Q. Can you suggest the best way to minimize capital gains on the sale of my house? My husband and I bought a house in San Diego CA in 1975 for $65,000. My name was on the title. We made about $130,000 of improvements. He died in 1999, when the house was worth about $325,000 to $350,000. There were no changes done to remove my husband's name from the mortgage, title, etc., after his death. Now I am 75 years old and would like to sell the house and move to Texas. The value of the house is now around $600,000.

The mortgage is paid off. I took out a $90,000 home equity loan to assist in fixing it up for sale and provide me with rental money while the house is being shown for sale. I have not remarried. The house I hope to buy in Texas is $360,000. I have been told by a real estate agent that I should expect my taxes to be near $50,000! It seems like I will not be able to afford a house worth half of what the San Diego house is worth.

I only have Social Security to live on. I was told to just buy a cheaper house, but it doesn't seem right that I can't go into a house with about the same price as the one I am leaving. Any guidance would be greatly appreciated. --LW, by e-mail

A. You may have misunderstood your Realtor. As I see it, your tax liability on the sale of the house will be quite small, about $10,000. You can understand by walking through the figures with me.

First, the cost basis of the house is $195,000 ($65,000 purchase price plus $130,000 in improvements). So your share of the cost basis for the house is $97,500. Your husband's share was the same, but values are "stepped up" at death to the value at that time. The share you inherited from your husband has a cost basis of $162,500 to $175,000. As a consequence, the cost basis of the house when you sell it will be about $260,000. In addition, as a single-income tax filer, you have an exemption of $250,000.

So you can realize about $510,000 from the sale with no tax liability. You can also deduct the Realtor's commission and other costs immediately related to selling. On a $600,000 sale, that could be $36,000 plus fix-up expenses. So your taxable capital gain will be about $54,000 less the fix-up expenses. Your tax bill will probably be about $10,000, less if you spent much on the pre-sale fix-up. When all the paperwork is done and the home equity loan has been paid off, you will have about $464,000 in cash. You should have an accountant help you with this.

That's the good news.

If Social Security is your only source of cash income, buying a $360,000 house is a really bad idea. Remember, real estate taxes in Texas are a lot higher than real estate taxes in California. You're likely to pay about $7,200 in annual real estate taxes on a $360,000 house. Add utilities, insurance, and maintenance, and the annual cost of owning the house, without a mortgage, is likely to take every dime of your Social Security income. Of course, you'll still have $100,000 in cash left from the home sale, but it would have to cover ALL of your other expenses for the rest of your life.

Fortunately, you can duplicate your San Diego house for much less than $360,000. According to the National Association of Realtors, for instance, the median single family home resale price in San Diego was $579,800 at the end of 2006. That's 3.3 times the $175,200 median resale price of existing homes in Austin, the most expensive city in Texas. (Here are the median prices in other Texas cities: Houston, $148,600; Dallas, $144,300; San Antonio, $140,600; and El Paso, $131,800. And don't forget Amarillo at $108,300.)

The difference in housing prices tells you why it currently costs $2,669 to rent a 24-foot Budget truck to move from San Diego to Dallas but only $299 to rent the same truck to move from Dallas to San Diego--- lots of people are thinking what you're thinking. Empty moving trucks are piling up in Texas.

If it were my choice, I'd set a target price of about $150,000 for your house in Texas. That would leave you with a $300,000 investment fund plus your Social Security income to support your personal expenses, the new house--- and an occasional trip to La Jolla.

On the web:

Price a move at Budget National Association of Realtors Existing Home Sale Price Figures