Fear looms over the concealed home equity tax: Who holds the fear?
Minimizing Capital Gains Taxes on Home Sales: Strategies for Homeowners
In the current housing market, with rising home values and equity stakes, more homeowners may find themselves facing a potential capital gains tax on their proceeds from the sale of their homes. However, there are strategies that can help homeowners minimize or avoid this tax.
The primary tool for homeowners is the homeowner exclusion, which allows the exclusion of up to £250,000 of gain for single filers and £500,000 for married couples on the sale of a primary residence, provided they have lived in the home for at least two of the last five years before the sale.
Key strategies include qualifying for the primary residence exclusion by living in the home for 24 months within the five years preceding the sale, keeping meticulous records of home improvements and maintenance costs, timing the sale wisely, and filing jointly for married couples to double the exclusion.
Homeowners should focus on meeting the residency requirements, accurately tracking home improvement costs, planning the sale timing, and utilizing the exclusion fully. It's also essential to calculate gains carefully by adding significant sums spent on maintaining, repairing, and improving the property over the years to their home's cost basis, lowering their taxable gain.
The National Association of Realtors (NAR) warns that more homesellers may incur a capital gains tax on their proceeds due to the rise in home equity stakes over the last few years and no changes to exemption limits. Single homeowners or those filing separately may be more vulnerable, as they only have a £250,000 exclusion compared to the £500,000 for married couples filing jointly.
In high-cost markets like San Francisco, New York City, or Los Angeles, homeowners who have owned their homes for years may have homes whose values have skyrocketed well beyond the original purchase price, making them more likely to incur a capital gains tax.
Long-term capital gains (from homes sold after 12 months) are taxed at a lower rate than regular income: either zero, 15, or 20 percent. However, homeowners in a higher income tax bracket are more likely to exceed the exclusion threshold and be taxed at a larger capital gains rate.
It's worth noting that the actual numbers of home sales that require capital gains payments are probably lower than the 7.9% figure at the end of 2023, as homeowners can deduct eligible costs and expenses from taxable gains.
Some members of Congress, including Rep. Marjorie Taylor Greene (R-Ga.) and Rep. Jimmy Panetta (D-CA), have proposed eliminating capital gains taxes or raising the home-sale exclusion amounts. While this could benefit many homeowners, it could also have unintended negative impacts, like the major loss of revenue at both the federal and state levels.
In conclusion, homeowners should be mindful of the potential capital gains tax implications when selling their homes and consider the strategies outlined above to minimize or avoid this tax. By focusing on meeting the residency requirements, accurately tracking home improvement costs, planning the sale timing, and utilizing the exclusion fully, homeowners can effectively manage their tax liability.
Homeowners in need of personal-finance advice should pay attention to the strategies helping them minimize or avoid capital gains taxes on home sales. The homeowner exclusion of up to £250,000 ($345,000) for single filers or £500,000 ($690,000) for married couples on the sale of a primary residence, provided they have lived in the home for at least two of the last five years before the sale, plays a significant role in personal-finance management for homeowners.
