Selling Your Home? – Learn About Capital Gains

With real estate prices rising, more people are paying capital gains taxes when they sell their homes. In 2023, nearly 8% of home sales triggered capital gains taxes, compared with only 3% in 2019.

Assuming a taxpayer has lived in the home as a primary residence for at least two out of the last five years and hasn’t sold and excluded gains from another primary residence in the past two years, the IRS allows home sale appreciation of up to $250,000 per individual or $500,000 per married couple filing jointly to be excluded from capital gains tax liabilities. The exclusion amount hasn’t been indexed for inflation since 1997, which is one reason why more homeowners are subject to capital gains tax on their home sales.

Fortunately, there are steps you can take to lower your capital gains tax liabilities.

#1 – Deduct the cost of major home improvements.

If you’ve done major home improvements since you purchased your primary residence, you may be able to deduct these expenses from the appreciated home value, thus lowering your capital gains tax liabilities.

For example, if you and your spouse (married filing jointly) spent $100,000 to renovate your kitchen and you sell your home for a $650,000 net profit, you can deduct the $100,000 from the $650,000 profit. This means that after factoring in the $500,000 exclusion, only $50,000 of the appreciated value would be subject to capital gains taxes.

With this strategy, it’s important to maintain all documentation of completed home improvements. This includes contractors’ invoices, materials and permitting fees. These receipts can help protect you in case of an audit.

#2 – Offset your gains with losses elsewhere in your portfolio.

Another strategy to save on capital gains taxes is to harvest losses elsewhere in your investment portfolio and use them to offset the gains associated with your home sale.

For example, a single filer who sells her home for a $350,000 profit, after the $250,000 exclusion, also sells a large stock position for a $150,000 loss. She can use the capital loss from the sale of stock to offset the capital gain from the sale of her home, which means she would only be subject to taxes on $200,000 of her home’s appreciated value ($350,000 minus $150,000).

When implementing a tax-loss harvesting strategy, be aware of the IRS’ “wash-sale rule.” This rule prevents investors from claiming an investment loss if a “substantially identical” security is repurchased within 30 days of the sale. If the wash-sale rule is triggered, the tax loss won’t be allowed. That’s why it’s important to consult with your wealth manager before attempting to harvest portfolio losses.

#3 – Moving due to employment, health or unforeseen circumstances.

Not all is lost if you have to move before you own and live in your home for two years. If you move due to employment, health or unforeseen circumstances, the IRS allows you partially exclude appreciation on your home.

The IRS provides examples and requirements of situations that qualify for this exception. Examples include your new place of employment being at least 50 miles from the home you’re selling, divorce or moving to obtain or provide medical care for a disease.²

Talking with your tax professional will help determine if your situation meets any of these exceptions. Could you use help minimizing capital gains taxes on your home sale?