By Elizabeth Lucchesi
Last year was a wild ride in real estate. Homes flew off the shelves quicker than toilet paper did in 2020. And 2022’s significant home value increases may mean you sold for more than you paid.
ATTOM, a curator of nationwide real estate data, reported home sellers nation- wide profited an average of $112,000 on the sale of their home in 2022, up 21% from 2021. This figure sounds fantastic but doesn’t reflect potential capital gains taxes and is a digit or two less large once this tax is deducted.
With tax deadlines approaching, you may wonder if you’ll owe the IRS for this capital gain. Here’s how to sort through tricky tax matters as a recent home seller.
Capital assets and taxes
A capital gain occurs when you sell an asset for more than you originally paid. Capital assets include most things you own, physical or otherwise, like your vehicle or a boat and stocks, bonds and real estate.
Many sellers’ profits fall under the capital gains thresholds for primary homes when selling a home. Others, particularly long-time property owners, may get hit with an unexpected bill in the form of a capital gains tax. This tax is calculated relative to the profit made from your home sale.
Short-term capital gains are profits realized from a home owned for less than a year and sold; these gains will be taxed at the ordinary income tax rate.
You have a loss in your basis is more than the selling price. While losses dent your wallet, there’s no tax impact and you can’t claim a loss.
Like many tax-related items, there are exceptions and not all gain is taxable. For example, if the home was your primary residence for at least two out of the five years before you sold it, you may be able to exclude up to $250,000 of the capital gain from your taxable income or up to $500,000 if you’re married and filing jointly. You can only claim this exclusion once every two years.
Homeowners will also not have a reportable gain or loss if their home was transferred to a spouse or ex-spouse as part of a divorce settlement. Other exceptions that may affect your gain include circumstances preventing you from living in your primary residence, deceased taxpayers, vacant land and condemned homes.
Exceptions made to ownership and residency are specific. For example, those on qualified official extended duty in the uniformed services, foreign service or intelligence community can suspend the five-year period for up to 10 years.
Keep better records
Every improvement and renovation related to your home should be closely recorded as these can increase your home value, sales price and ultimately your potential capital gain. Use a spreadsheet to enter all receipts and invoices for home-related expenses, including maintenance and have a physical copy filed away.
Home Sales In 2023
Many homeowners will profit from their home sales in 2023. And assuming no changes from Congress, the same capital gains rules will apply.
If you’re thinking about selling this year, start planning now. Organize your records. Gains recognized in 2023 won’t be taxable until 2024, but you should think ahead to figure out your basis and adjustments now.
Be smart and save time when you lean into the advice of an experienced tax expert and realtor you know and trust. These professionals will help you understand your tax obligations when selling a home and clearly explain the best options for your situation.
The information provided here is not investment or financial advice. The writer is the founder of the LizLuke Team of Long & Foster Real Estate. She is also a buyer and seller agent.