As property values soar, more Americans are facing capital gains taxes on profits from home sales, with nearly 8% of U.S. home sales generating profits exceeding $500,000 in 2023 compared to about 3% in 2019. Married couples filing jointly can earn up to $500,000 tax-free on the sale of their primary residence, while for single filers, the threshold is $250,000. These thresholds have not been adjusted for inflation since 1997, leading to more sellers facing capital gains tax hits due to rising home values.
Capital gains taxes on home sales are more common in high-cost areas, with states like Colorado, Massachusetts, New Jersey, New York, and Washington seeing double digits in the percentage of sales with profits exceeding $500,000. To qualify for the capital gains exemption, homeowners must own the home for at least two of the past five years and use it as their primary residence for any 24 months within the same period. Making improvements to the home can help increase the basis, or original purchase price, which in turn reduces the profit subject to taxes. However, routine maintenance and repairs do not count towards the basis.
Experts suggest that homeowners who have lived in a home long enough to exceed the capital gains exemptions are likely to have made improvements that can be used to reduce their tax bills. Adding the cost of significant improvements like a new roof or addition to the basis can help lower the taxable profit from the sale. After selling a home, the IRS receives Form 1099-S which shows the closing date and gross proceeds, but homeowners need to keep documentation to prove any changes to their home’s basis in case of an audit.
Implementing strategies to reduce capital gains taxes on home sales is essential for homeowners looking to maximize their profits. With property values on the rise, more sellers are facing tax hits on their gains, making it crucial to understand the rules for qualifying for the capital gains exemption and taking advantage of opportunities to increase the basis. By making improvements to the home and keeping detailed records of these enhancements, homeowners can ensure they are not paying more in taxes than necessary on the sale of their property. Consulting with a financial advisor or tax professional can help individuals navigate the complex rules around capital gains taxes and develop a plan to minimize their tax liability.
