May 25, 2024

Rise To Thrive

Investing guide, latest news & videos!

More home sellers are paying capital gains taxes — here’s how to reduce your bill

2 min read
More home sellers are paying capital gains taxes — here’s how to reduce your bill

The Good Brigade | Digitalvision | Getty Images

More Americans are paying capital gains taxes on home sale profits amid soaring property values — but there are ways to reduce your bill, experts say.

In 2023, nearly 8% of U.S. home sales yielded profits exceeding $500,000, compared to about 3% in 2019, according to an April report from real estate data firm CoreLogic.

There’s a reason the report called out that threshold.

It’s key for a special tax break for homeowners who make a profit when selling a primary residence. Married couples filing together can make up to $500,000 on the sale without owing capital gains taxes. The threshold for single filers is $250,000.

More from Personal Finance:
How to reduce taxes on your inherited individual retirement account, experts say
Americans can’t stop ‘spaving’ — here’s how to avoid this financial trap
Women farmers are key decision-makers, according to USDA data

Those capital gains exemption thresholds haven’t been indexed for inflation since 1997, said certified financial planner Jaime Quinones with Stockade Wealth Management in Marlboro, New Jersey.

“With the recent rise in home values, more sellers have been facing a capital gains tax hit,” Quinones said.

Home sale profits above the $250,000 or $500,000 thresholds incur capital gains taxes of 0%, 15% or 20%, depending on your income.

Capital gains taxes on a home sale are more common in high-cost areas. In 2023, the percentage of home sales that had profits exceeding $500,000 hit double digits in Colorado, Massachusetts, New Jersey, New York and Washington, the CoreLogic report found.

How to qualify for the capital gains exemption

The IRS has strict rules to qualify for the $250,000 or $500,000 capital gains exemption, according to the IRS. To that point, you must own the home for at least two of the past five years before your home sale to satisfy the “ownership test.”

The “residence test” says the home must be your primary residence for any 24 months of the five years before the sale, with some exceptions. The 24 months don’t need to be consecutive.

How to reduce your capital gains tax bill