Rosalind Evans
In the ever-fluctuating U.S. housing market, homeowners who sold their properties in 2023 may navigate the complex terrain of capital gains taxes. Despite a general downturn in home sales, many sellers still managed to secure a profit, with the average profit on median-priced single-family homes reaching $121,000, according to ATTOM data. However, this financial gain might come with an unexpected guest: a hefty tax bill. As certified public accountant Miklos Ringbauer, founder of MiklosCPA in Los Angeles pointed out that exceeding the IRS’s limits for tax-free gains can often be a “shock” to sellers. Yet, there’s a silver lining. The tax code offers avenues to mitigate this burden, promoting homeownership and providing tax breaks for eligible sellers.
Capital Gains Tax: A Closer Look
The IRS permits single homeowners to exclude up to $250,000 of profit from capital gains taxes, with married couples filing jointly eligible for up to a $500,000 exclusion, contingent upon meeting specific criteria. Profits beyond these thresholds are subject to long-term capital gains taxes, which vary based on taxable income. To qualify for these exemptions, homeowners must navigate through the “ownership test” and “residence test,” ensuring compliance with the stipulated durations of ownership and residency.
For those whose profits exceed the IRS exclusions, strategies exist to reduce the taxable amount. Certified financial planner Assunta McLane, managing director of Summit Place Financial Advisors, suggests augmenting the home’s original purchase price or “basis” through capital improvements that extend the property’s useful life. This approach diminishes taxable profits and emphasizes the importance of meticulous record-keeping to substantiate these improvements during IRS audits.
The journey of selling a home can lead to unexpected tax implications, but with informed strategies and adherence to IRS guidelines, homeowners can navigate these waters more smoothly. As Ringbauer eloquently puts it, the tax laws are designed to “encourage homeownership,” providing a cushion through tax breaks for many sellers. By understanding the eligibility criteria and exploring avenues to reduce taxable gains, homeowners can turn the potential tax shock into a manageable aspect of their home-selling experience.
