With soaring prices and record home equity, you may expect to make a profit on the sale of your property. The windfall may cause a tax bill next April.
The average single- family seller scored a $103,000 gross profit in the first quarter of 2022, down slightly from the previous year.
Although many skirt taxes with profits under the capital gains thresholds, others may have a costly surprise.
A survey shows that nearly 40% of investors who pulled money out of markets in the last year regret it.
Home sales profits are taxed at federal rates of zero, 15% or 20% depending on income.
Single taxpayers can exclude up to $250,000 of profits, while married couples can subtract up to $500,000 from their taxes.
Median home sales prices have more than doubled over the past two decades, affecting many long-term homeowners, and these thresholds haven't changed since 1997.
John Schultz, a CPA and partner at Genske, Mulder & Company in Ontario, California, said that it has become a huge part of the conversation.
The exemption may be significant for some homeowners, but there are strict guidelines to follow. For two of the five years preceding the sale, the home must be owned by the seller.
Mary Geong, a Piedmont, California-based CPA and enroll agent at the firm, said that the two years don't have to be consecutive.
If their cumulative time living at one place equals at least two years, they may be able to split time between the properties.
For a partial exclusion, someone can convert a rental property to a primary residence. The write-off is based on how much time they spent there.
If a single filer owns a rental property for 10 years and lives there for two, they may be eligible for 20% of the $250,000 exclusion.
Good recordkeeping is required, according to Geong.
If homeowners exceed the exemptions and owe taxes, they may reduce profits by adding certain home improvements to the original purchase price.
Home additions, patios, landscaping, swimming pools, new systems and more may qualify as improvements according to the IRS.
Repairs that don't add value or prolong the home's life, such as painting or fixing leaks, won't count.
It can be difficult for homeowners to show proof of improvements after many years. There are other methods if someone lost receipts.
Property tax history can be used to calculate reasonable estimates.
Adding certain closing costs, such as title, legal or surveying fees, along with title insurance, may increase basis.
There are other tax consequences when selling a home with a large profit.
Increasing adjusted gross income can affect eligibility for health insurance subsidies, and may require someone to pay back premium credits at tax time.
Increasing income may lead to higher Medicare Part B and Part D premiums for retirees.
If you are selling any asset of significance, you should be talking to an advisor.
Depending on someone's complete situation, a financial advisor or tax professional can project possible outcomes.
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