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More Americans are paying capital gains taxes on home sale profits amid rising property values — but there are ways to reduce your bill, experts say.
In 2023, nearly 8% of U.S. home sales generated profits exceeding $500,000, compared to about 3% in 2019, according to an April report from real estate data firm CoreLogic.
There's a reason the report calls for this threshold.
It's key to a special tax break for homeowners who make a profit on the sale of a primary residence. Married couples filing jointly can receive up to $500,000 from the sale without capital gains taxes. The minimum for individual filings is $250,000.
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These capital gains exemption thresholds have not been indexed for inflation since 1997, said certified financial planner Jaime Quinones of Stockade Wealth Management in Marlboro, New Jersey.
“With the recent rise in home values, more sellers are facing capital gains tax,” Quiñones said.
Home sale gains of more than $250,000 or $500,000 trigger capital gains taxes at 0%, 15% or 20%, depending on your income.
Capital gains taxes on home sales are more common in high-cost areas. The CoreLogic report found that in 2023, the percentage of home sales with a profit exceeding $500,000 reached double digits in Colorado, Massachusetts, New Jersey, New York and Washington.
How to qualify for the capital gains exemption
The IRS has strict rules for qualifying for the $250,000 or $500,000 capital gains exemption, according to the IRS. To this point, you must have owned the home for at least two of the past five years before selling your home to meet the “ownership test.”
The “residence test” states that the home must be your primary residence for 24 months of the five years prior to the sale, with some exceptions. The 24 months do not have to be consecutive.
How to reduce your capital gains tax bill
If you've lived in a home long enough to get past the capital gains exemptions, there's a “good chance” you've made home improvements, said Parker Trasburg, senior financial advisor at CJM Wealth Advisers. .
You can use these improvements to increase your home's “basis,” or original purchase price, reducing your profits, he said.
But routine maintenance and repairs do not count. For example, you can increase your home's foundation by adding the cost of a new roof or addition. But repairs to leaky pipes will not qualify.
After the home is sold, the IRS receives Form 1099-S, which shows the closing date and total proceeds. But you will need paperwork to prove any changes to your home's basis in the event of an IRS audit.
