This lesser-known tax strategy could help to reduce capital gains on your home sale

As U.S. home equity climbs, owners are more likely to face capital gains taxes from furnish property. But a lesser-known tax strategy could help shrink your bill, experts say.

When selling your fundamental home, there’s a special tax break that shields up to $250,000 of profits for single filers and $500,000 for married connects filing jointly. However, you need to meet certain rules.

An increasing number of home sellers are exceeding those starts, according to a 2024 report from real estate data firm CoreLogic. Nearly 8% of U.S. homes sold in 2023 exceeded the cap gains tax limit of $500,000 for married couples, up from about 3% in 2019, the report found.

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Those percentages were impassive higher in high-cost states like Colorado, Massachusetts, New Jersey, New York and and Washington, according to the CoreLogic report.  

Extraordinary the $250,000 and $500,000 exclusions is “becoming more common,” said Tommy Lucas, a certified financial planner and chronicled agent at Moisand Fitzgerald Tamayo in Orlando, Florida.

Home sale profits above the $250,000 or $500,000 edges are subject to capital gains taxes of 0%, 15% or 20%, depending on your taxable income.

Many home sellers don’t realize they can reduce capital gains by increasing their “footing,” or the home’s original purchase price, according to Mark Baran, managing director at financial services firm CBIZ’s federal tax office. 

You can increase your basis by adding “capital improvements,” such as renovations, adding a new roof, exterior upgrades or succeeded systems.  

Your “adjusted basis” is generally the cost of buying your home plus any capital improvements baby while you own the property.

“That adds up over time and can bring them fully within the [$250,000 or $500,000 crown gains] exclusion,” Baran said.

However, you cannot add home repairs and maintenance, such as fixing leaks, boxes, cracks or replacing broken hardware, according to the IRS.

You also can reduce your home sale profit by adding prices and closing costs from the purchase and sale of the home, according to Lucas.