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Capital Gains Taxes on Your Home?

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Paul George,

We have a housing shortage in our country.

We have an affordability challenge for homebuyers. Current homeowners feel “stuck” in their current home either because they hold a much lower interest rate on their current home, or they can’t make sense of selling their home of 30 years to get something half the size for the same, or higher price.

Another factor has become part of the decision-making process. Homeowners are asking, “will the sale of my home trigger a capital gains tax?” Since 1997, there has been an exclusion of $250,000 of gain if you are filing single, and a $500,000 exclusion if you are filing your income taxes jointly. For most of the time since 1997, this was not a tax triggering event for most home sellers because they did not profit that much from the sale of their home. The average stay in a home at the time was seven years. You also could deduct any expenses or improvements used on the house itself. A quick example, you purchase your home in 2019 for $500,000. Since you purchased the home, you replaced the HVAC system for $15,000. Your cost basis for the house is now $515,000. In 2024 you sell for $700,000. Your expenses to sell the house are $40,000, you net $660,000. Your basis for capital gains purposes is $515k, your net sale was $660k for a gain of $145k, well below the $250k or $500k threshold. THIS IS A GENERAL EXAMPLE, always consult your tax advisor before making any decisions and verify this information.

Because homeowners are staying in their homes longer, and they have a lower interest rate, and even if they have no mortgage, they cannot see a reason to sell something larger for something smaller at the same or higher price… we have an inventory problem. Now, on top of the reasons just mentioned, there might be a capital gains tax because the fast appreciation of home values and longer stays in home are making for profits of more than $500,000, especially in the higher value states like the ones on either coast. So, this is another reason people are not selling their homes.

There MIGHT be some help on the horizon but it’s very political and when politics are involved, you never know if and when it might come to fruition. HR Bill 1321, named the “More Homes on The Market Act” has been introduced to amend the IRS code increasing the exclusion to $500,000 for single filers and $1,000,000 for joint filers AND would index the amount based on inflation. Commonsense right? Again, politics is a tough business and the possibility of a new revenue stream from taxpayers profiting over $500,000 or $1,000,000 might be a tough sell.

I’m starting to see more and more of this becoming an issue for sellers. Have a discussion with me to see if you might fall into this category, while paying capital gains was rare in the past, equity has increased exponentially and it’s starting to have an impact on whether to sell or not.

 

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