The Internal Revenue Service (IRS) offers a significant tax break for home sellers, allowing them to exclude up to $250,000 of profits for single filers and $500,000 for married couples filing jointly from capital gains taxes. However, an increasing number of U.S. homeowners are exceeding these thresholds, resulting in capital gains taxes being levied on their home sale profits. A 2024 report from CoreLogic reveals that nearly 8% of U.S. homes sold in 2023 surpassed the capital gains tax limit of $500,000 for married couples, a substantial increase from about 3% in 2019.
Homeowners whose sale profits exceed the $250,000 or $500,000 exclusions face capital gains taxes at rates of 0%, 15%, or 20%, depending on their taxable income. The rise in home equity across the United States has made it more common for sellers to encounter these tax implications. This trend is particularly notable in high-cost states such as Colorado, Massachusetts, New Jersey, New York, and Washington, where property values have soared.
To mitigate the impact of capital gains taxes, home sellers can employ strategies to increase their "basis," or the home's original purchase price. By adding fees and closing costs associated with both purchasing and selling the home, sellers can effectively reduce their taxable gains. Eligible expenses include title fees, utility installation charges, legal and recording fees, surveys, transfer taxes, and title insurance. Additionally, any balances owed by the seller can also be incorporated to lower capital gains.
Despite these potential savings, many home sellers remain unaware of their ability to reduce capital gains by increasing their basis. Mark Baran, managing director at CBIZ's national tax office, emphasizes the importance of recognizing these opportunities.
"That adds up over time and can bring them fully within the [$250,000 or $500,000 capital gains] exclusion," – Mark Baran, managing director at financial services firm CBIZ's national tax office.
It is crucial for sellers to maintain accurate records of their home's original purchase price and any subsequent improvements made. However, it's important to note that routine home repairs and maintenance—such as fixing leaks or replacing broken hardware—cannot be included to reduce capital gains.
Tommy Lucas, a certified financial planner and enrolled agent, observes that exceeding the $250,000 and $500,000 exclusions is becoming more prevalent as U.S. home equity continues to climb. This increase underscores the need for homeowners to explore all available avenues to manage potential tax liabilities when selling their properties.