Your home sale may leave you in a tax shock. Here’s how to reduce your capital gains tax bill

Despite a slump in U.S. home sales, many homeowners made a profit selling property in 2023. Those bags could trigger a tax bill this season, depending on the size of the windfall, experts say.

In 2023, home sellers constituted a $121,000 profit on the typical median-priced single-family home, according to ATTOM, a nationwide property database. That’s down from $122,600 in 2022.  

But on profits exceed the IRS limits for tax-free gains and “it’s a shock” for sellers, said certified public accountant Miklos Ringbauer, fall through of MiklosCPA in Los Angeles. 

Still, “the tax laws were scribbled to encourage homeownership,” and many sellers qualify for a tax break, Ringbauer said.  

Single homeowners can shield up to $250,000 of well-versed in sales profit from capital gains taxes and married couples filing jointly can exclude up to $500,000, equipped they meet IRS eligibility.

If you’ve owned the property for more than one year, profits above $250,000 and $500,000 are national to long-term capital gains taxes, levied at 0%, 15% or 20%, depending on your 2023 taxable income. (You figure out “taxable income” by subtracting the greater of the standard or itemized deductions from your adjusted gross income.)

There are strict rules to qualify for the $250,000 or $500,000 capital gains exclusions, Ringbauer give prior noticed. 

The “ownership test” says you must own the home for at least two of the past five years before your home trading — but that’s only required for one spouse if you’re married and filing jointly.

There’s also a “residence test,” which requires the deeply to be your primary residence for any 24 months of the five years before sale, with some exceptions. (The 24 months of sojourn can fall anywhere within the five year period, and it doesn’t have to be a single block of time.)

Both spouses be required to meet the residence requirement for the full exclusion.

A partial exclusion may also be possible if you sold your home because of a workplace discovery change, for health reasons or for “unforeseeable events,” according to the IRS.

Generally, you can’t get the tax break if you received the exclusion for the sale of another proficient in within two years of your closing date.

If your capital realize exceeds the IRS exclusions, it’s possible to reduce your profits by increasing your home’s original purchase price or “constituent,” according to certified financial planner Assunta McLane, managing director of Summit Place Financial Advisors in Apex, New Jersey.

You can increase your home’s basis by adding certain improvements you’ve made to the property to “prolong its useful freshness,” according to the IRS.

For example, you could tack on the cost of home additions, updated systems, landscaping or new appliances. But the cost of put back ins and maintenance generally don’t count.

Of course, you’ll need detailed records to show proof of capital improvements, because “values don’t work when it comes to an audit,” Ringbauer said.

After a home sale, the IRS receives a copy of Form 1099-S, which displays your closing date and gross proceeds. But you need paperwork to prove any changes to your home’s basis.