• Home equity represents at least 80 percent of net wealth for 6.5 million homeowners nearing retirement, according to a 2009 study published by the Federal Reserve Board. Using that equity wisely is critical for seniors. How taxes affect home equity in a sale is an important consideration in deciding what to do with your house in retirement.
  
  

Federal Capital Gains

• The very best news about selling your home, whether in retirement or at any other point during your life, is that a large portion of the profit is entirely exempt from federal and state taxes. The limits are $250,000 for single homeowners, and $500,000 for married couples. If you have paid off or paid down your mortgage substantially and live in an area with higher than the national median home value, you could easily pocket a sizable gain, pay all cash for a smaller house or a unit in a life-care facility in a less expensive part of the country and have plenty of cash to spare. The exemption applies to any principal residence which you have owned and lived in for at least two of the last five years. All profit over and above the exemption level is taxed at long-term capital gains rates which top out at 15 percent as of 2010.
  
  

State Capital Gains Tax

• All states recognize and respect the home sales tax exemption. Nine do not tax capital gains at all, regardless of the profit amount. Forty states have long-term capital gains rates, varying from a low of 2.7 percent in Wisconsin to a high of 9.3 percent in California, applicable to gains over the federally exempted amounts.
  
  

State Real Estate Transfer Tax

• Thirty-five states and the District of Columbia have a real estate transfer tax. Formulas vary but translate into percentage rates (of the sales price) of about a fifth of 1 percent in North Carolina to 1.21 percent in New Jersey. Pennsylvania imposes a cap of 4 percent on the combination of state tax, which is 1 percent, and local tax. Some states, like New York and New Jersey, have higher tax rates for properties over $1 million.
  
  

Local Transfer Tax

• In California, Louisiana and Ohio, all of which have no state transfer tax, cities, towns and/or counties impose transfer taxes. In seven other states both the states and localities within the state impose transfer taxes.