given us some indication that they will allow the 500,000 for two years from the date of death. So, if she wants to get the exclusion for 500,000, she has to sell it within two years of that April. One year, by the second year, she has to have it filed to be able to claim that 500,000.

And that’s a “gotcha” that we want all of our listeners to be aware of using that exemption. It’s available anywhere in the country, it’s a federal tax exemption on capital gains on your primary residence.

Jason Hosler (04:38):

So, if someone is considering, like for example, downsizing after the death of a spouse, you want to keep that in mind that there is a timeframe on being able to use that exclusion.

Bruce Hosler (04:48):

Here’s the other situation, I had a client just call me the other day – his mom has decided that she’s finally ready to go into independent living, she’s got a bunch of friends from church. She’s going to keep her home and go live in the independent living and they’re going to keep it as a rental.

And I talked to him, I said, “Hey, wait a minute, if she sells that, she can get the exclusion on the capital gain and not have to pay the taxes. But if she holds onto it past the two years as a rental, she just lost that $250,000 deduction that she would’ve had otherwise.”

So, there’s some considerations there about when you should sell your home.

Jon Gay (05:28):

That is a big dollar amount, I’m really glad you brought that up. So, we’ve started to get near this topic, so let me bring it back around to the step up in basis rules. What are they and how do they apply in community property states such as Arizona?

Jason Hosler (05:41):

So, normally, outside of community property states, when one spouse dies, the surviving spouse gets a step up on the basis for the spouse who died. So, if you both own a home that you bought for $500,000 and it’s worth a million dollars now, you each had a $250,000 basis.

And let’s say that the husband died in this example, outside of the community property state, the surviving spouse, the wife would get a step up on her husband’s half. So, that would step it up $250,000, half of that gain, and her new basis for the entire house would be $750,000.

Bruce Hosler (06:24):

Let’s explain what that is, Jason. Her original 250 plus the other 500,000 that she got for the step up, that’s how it’s combined to get to that.

Jason Hosler (06:36):

And in a community property state, you’re able to take a step up in basis on both spouses’ interest in the property. So, her basis would step up all the way to a million dollars.

So, that’s a very valuable thing that community property rules provide to people who live in community property states such as Arizona like we do. And this doesn’t just apply to your principal residence, it applies to all the property that you own jointly titled in community property.

This is why titling is so important. If you own property jointly that is not community property, it’s not going to get that treatment. Which is why we recommend in most cases that your joint property be titled inside of your trust where those community property rules are applied.

Jon Gay (07:24):

Got it. We’ve talked a lot about some big-ticket items as far as dollar amounts. Let me zoom out a little bit. If you’re thinking about selling your primary residence, should you pay the house off first?

Bruce Hosler (07:36):

Great question. It depends on your interest rate folks. If you got a 2% or a 2.5% interest rate, you may not want to pay it off. If you have a 5 or 6% interest rate, you might as well just hold on, sell it, and then do that. You want to hold onto that low interest rate as long as you possibly can. I doubt in your lifetime you’re ever going to see money that cheap again.

Jon Gay (07:57):

I know my wife and I re-fied our house during COVID and our interest rate was I think around 2%, which makes us a little hesitant to move even though we’ve kind of outgrown this house.

Bruce Hosler (08:06):

And that is what’s dampened this real estate market. But we think if the interest rates start coming back down again, Jon, they get down to 5% again or that, in my lifetime, a 6 or 8% was a good interest rate.

But for younger people like you and Jason, you’re like. “6% or 8%, what are you talking about? There’s 2 or 3%, it’s what I’m hoping for.”

But if it gets down 4, 5, 6%, we think that the economy in the real estate market is going to take off because of all the pent-up demand. People have not been able to move or buy or upgrade or downgrade, anything like that at all.

Jon Gay (08:40):

Alright, so last night, I couldn’t sleep. It was like three in the morning and threw the television on, and I was seeing ads all over the place for reverse mortgages. Good idea, bad idea, what does it depend on?

