{"id":1337,"date":"2025-04-19T02:59:32","date_gmt":"2025-04-19T02:59:32","guid":{"rendered":"https:\/\/staging8.dynaserverx.com\/newenglandtrust.com\/?post_type=newsletter&p=1337"},"modified":"2025-04-19T03:00:51","modified_gmt":"2025-04-19T03:00:51","slug":"thinking-of-selling-your-home-dont-be-surprised-by-capital-gains-taxes","status":"publish","type":"newsletter","link":"https:\/\/staging8.dynaserverx.com\/newenglandtrust.com\/newsletter\/thinking-of-selling-your-home-dont-be-surprised-by-capital-gains-taxes\/","title":{"rendered":"Thinking of Selling Your Home? Don\u2019t Be Surprised by Capital Gains Taxes"},"content":{"rendered":"

Capital gains taxes apply to the profit from selling a home, so they may be of special concern \u2014 and potential surprise \u2014 for older homeowners who bought their homes many years ago and might yield well over $500,000 in profits if they sell. In some areas of the country, a home bought for $100,000 in the 1980s could sell for $1 million or more today.2<\/sup> At a federal tax rate of 15% or 20% (depending on income) plus state taxes in some states, capital gains taxes can take a big bite out of profits when selling a home. Fortunately, there are some things you can do to help reduce the taxes.<\/p>\n

Qualifying for exclusion<\/h2>\n

In order to qualify for the full exclusion, you or your spouse must own the home for at least two years during the five-year period prior to the home sale. You AND your spouse (if filing jointly) must live in the home for at least two years during the same period. The exclusion can only be claimed once every two years. There are a number of exceptions, including rules related to divorce, death, and military service. If you do not qualify for the full exclusion, you may qualify for a partial exclusion if the main reason for the home sale was a change in workplace location, a health issue, or an unforeseeable event.<\/p>\n

Increase basis for lower taxes<\/h2>\n

The capital gain (or loss) in selling a home is determined through a two-part calculation. First, the selling price is reduced by direct selling costs, including certain fees and closing costs, real estate commissions, and certain costs that the seller pays for the buyer. (The amount of any mortgage pay-off is not relevant for determining capital gains.) This yields the amount realized, which is then reduced by the adjusted basis.<\/p>\n

The basis of your home is the amount you paid for it, including certain costs related to the purchase, plus the costs of improvements that are still part of your home at the date of sale. In general, qualified improvements include new construction or remodeling, such as a room addition or major kitchen remodel, as well as repair-type work that is done as part of a larger project. For example, replacing a broken window would not increase your basis, but replacing the window as part of a project that includes replacing all windows in your house would be eligible. This basis is adjusted by adding certain payments, deductions, and credits such as tax deductions and insurance payments for casualty losses, tax credits for energy improvements, and depreciation for business use of the home. (See hypothetical example below.)<\/p>\n

\n

Hypothetical Example<\/h2>\n

Pete and Joanne purchased their home for $100,000 in 1985 and sold it for $800,000 in 2024.
\nThis is how their capital gains might be calculated.<\/p>\n\n\n\n\n\n\n\n\n\n\n\n
Capital gains<\/strong><\/span><\/th>\nBasis<\/strong><\/span><\/th>\n<\/tr>\n<\/thead>\n
\u00a0 \u00a0 \u00a0$800,000 sales price<\/td>\n\u00a0 \u00a0 \u00a0$100,000 purchase price<\/td>\n<\/tr>\n
\u2013 \u00a0 $50,000 direct selling costs\u00a0<\/strong><\/td>\n+\u00a0 \u00a0$8,000 purchase costs<\/td>\n<\/tr>\n
\u00a0 \u00a0 \u00a0$750,000 amount realized\u00a0<\/strong><\/td>\n+\u00a0 \u00a0$52,000 improvements<\/td>\n<\/tr>\n
\u2013 \u00a0 $150,000 adjusted basis<\/td>\n\u00a0 \u00a0 \u00a0$160,000 total basis<\/strong><\/td>\n<\/tr>\n
\u00a0 \u00a0 \u00a0$600,000 capital gain<\/strong><\/td>\n\u2013\u00a0 \u00a0$10,000 solar energy credit<\/td>\n<\/tr>\n
\u2013\u00a0 \u00a0$500,000 capital gains exclusion<\/td>\n\u00a0 \u00a0 \u00a0$150,000 adjusted basis<\/strong><\/td>\n<\/tr>\n
\u00a0 \u00a0 \u00a0$100,000 taxable gains<\/strong><\/td>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

At a 15% rate \u2014 which applies to most taxpayers \u2014
\nthis would cost $15,000 in federal capital gains taxes.<\/p>\n

This hypothetical example of mathematical principles is for illustration purposes only. Actual results will vary.<\/p>\n

\n

Inheriting a home<\/h2>\n

Upon the death of a homeowner, the basis of the home is stepped up (increased) to the value at the time of death, which means that the heirs will only be liable for future gains. In community property states, this usually also applies to a surviving spouse. In other states, the basis for the surviving spouse is typically increased by half the value at the time of death (i.e., the value of the deceased spouse\u2019s share).<\/p>\n

Determining the capital gain on a home sale is complex, so be sure to consult your tax advisor. For more information, see IRS Publication 523 Selling Your Home.<\/p>\n

1) U.S. Census Bureau, retrieved from FRED, Federal Reserve Bank of St. Louis, 2024
\n2) CNN, January 29, 2024<\/p>\n

This information is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek guidance from an independent tax or legal professional. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Broadridge Advisor Solutions. \u00a9 2024 Broadridge Financial Solutions, Inc.<\/p>\n","protected":false},"featured_media":1338,"template":"","meta":{"_acf_changed":false},"newsletter-category":[30],"class_list":["post-1337","newsletter","type-newsletter","status-publish","has-post-thumbnail","hentry","newsletter-category-september"],"acf":[],"yoast_head":"\nThinking of Selling Your Home? 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