Rosalind Evans
In 2023, more Americans paid capital gains taxes due to elevated home sale profits. As real estate values climb, homeowners who sell their primary residence face significant tax implications, particularly when profits exceed certain thresholds. However, financial experts offer strategies to mitigate these tax burdens effectively.
Understanding the Capital Gains Exemption
Key Thresholds and Their Impact
According to CoreLogic’s recent findings, approximately 8% of home sales in the U.S. during 2023 resulted in profits that surpassed the $500,000 mark for married couples and $250,000 for single filers. These figures have risen sharply from about 3% in 2019. “With the recent rise in home values, more sellers have been facing a capital gains tax hit,” explained Jaime Quinones, a certified financial planner with Stockade Wealth Management. Significantly, these exemption thresholds have not been adjusted for inflation since 1997, intensifying the tax impact for many homeowners.
Qualifying for the Capital Gains Exemption
Meeting IRS Requirements
Homeowners must meet specific IRS criteria to benefit from the capital gains exemption. These include the “ownership test,” where the homeowner must have owned the property for at least two of the past five years, and the “residence test,” which requires the property to have been the homeowner’s primary residence for any 24 months within those five years. These months do not need to be consecutive, allowing some flexibility in qualifying for the exemption.
Strategies to Reduce Capital Gains Tax
Increasing Home’s Basis through Improvements
Parker Trasborg, a senior financial advisor at CJM Wealth Advisers, notes, “If you’ve lived in a home long enough to exceed the capital gains exemptions, there’s a ‘high probability’ you’ve made improvements to the home.” Homeowners can leverage these improvements, such as adding a new roof or building an addition, to increase the home’s “basis” or the original purchase price. This adjustment can effectively reduce the taxable profit, although routine maintenance like fixing leaky pipes does not qualify. Proper documentation of these improvements is crucial, especially during an IRS audit.
As real estate markets evolve, understanding and navigating capital gains taxes on home sales is crucial for maximizing financial outcomes. By familiarizing themselves with tax laws and available exemptions and strategically adjusting their home’s basis, homeowners can significantly mitigate their tax responsibilities. Staying informed and consulting with financial professionals can lead to substantial savings and a smoother sale process.