Jason Hosler (08:51):

It really depends on your individual situation. The reverse mortgage is a very versatile financial planning tool. It’s kind of like a Swiss Army knife. There’s a lot of different ways you can use it and a lot of different planning opportunities that it opens up.

But it really does depend on what your cash flow situation is, what interest rate you can get currently for those reverse mortgages, how much you currently owe on the house, whether you’re going to use it as a line of credit. And the other financial planning and retirement planning interests and goals that you have and how you can apply it to that.

So, if you are interested in a reverse mortgage … when you’re selling your principal residence, it functions very much the same as a traditional mortgage. When you sell the house, the mortgage gets paid off and you receive the remaining proceeds. When you go to purchase your next house, you could also use a reverse mortgage for purchase.

So, if you’re interested in reverse mortgages, that’s definitely a topic that we can talk with you about, and I would recommend that you include it within the context of your overall financial and retirement plan.

Bruce Hosler (10:01):

And tax planning because the proceeds of a reverse mortgage are tax-free, folks.

Jon Gay (10:05):

Good to know. Bruce, you mentioned a specific example earlier, but generally speaking, what about keeping the house and renting it out versus selling it? Again, we’re talking primary residence here.

Bruce Hosler (10:15):

It depends. We run into people that are real estate investors and they’re comfortable being landlords. Some of the rest of us, we don’t like to deal with everything, being the landlord and getting calls in the middle of the night that the toilet doesn’t work.

Jason Hosler (10:30):

Taxes, toilets, trash, tenants.

Jon Gay (10:33):

I knew there was an alliteration there, that you mentioned in a previous episode! That’s what it was Jason, thank you.

Jason Hosler (10:37):

Thats the one. The four Ts: taxes, tenants, toilets, and trash. If you don’t like to do that, then I say sell it. If you like to be a landlord and you want to have rental property, then that’s okay, do it too. It kind of depends on what the economic situation at the time was going on as well.

Jon Gay (10:56):

And your personal pain tolerance. My wife and I have a friend who was a landlord for a while, and she gave it up because those four Ts were driving her … I was trying to think of a synonym for crazy that started with T but I couldn’t get there.

Bruce Hosler (11:07):

Frustrated.

Jason Hosler (11:08):

You have to remember too that this is an investment question: is that house the best investment for that portion of your portfolio? And remember, we mentioned that Section 121 exclusion. So, if you have rented it out for more than two years, you’re losing that capital gain exclusion of potentially $250,000 single or $500,000 (married).

Is that house such a good rental and going to make you such a good return that it’s worth giving up that tax benefit when you could potentially sell, buy another house to be a landlord, sell and invest it in a different type of market besides real estate? So, you want to keep all of those considerations in mind.

Jon Gay (11:47):

Got it. Let me pivot a little bit to a different angle here guys. Let’s talk insurance. What is an umbrella liability insurance policy for those who aren’t familiar with it?

Bruce Hosler (11:56):

So, an umbrella policy is just an additional level of liability insurance. So, you have your homeowner’s insurance and it’s going to give you a baseline amount of liability insurance. You buy an umbrella which kind of shelters you up and above and over that, and it can help you with your car accidents, but also with slip and falls at the house or on your real estate.

I would say any more $2 million at a minimum and maybe as much as $3 to $5 million is how much people should have because you just need this additional protection, and it’s not really that expensive. $400 or $500, $600 will cover your policy for the whole year. It’s probably worth it having that additional protection. Which also helps you in the case of a car accident, if it goes really big, that umbrella kicks in for liability purposes there as well.

Jason Hosler (12:43):

And we’ve seen that happen with clients and people that we know where there have been car accidents, and really big liabilities associated with that for medical costs that are above and beyond.

Jon Gay (12:55):

Right. So, that’s umbrella liability. What about specifically homeowner’s insurance?

