Is It Better to Keep or Sell Your Home Before Death?

May 6, 2025
Paramus Estate Planning

One of the most common estate planning questions we hear is: “Should I sell my house before I die?” The answer, as with many legal and financial matters, is: It depends. The key factor often comes down to capital gains tax and how it plays out during your lifetime versus after your death.

Understanding Capital Gains and Home Sales

Capital gains tax is triggered when you sell an asset—such as a house—for more than your “basis” in the property. Your basis is generally what you paid for the house, plus the cost of any capital improvements (like renovations), not including regular maintenance.

Example:

  • You buy a home for $250,000.

  • You invest $50,000 in a new kitchen and bathroom.

  • Your tax basis is now $300,000.

  • If you later sell the home for $400,000, and pay a 5% realtor commission ($20,000), your net proceeds are $380,000.

  • Your capital gain is $80,000 ($380,000 – $300,000).

But there’s good news for homeowners. If you’ve owned and lived in the home for at least two of the last five years, you may qualify for the home sale exclusion:

  • Up to $250,000 of capital gains is excluded from tax if you’re single.

  • Up to $500,000 if you’re married and filing jointly.

So in the example above, your $80,000 gain would fall well under the exclusion limit—no capital gains tax owed.

When It Might Make Sense to Sell

If your total gain is less than the exclusion amount, selling during your lifetime could make financial sense, especially if you want to distribute the proceeds directly to loved ones or need the funds for retirement or healthcare. The sale avoids probate and gives you control over how the money is used.

But what if your gain is substantial?

Let’s say:

  • Basis: $300,000 (purchase + improvements)

  • Sale Price: $700,000

  • Gain: $400,000

  • After applying the $250,000 exclusion (single filer), you’re taxed on $150,000.

At a 15% capital gains tax rate, that’s $22,500 in taxes.

The Advantage of Holding Until Death: Step-Up in Basis

Here’s where estate planning offers a powerful tax benefit. If you hold the home until your death, your heirs receive what’s called a “step-up in basis.” That means their new tax basis becomes the fair market value of the home at the date of your death.

So if the home is worth $700,000 when they inherit it, their basis is $700,000. If they sell it for $700,000, no capital gains tax is due.

This step-up can save your heirs tens of thousands of dollars in taxes—sometimes more than the cost of probating the estate.

So… Should You Sell?

Whether it’s better to sell now or hold onto the property depends on:

  • The current value of the home versus your tax basis

  • How much of the gain would be taxable

  • Whether you qualify for the homeowner exclusion

  • Your long-term financial needs

  • The potential probate costs your heirs may face

Bottom Line: If your gain is modest and qualifies for the homeowner exclusion, selling before death might be a smart option. But if your home has appreciated significantly, holding it until death can provide a major tax advantage to your heirs.

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