Capital-Gains Tax Hits More Home Sellers
Selling a home is now so profitable that many more Americans are getting hit with an unexpected tax bill.
Roughly 8% of 2023 home sales brought windfalls over the $500,000 limit for couples to be exempt from capital-gains taxes, more than double the share in 2019, according to CoreLogic, a real-estate data firm.
More sellers are on the hook for taxes because of the huge run up in property values since the pandemic. While home prices surged, the limit on how much profit is exempt from taxes, meanwhile, isn’t indexed for inflation.
The tax hit is even more prevalent in states with high home values, such as California, where nearly a third of sales exceed the threshold. In West Virginia, less than 1% of home sales are affected.
The prospect of a big tax bill gives homeowners one more reason to remain hesitant to sell. High interest rates and elevated home prices, along with a shortage of appealing homes to move to, have led many Americans to hold off listing their homes, financial advisers said. Others don’t have a choice.
“You may need to accept the fact that you’re not able to plow every dime from the sale of your home into the purchase of your next one,” Thomas Mullooly, a financial adviser in Wall Township, N.J., told clients.
There are ways to cut down or eliminate the capital-gains tax, especially for those who can document expenses for renovations and other capital improvements.
How do capital-gains taxes on home sales work?
Taxes on capital gains apply to profits from the sale of stocks and other assets, including real estate. One of the big tax breaks for homeowners is the home-sale exclusion: Single filers get an exemption of up to $250,000 of net gains on a sale, and married couples filing jointly get up to $500,000. CoreLogic analyzed gross capital gains.
To get the home-sale exclusion, you need to have owned the home and used it as your primary residence for at least 24 months of the five years leading up to the sale. For married couples, only one spouse has to satisfy the ownership requirement, but both spouses must meet the residency test.
If the net gain on the home sale exceeds the full exemption, the excess may be taxed up to 20% if you have owned the home for more than a year. Some high earners might also face a 3.8% surtax.