Can Selling Your Home Create a Tax Liability?

Planning Article

May 2024 – By Tom Rueger CFP®

The tax code provides some favorable provisions for homeowners, one of which is the exclusion from taxation on the gain on some or even all of your primary home. However, as the price of homes continues to rise at a fairly substantial pace, more homeowners are or could be finding themselves in a situation where they have to pay tax on some of that gain when they sell their homes. An exclusion from taxation of gains was passed back in 1997 and the intent was to not have people that lived in their homes for a long time have to pay a potentially sizable tax when they finally did move out. However, unlike a lot of other provisions in the tax code, the exclusion has not been indexed to inflation and the gain in value of the home could now cause a tax liability.

The tax code allows for a married couple to shield up to $500,000 in home sale profits from capital gains tax and single filers can shield up to $250,000. For example, the other day my neighbor said that his parents bought a house in Brooklyn in 1986 for $300,000 and now it is worth about $3 million (we should all be so lucky!). Based on the current tax law, if they sold their house for $3 million, they could owe long term capital gains tax on $2.2 million (the original purchase price of $300,000 plus the excluded amount of $500,000). Most people will not find themselves in nearly this dramatic of a situation, but some could be in for a big surprise, especially those that have lived in their house for a long time and/or live in an area with high housing costs.

But there is some good news. The cost of any “capital improvements” can be added to your “basis” (the original price) in your home. Capital improvements are improvements to the house, but they do not include home maintenance. In broad terms, a capital improvement adds value, extends the useful life, or adapts it to new uses. However, home maintenance keeps the house in working condition and includes things like painting, fixing a broken pipe or repairing a leaking roof.

The bottom line is that you may need to document the capital improvements to the IRS, so you will want to organize and save any paperwork that proves the changes in your home’s basis.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. Although general strategies and / or opinions are revealed, this post is not intended to, nor does it represent or reflect, transactions or activity specific to any one account. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All data and information are gathered from sources believed to be reliable and is not warranted to be correct, complete, or accurate.

Investments carry the risk of loss including loss of principal. Past performance is never a guarantee of future results. Vantage Financial Partners Limited is not a tax advisor. Please consult a tax professional for any specific questions regarding your tax situation.