Welcome to Extreme Investor Network, where we provide unique insights and valuable information on all things personal finance. Today, we’re diving into the topic of capital gains taxes on home sale profits.
As property values continue to soar, more Americans are finding themselves facing capital gains taxes on their home sale profits. In fact, in 2023, nearly 8% of U.S. home sales yielded profits exceeding $500,000, compared to just 3% in 2019. As a result, it’s essential to know how to reduce your tax bill.
One key way to minimize your capital gains tax is by taking advantage of the special tax break for homeowners. Married couples filing jointly can make up to $500,000 on the sale of their primary residence without owing any capital gains taxes. For single filers, the threshold is $250,000.
It’s important to note that these exemption thresholds have not been adjusted for inflation since 1997. With the recent rise in home values, more sellers are facing potential capital gains tax hits. Home sale profits above the thresholds will incur capital gains taxes of 0%, 15%, or 20%, depending on your income.
Capital gains taxes on home sales are more common in high-cost areas. In states like Colorado, Massachusetts, New Jersey, New York, and Washington, the percentage of home sales with profits exceeding $500,000 has hit double digits.
To qualify for the capital gains exemption, the IRS has strict rules in place. You must own the home for at least two of the past five years before the sale to satisfy the “ownership test.” Additionally, the home must be your primary residence for any 24 months of the five years before the sale to meet the “residence test.”
If you’ve lived in a home long enough to exceed the capital gains exemptions, there are ways to reduce your tax bill. One strategy is to increase your home’s “basis” by including the cost of improvements you’ve made over the years. However, routine maintenance and repairs do not count towards increasing the basis.
Remember, after selling your home, the IRS will receive Form 1099-S, which shows your closing date and gross proceeds. To prove any changes to your home’s basis in case of an IRS audit, make sure to keep all relevant paperwork.
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