Retirement & Income

By the Retiree Report Editorial Team · Updated 2026-05-23 · 7 min read

This article is general information, not financial, tax, or legal advice. Consult a licensed professional before acting on it.

Downsizing your home after 65: the tax rules that decide whether selling now or later wins

If you’re 65 and thinking about selling the house, the federal tax bill probably matters less than you fear — and the timing matters more. The Section 121 home sale exclusion still shields the first $250,000 of gain for a single filer, or $500,000 for a married couple filing jointly, and the IRS hasn’t moved those caps since 1997. What’s moved is everything around them: 2026 capital gains brackets, the Medicare premium surcharge tied to your income, and rules that close fast after a spouse dies.

What the $250,000 and $500,000 exclusion actually shields

The exclusion comes from IRS Publication 523, and it’s the single biggest reason most retirees walk away from a downsize owing nothing federal. To use it you have to clear two tests inside the same five-year window ending on the sale date. You need to have owned the place for at least 24 months. You need to have lived in it as your main home for at least 24 months. The months don’t have to be consecutive.

For a married couple filing jointly, only one spouse has to satisfy the ownership test, but both must clear the use test individually to claim the full $500,000. Sell two homes inside any 24-month period and you get the exclusion on only one of them. That part trips people up when a Florida condo and a Colorado cabin are both in the picture.

The IRS does carve out a partial exclusion when the move is forced by a change in employment, a documented health reason, or what the agency calls “unforeseen circumstances” — divorce, the death of a co-owner, a natural disaster. There’s also a quieter rule that matters at this age: if you become physically or mentally unable to care for yourself, time spent in a licensed care facility counts toward the use test, as long as the home was your main residence for at least 12 of the prior 60 months. (Read that sentence twice if a memory diagnosis is in the family.)

When the gain runs past the cap

Walk through real numbers. A couple bought in 1992 for $180,000. Improvements over three decades — a new roof, an addition, replacement windows, central air — pushed their adjusted basis to $260,000. They sell in 2026 for $1.1 million net of commissions. Gross gain: $840,000. Subtract the $500,000 joint exclusion. Taxable long-term gain: $340,000.

That $340,000 lands in the long-term capital gains brackets the IRS published for 2026. According to Kiplinger’s summary of the IRS update, the 0% rate runs up to $98,900 of taxable income for joint filers, the 15% rate covers everything up to $613,700, and the 20% rate sits above that. Most retirees with a one-time house gain stay in the 15% lane. But Social Security plus a required minimum distribution plus $340,000 of capital gain can push household taxable income high enough that a chunk lands in 20% territory.

Tack on the Net Investment Income Tax. The 3.8% NIIT applies to investment income — capital gains included — once modified adjusted gross income clears $200,000 for a single filer or $250,000 for a married couple. Those thresholds aren’t indexed for inflation either. Combine NIIT with the top long-term rate and the federal hit on the final dollars reaches 23.8%, before any state tax.

Has anyone told you that’s the part to plan around?

Most listing agents don’t.

The Medicare surprise nobody puts in the spreadsheet

Here’s the part that catches people two years late. The Income-Related Monthly Adjustment Amount — IRMAA — is the surcharge layered onto your Medicare Part B and Part D premiums when modified adjusted gross income clears certain tiers. Because Social Security uses a two-year lookback, the home you sell in 2026 will reshape your Medicare premium in 2028.

For 2026, CMS pegged the standard Part B premium at $202.90 per month, and IRMAA tiers begin once MAGI in the relevant tax year exceeds $109,000 for a single filer or $218,000 for a married couple filing jointly. The top tier ($500,000+ single, $750,000+ joint) adds $487 to Part B and another $91 to Part D — per person, per month. Kiplinger’s breakdown of the 2026 IRMAA tables lays out the full grid.

A $340,000 taxable gain from the example above will almost certainly push a household into one of the higher IRMAA tiers two years after the sale. The good news: IRMAA resets every year against current MAGI, so the spike isn’t permanent. The bad news: you’ll pay it for a full 12 months of premiums before income drops back and the Social Security Administration catches up. If you’d like the full mechanics, our 2026 IRMAA income threshold guide walks through every tier.

There is a partial reset path. Form SSA-44 lets you request a recalculation when income falls due to a life-changing event — but a home sale by itself isn’t on the agency’s qualifying list, so don’t count on the appeal saving you.

Widowhood, the two-year window, and a step-up most people don’t claim

When a spouse dies, the surviving spouse can still file as married — and claim the $500,000 exclusion — on a sale completed within two years of the date of death, provided the residence and ownership tests were met before. After that window closes, the cap drops to $250,000. Two years feels generous in the abstract and very short when you’re grieving.

A second rule matters even more, and it has nothing to do with Section 121. When one spouse dies, the deceased spouse’s share of the home receives a step-up in cost basis to fair market value on the date of death. In most states, that’s a step-up on half the house. In community-property states — Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin — both halves step up.

What that means in practice: a widow in Texas who inherits the family home with a fair-market value of $900,000 now has a $900,000 basis, regardless of what the couple paid in 1985. If she sells the next year for $920,000, the taxable gain is $20,000, and the $250,000 single-filer exclusion swallows it whole. Same widow, same numbers, but in Pennsylvania? Only half the basis stepped up, so the taxable gain runs much higher.

This is one of the few places where a post-retirement Roth conversion plan intersects with a home sale — both involve managing a single year’s MAGI on purpose.

What should you do before you list?

Three documents save more money than any negotiation tactic with a buyer’s agent. Pull together your original closing statement (the HUD-1 or Closing Disclosure), receipts for capital improvements over the years — a new roof, an addition, a kitchen remodel, replacement windows, central air installed where there wasn’t any — and any depreciation schedules if part of the house was ever used for business. Improvements add to basis; ordinary maintenance like painting and leak repairs doesn’t. The IRS reminders page on home sales spells out the reporting and recordkeeping basics, including when you have to file even if the entire gain is excluded.

Time the sale around your other income. If you can defer an IRA withdrawal or a Roth conversion to a year when you aren’t selling, your gain may stack on a smaller base and miss the 20% bracket entirely. If a home office or rental room was deducted after May 6, 1997, the depreciation you claimed is recaptured at up to 25% regardless of the exclusion — that’s a Section 121 fact pattern worth flagging to a CPA before you sign a listing agreement.

Check the state tax angle too. Many states tax long-term capital gains as ordinary income, with no special preferential rate. A handful — Florida, Texas, Tennessee, Wyoming, South Dakota, Nevada, Alaska, and New Hampshire on most income — impose no state income tax at all, which is part of the math when retirees consider crossing state lines anyway.

If your gain looks tight, the IRS Topic 701 page on sale of home is the plainest official summary worth bookmarking before you talk to a professional. None of this replaces a one-hour appointment with a CPA or enrolled agent who handles real estate; the fee is small against a six-figure gain.

What to remember

A $250,000-or-$500,000 federal exclusion still covers most retiree downsizing math, but the cap hasn’t moved in nearly three decades, and the gain it doesn’t cover triggers ripples — long-term capital gains tax, the 3.8% NIIT, and a Medicare premium spike two years later. The widow’s two-year window and the step-up in basis at death can rewrite the bill entirely, especially in community-property states. Walk into a sale with your improvement receipts, an honest MAGI estimate, and at least one professional opinion.