The real estate market took a hit in 2023, with existing home sales at the lowest pace since 1995. Reasons for this slow down include buyer burnout post-pandemic, rising mortgage rates, and low inventory. However, sellers saw some positive news, as the median sales price reached a historical high of $389,800, up 1% from 2022. This mix of news created volatility in the real estate market, potentially leading to confusion at tax time for homeowners.
One important aspect of taxes for homeowners selling their main residence is the exclusion under section 121 of the tax code. Taxpayers can exclude up to $250,000, or $500,000 for married couples, of the gain from the sale of their main home if they meet certain criteria, such as owning and living in the home for two of the five years before the sale. Other factors, such as where you receive mail, vote, get your driver’s license, and file taxes, can also be considered when determining your main home.
Tax reporting requirements must also be met when selling a home, even if the gain is excludable. If you receive an informational income-reporting document like Form 1099-S, you must report the sale. Additionally, capital gains from the sale must be calculated based on the basis of the property, including the purchase price and any improvements made. Calculating your capital gain correctly is crucial to determine if you owe capital gains tax on the sale.
For homeowners who have owned their home for more than a year, their capital gain will be considered long-term and taxed at rates of 0%, 15%, or 20% depending on their filing status and income. Losses on the sale of a personal residence cannot be claimed for tax purposes. There are also specific situations where homeowners may be disqualified from the exclusion, or may qualify for a partial exclusion of gain, based on certain circumstances such as a change in workplace location, health issue, or unforeseeable events.
Looking ahead to 2024, the real estate market is expected to see an improvement over 2023, with the National Association of Realtors predicting 4.71 million existing-home sales, a 13.5% increase from the previous year. Some of the most active markets are expected to be in Austin, Dallas-Fort Worth, Nashville, Philadelphia, and Washington, D.C. Despite the increase in sales, median home prices are expected to remain largely unchanged. Homeowners planning to sell in 2024 should be aware of the capital gains exclusions and rules that will apply, assuming no changes from Congress.
