As property values rise across the U.S., homeowners are increasingly likely to tangle with capital gains taxes when selling their homes. However, there are savvy strategies that might ease the financial blow, according to financial experts.
When you sell your primary residence, there’s a tax perk that can exclude up to $250,000 of your profit if you’re single, or $500,000 for married couples filing jointly. Of course, there are specific criteria you need to meet to qualify for this break.
Real estate data company CoreLogic reports that more and more Americans are surpassing these exclusion limits. Their 2024 study reveals that around 8% of U.S. homes sold last year had profits exceeding the $500,000 cap for married couples, a significant jump from about 3% in 2019.
In expensive states such as Colorado, Massachusetts, New Jersey, New York, and Washington, these numbers are even more pronounced, based on CoreLogic’s findings.
Tommy Lucas, a certified financial planner from Moisand Fitzgerald Tamayo in Orlando, Florida, notes that exceeding these $250,000 and $500,000 thresholds is becoming a more frequent occurrence. Any profit above these amounts gets taxed at the capital gains rate, which could be 0%, 15%, or 20%, depending on your income.
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One way to minimize those profits is by increasing your “basis,” which essentially means enhancing the initial purchase price of your home, suggests Mark Baran of CBIZ’s national tax office. To boost your basis, consider logging capital improvements—think renovations, new roofs, exterior modifications, or system upgrades.
Typically, your adjusted basis is calculated as the initial buying cost of your home plus these capital improvements. This cumulative amount could potentially help keep you under the capped exclusion limits of $250,000 or $500,000, says Baran.
However, the IRS is clear that regular home repairs like fixing leaks, filling cracks, or replacing worn-out fixtures don’t qualify as capital improvements.
Furthermore, Lucas advises that reducing your taxable profit can also involve adding certain fees and closing costs related to buying and selling your home. According to the IRS, these can include:
– Title fees
– Utility installation charges
– Legal and recording fees
– Survey costs
– Transfer taxes
– Title insurance
– Remaining seller debts
Lucas points out that incorporating these expenses might trim down your taxable profit by a few thousand dollars, providing some extra financial breathing room.
