Capital Gains Giving Home Sellers Headaches at Tax Time

Rising Home Values Mean More Capital Gains Tax Burdens

Rising property values have provided many home sellers with a cash windfall over the past year. The average profit came in at just over $94,000, which is 71% higher than 2019. For many people filing their taxes, those profits come with a surprising drawback in the form of capital gains taxes.

When selling your primary home, the profits are subject to taxes on capital gains. Depending on household income, capital gains taxes are levied at rates of 0%, 15%, or 20%. If gains fall below a certain amount no taxes are owed, but longtime owners could owe the government a check — especially in light of rising prices.

Capital Gains Thresholds Stagnant Since 1997

There are certain exceptions available to homeowners when they go to sell their property. Single filers can write off $250,000 in profits, while married couples who jointly file are able to subtract up to $500,000. Still, analysts note while median home sale prices have doubled since 2000, the IRS thresholds haven’t been raised since 1997.

Financial advisors note there’s another risk for homeowners when their gross income is dramatically increased by the sale of a home. Large profits could leave individuals ineligible for health insurance premiums and retirees could face higher Medicare premiums.

How Homeowners Reduce Tax Burdens and Keep Profits

Advisors note home sellers can take several steps to reduce or eliminate their capital gains tax burden. In order to qualify for exceptions, a property must be the seller’s primary residence for two years. Those years aren’t required to be consecutive, and some owners alter their living arrangements prior to selling in an effort to avoid capital gains.

Another option for property owners is known as “increasing basis.” This involves adding the cost of home improvements to the original purchase price, including things like additions, landscaping, and swimming pools. Owners who don’t have receipts or work orders may be able to use old tax records to show that improvements were made. Rising home prices are a welcome trend for many sellers, but tax season carries a hidden downside.

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