Hopeful buyers have struggled on and on with real estate price surges. Those who have managed to break into this market have watched their home values surge, too.
When these homeowners decide to sell, the profits they accumulated in their homes are known to the Internal Revenue Service (IRS) as capital gains.
People who sold their homes in 2023 have received Form 1099-S from their brokers. They’re ready to file it, to declare proceeds from the sale of a home. Most of these sellers will be glad to know they’ll get to keep their gains.
Here, we take a look at what home sellers should know — even if their profits won’t be taxed.
How About a Quick Capital Gains Refresher?
OK. First off, capital gains are not taxable until the year you transfer the deed. If you’re like most people, you’ll keep the deed in your name for years before deciding to transfer it.
Capital gains represent how much more the home is worth since you paid for it, but only become an issue when you transfer ownership. If you sold in 2023, the 2023 tax return is in play.
How much did you pay for the home? To the IRS, that’s your tax basis. To the extent a home’s value today is more than the original basis, you have capital gains.
How long did you hold the deed before selling? Depending on your answer, your profits count either as short-term or long-term capital gains.
Once you have held the deed for more than a year, you’ve earned the long-term tax rate. That’s a good thing. Long-term capital gains receive a lower tax rate.
But the IRS treats short-term capital gains, earned on real estate held a year or less, as normal income. In other words, sell the home in under a year, and the IRS treats the proceeds as part of your income for the year.
But what if you sold at a price less than you originally paid for your home? Loss on the sale is not tax-deductible. According to a government fact sheet on capital gains and losses:
- You have a capital gain if you sell the home at a profit.
- You have a capital loss if you lose money on the home when you sell.
- Losses from the sale of a home are not tax deductions.
Did you give your ownership share to someone else? That’s not a taxable sale, but it could be a taxable gift.
OK, I Earned a Profit. Now, What About My Exclusions?
Under current tax law, you can get a capital gain exclusion allowance every two years. If you’re filing singly, you may keep your gains, untaxed, up to $250,000. A couple filing jointly gets an allowance of $500,000 in tax-exempt home sale profits.
If selling your home fetched you a profit under $250,000 per taxpayer, then you won’t need to pay capital gains tax. If you made more than that on your sale, check the tax rate for your income bracket to find out how much tax you’ll owe for capital gains.
The IRS offers worksheets so home sellers can calculate the relevant numbers. See Publication 523 (2023), Selling Your Home.
The $250K (single) or $500K (couple) exemption applies if the taxpayer sells the home they used as their primary residence for at least two of the five years leading up to the deed transfer. Two years in terms of total days you occupied the home is the minimum. This does not need to mean you lived in the home for two years straight. So, you could have rented out your home for a while, then made it a primary residence again, and still exclude your sale profits up to $250K. Meanwhile, any rental profits you earned would be taxed as income.
Note: The IRS may let you take a partial exclusion of gain if you sold your primary home because of a life change. There are also special exemption allowances for military personnel deployed away from home.
Do I Get Any Credit for Improvements I Made on the Home?
Indeed, you can subtract from your taxable proceeds the expenses you invested into your home’s marketability. You can add your expenses to the tax basis of your home. That way, it’s as though you paid more for it. Now, there’s less taxable profit in your sale proceeds. For some people, this keeps capital gains under the exemption limit.
You can also add in fees and expenses related to your original purchase, like the cost of title policies, transfer taxes, certain professional fees — as well as the cost of improvements that you put into use for a year or more.
Keep those receipts and records whenever you work on your home! This way, you’ll have a valuable record for yourself — or your beneficiaries down the road. Special tax rules apply if you yourself inherited the real estate you sold. The thing to know? Under the Internal Revenue Code, when a beneficiary receives a deed from an estate, there’s no taxable sale.
But now you have already sold your home. And to figure out your capital gains:
- Take your selling price.
- Subtract what you paid (including fees etc.) to buy and to improve the home.
Now you know your gains and whether they are low enough to avoid capital gains tax.
Say you paid $170K for your home, then put $30K into improvements. You lived in it more than two years, and sold it for $250K. Your capital gains are $50K. That’s well under the exemption cap. So you owe $0 in capital gains.
Tax-Time Takeaways
Given how home prices have soared, the bulk of recent sellers realized significant property value gains. This translates into profits on their sales.
If you’re a seller whose home has appreciated in value, your gains are taxable — but exempt from that tax, up to a limit. Under our current laws, you can sell your primary residence while excluding up to $250,000 in profit from federal taxes.
Good planning for a deed transfer includes reviewing the current federal and state tax laws. (Your state might expect you to pay taxes even when the IRS doesn’t.)
Note to our readers: We cannot dispense financial or legal advice. Nor can we mention all potentially relevant tax provisions in this brief overview. The tax code is famously complicated. It’s important to speak with a tax expert in your state for advice on your particular situation.
Supporting References
IRS Publication 523: Selling Your Home.
IRS Publication 551: Basis of Assets.
Sara Stanich for Forbes.com: Navigating Capital Gains Taxes in a Challenging Real Estate Market (Apr. 3, 2024).
Deeds.com: Capital Gains: Were Profits on Your 2023 Home Sale EXEMPT? Head Form 1099-S Off at the Pass (Jan. 15, 2024).
Deeds.com: Selling Your Home for a Handsome Profit This Year? Is Capital Gains Tax an Issue? (Jul. 14, 2023).
Deeds.com: For Home Sellers: Capital Gains Tax 101 (Mar. 29, 2021).
Deeds.com: Real Estate Tax Changes Could Be Coming: Spotlight on Capital Gains and the Stepped-Up Cost Basis (Dec. 21, 2020).
And as linked.
Photo credits: Leeloo the First and Mikhail Nilov, via Pexels.