Jason Hosler (13:00):

Yeah, the homeowner’s insurance is becoming a much more difficult and thorny deal, especially in areas that might be exposed to say fire or floodplains.

Jon Gay (13:10):

Florida hurricanes is the first thing I think of.

Jason Hosler (13:12):

We’ve seen all these stories too of insurance companies pulling out of California because of the regulatory issues. And the fact that with the fires that we had in the Palisades and LA area, they’re going to be on the hook for a lot of liability there.

So, making sure that the home is insurable and buying homes in areas that are insurable and doing your due diligence on homeowners’ insurance, both with the sale of your principal residence and when you’re going to purchase your next one is something that people need to be paying attention to.

Jon Gay (13:47):

I remember I lived in Louisiana for three years down in New Orleans, and the flood zones and floodplains, that was just a nightmare for homeowners to deal with. It’s no matter where you are in the country, it seems like there’s a different potential natural disaster you’re worried about.

These insurance companies, they’re there to protect you, but they’re also businesses and if they’re going to lose money because of all these natural disasters, they’re out.

Bruce Hosler (14:08):

Right, absolutely.

Jon Gay (14:10):

Okay, we’ve talked about this next one in some previous podcasts, so let’s hit on it briefly. 1031 exchanges. This is not something you can use on the primary residence, right?

Bruce Hosler (14:19):

That is correct. A 1031 exchange now is a like for like, and it used to be we could do it with vehicles and other stuff. The tax law now has limited it to real estate, but specifically, income or investment real estate, it’s not available for your primary residence.

A lot of clients still think, well, if I sell my house and I buy a new one and I roll the money over and I don’t take any out, do I have to pay taxes on it? And yes, if you have a capital gain, if you paid down here and the house went up, and even though you take that million dollars and put it over into a new property, you cannot do a 1031 exchange. So, that’s not available. People still think it is, and it’s not.

Jon Gay (15:02):

Really important point, I’m glad you brought that up. Let’s just talk about where the market is right now. Buyer’s market, seller’s market, what are we looking at here in April of 2025 as we record this?

Jason Hosler (15:12):

Well, Jon, it still is a buyer’s market at the moment. We are seeing across the country, specifically here in Arizona, Scottsdale and Prescott, where buyers are able to kind of shop and people have been lowering prices a bit.

Now, prices have gone up so much that it seems that sellers do have some room to be able to lower prices to try and entice buyers. But until we see interest rates ease, which we are expecting over the next few years, then it could become a seller’s market again as more pent-up demand comes to market.

Jon, if it was cheap enough that you could afford the mortgage on a bigger place, you would consider moving, that might bring someone like you to the market again.

Jon Gay (15:56):

Absolutely. Well, this is going to be part one of our series where we’re talking about considerations when selling your primary residence, your principal residence. In our next podcast, we’re going to flip it and talk about selling a second home or other rental properties.

In the meantime, if one of our listeners wants to come talk to you and the team at Hosler Wealth Management, how do they best find you?

Jason Hosler (16:16):

Up in Prescott, you can give us a call at (928)-778-7666.

Bruce Hosler (16:21):

You can reach us on the website at hoslerwm.com and click on the button in the top right to schedule an appointment, or call us in Scottsdale at (480)-994-7342.

Jon Gay (16:32):

Great stuff as always guys, we’ll talk again soon.

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Bruce Hosler (16:35):

Thank you, Jon.

Jason Hosler (16:36):

Thanks, Jon.

Disclosure (16:37):

Investment advisory services are offered through Mutual Advisors, LLC DBA Hosler Wealth Management, a SEC registered investment adviser. Securities are offered through Mutual Securities, Inc., member FINRA/SIPC. Mutual Advisors, LLC and Mutual Securities, Inc. (collectively “Mutual Group”) are affiliated companies. Forward-looking commentary should not be misconstrued as investment or financial advice. The advisor associated with this podcast is not monitored for comments and any comments should be given directly to the office at the contact information specified.

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