I sold my home in 2021. Will I face a large tax bill?
By: Stacey Nickens
Because owning a home is considered an investment, selling a home can lead to taxable capital gains. However, you can exclude a certain amount of those capital gains on your tax return, and if you save receipts and records documenting home improvements, you may be able to increase your home’s cost basis enough to avoid capital gains taxation on a property sale.
Married couples can exclude up to $500,000 in capital gains on the sale of a primary residence. Single filers can exclude up to $250,000.
The capital gain on your home is the difference between the price for which your home is sold and your home’s cost basis. Your home’s cost basis is the value of the home when you purchased it plus the value of upgrades and improvements that you have made to the home.
For example, consider a married couple who bought a home for $400,000. During the five years that they live in the home, they finish the home’s basement and renovate the home’s upper level, increasing the home’s cost basis to $500,000. They sell the home for $700,000. The couple realizes a capital gain of $200,000 ($700,000 – $500,000) and is able to exclude this entire gain on their tax return.
The married couple can claim this exclusion because the home was their primary residence for at least two of the past five years. Moreover, the couple did not sell another home and claim the exclusion during the two years before the sale of this primary home. Doing so may have prevented them from claiming this exclusion a second time.
If your spouse passes away, you may still be able to claim the joint exclusion of $500,000. You can do so if you sell your primary home within two years of your spouse’s passing. Moreover, your spouse’s “half” of the home will receive a step-up cost basis, meaning half of your home’s cost basis will increase to the value of your home on the day that your spouse died. This stepped-up basis can reduce your capital gains when you sell the home.
You may still owe capital gains tax on your home if your home was not your primary residence for at least two of the past five years or if your capital gain exceeds the exclusion. Homes owned for less than one year generate short-term capital gains, which are taxed as ordinary income. Homes owned for longer than one year generate long-term capital gains, which are taxed at a 0%, 15%, or 20% tax rate, depending on your filing status and income.
If you sold your home in 2021, reach out to the Elm3 tax team, and we would be happy to assist you in preparing your tax return to maximize any available exclusions.
