Many sellers expect to make a lot of money when they list their property. Capital gains taxes may affect their windfall.
Home sales profits are taxed at federal rates of zero to 20% in 2021, depending on income.
The IRS offers a write-off for homeowners, allowing single filers to exclude up to $250,000 of profit, and married couples to subtract up to $500,000.
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The thresholds haven't changed since 1997, and the median home sales price has more than doubled over the past two decades, affecting many long-term homeowners.
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. The home must be used as the primary residence for two of the five years preceding the sale.
Mary Geong, a Piedmont, California-based CPA and enroll agent at the firm in her name, 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 two homes.
For a partial exclusion, someone can convert a rental property to a primary residence. The write-off is based on the percentage of 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 needed, said 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 and maintenance expenses 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.
Schultz explained how property tax history can help you make better estimates.
Adding certain closing costs, such as title, legal or surveying fees, along with title insurance, may increase basis.
There are 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.
Retirees who increase their income may see higher Medicare Part B and Part D premiums.
If you are selling any asset of significance, you should be talking to an advisor.
Depending on a person's situation, a financial advisor or tax professional can project possible outcomes.
