- If you want to sell your home, you can expect a profit due to soaring prices and record equity.
- You may owe capital gains taxes if the windfall exceeds $250,000 for single sellers or $500,000 for married couples filing jointly.
- Experts say that adding home improvements to the original purchase price can reduce your bill.
In an era of rising prices and record home equity, you may be able to sell your home for a profit. However, you may have to pay unexpected taxes next April.
According to ATTOM, a nationwide property database, the average home seller in the first quarter of 2022 still earned $103,000 in gross profits.
Despite many squeezing through capital gains tax with profits under the thresholds, others – especially longtime homeowners – may be in for a costly surprise, experts say.
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In 2022, capital gains from home sales will be taxed at federal rates of 0%, 15% or 20%, depending on taxable income.
Capital gains tax rates for 2022
IRS offers a write-off for homeowners, allowing single filers to exclude up to $250,000 of profits, while married couples filing jointly can exclude up to $500,000.
Although these thresholds haven’t changed since 1997, median home sales prices have doubled over the past two decades, affecting many long-term homeowners.
It has become a huge part of the conversation now, says John Schultz, a CPA and partner at Genske, Mulder & Company in Ontario, City in California.
Some homeowners may benefit from the exemption, but there are strict requirements to qualify. The seller must own and use the home as their primary residence for at least two years prior to the sale.
According to Mary Geong, a CPA and enrolled agent at the firm in her name, the two years do not need to be consecutive.
Owners of two homes may split their time between them, and if their cumulative time living in one place equals at least two years, they may qualify.
For a partial exclusion, someone may convert a rental property into their primary residence for two years. In that case, the write-off is based on the percentage of time they spent living there, she explained.
If a single filer owns a rental property for 10 years and lives there for 2 years, he or she may be eligible for 20% of the exclusion of $250,000.
Geong added, “But you need good recordkeeping.”.
Boost the purchase price
By adding certain home improvements to the original purchase price, known as basis, homeowners may reduce profits if they exceed exemptions and owe taxes, Schultz explained.
The IRS considers improvements such as home additions, patios, landscaping, swimming pools, and new systems to be improvements.
However, ongoing repairs and maintenance costs that don’t add value or prolong the life of the home, such as painting or fixing leaks, will not be counted.
The homeowner must provide proof of the improvements, which can be difficult after many years. There are, however, other methods if receipts are lost.
The property tax history can help you recalculate some of that, Schultz said, explaining how reasonable estimates may be acceptable.
Additionally, homeowners can increase basis by adding certain closing costs, such as title, legal, or surveying fees, along with title insurance.
When a home is sold for a large profit, there may also be other tax consequences.
As an example, increasing adjusted gross income can affect eligibility for health insurance subsidies, and may require someone to repay premium credits on their taxes.
Retirement income may result in higher Medicare Part B and Part D premiums in the future.
“If you’re thinking of selling anything of significance, you should speak with an advisor,” Schultz said.
Tax advisors or financial advisors can help people determine the best course of action depending on their complete situation.