U.S. home prices may have come down from their peaks around 2022, but many home sellers could still see considerable profits—and the resulting tax bill could be significant.
Under current law, you may be able to exclude from your taxable income up to $250,000 in capital gains ($500,000 for married couples) generated from the sale of your home. That means any gains equal to or below those limits will be tax-free so long as you:
- Owned and used the home as your primary residence for at least two years, in aggregate, of the five years prior to the sale date.
- Didn't exclude the gain from the sale of another home during the two years prior to the sale of your current home.
- Didn't acquire the home through a 1031 exchange, in which you defer gains from the sale of an investment property by reinvesting the proceeds in a similar property.
Any profit that doesn't qualify for or exceeds the exclusion will be taxed as a capital gain. Short-term gains, which apply to properties held for one year or less, are taxed at your ordinary tax rate (up to 37%); long-term gains for properties held longer than a year are taxed at 0%, 15%, or 20%, depending on your income.
The trouble is that today's still-high prices mean more home values are approaching those exclusion thresholds, which haven't changed since 1997.
So, what can you do? One way to manage a potential tax bill is to take full advantage of the cost-basis adjustments available to you.
Your cost basis, which is used to determine your total gain, isn't just the home's purchase price. If you paid certain closing costs or made value-adding improvements—like a new roof, replacing the HVAC, etc.—you can add those expenses to your basis and potentially lower your tax bill. (You can find details on acceptable cost-basis adjustments in IRS Publication 523, Selling Your Home.)
Still, it's possible you may realize a taxable capital gain even after applying the personal residence exclusion and adjusting your cost basis. In that case, you may need to increase your withholding or make estimated tax payments to avoid under-withholding penalties.
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This material is intended for general informational and educational purposes only. This should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decisions.
All expressions of opinion are subject to change without notice in reaction to shifting market, economic or political conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
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This information is not a specific recommendation, individualized tax, legal, or investment advice. Tax laws are subject to change, either prospectively or retroactively. Where specific advice is necessary or appropriate, individuals should contact their own professional tax and investment advisors or other professionals (CPA, Financial Planner, Investment Manager, Estate Attorney) to help answer questions about specific situations or needs prior to taking any action based upon this information.