Selling a home can lead to a hefty tax bill if your profits exceed IRS limits.
However, homeowners have options to minimize capital gains taxes and keep more money in their pockets.
According to nationwide data, in 2023, typical homeowners pocketed $121,000 when selling their home.
While profits are down from last year, gains can still push filers over tax-free thresholds.
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- Home sellers can exclude up to $250k (single) or $500k (married) in profits from capital gains tax.
- Boost your home’s basis by tallying past improvements to lower taxable gains.
- Review closing costs for other potential deductions to reduce your tax burden.
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Reduce Your Capital Gains Tax Burden From Selling a Home in 2023
The good news? Single filers can exclude up to $250,000 of capital gains, and married couples get a $500,000 exclusion.
You may qualify if you meet ownership and residency requirements.
Who Qualifies for Capital Gains Tax Exclusions
Home sellers must pass two key tests to get the full tax exclusion:
Ownership Test: Before selling, you must own the home for 2 of the past 5 years. For joint filers, only one spouse needs to meet this.
Residence Test: You must have lived in the home as your primary residence for 24 months of the past 5 years before the sale date.
The months don’t need to be consecutive.
Married couples filing jointly must individually satisfy the residence test.
Exclusions may be partial if you have an eligible reason for selling, like a job relocation or health issue.
And you typically can’t claim the exclusion if you’ve used it within the past 2 years for another property sale.
Strategies to Reduce Taxable Gains
If your capital gains top the $250,000 or $500,000 mark, take steps to minimize taxable profits:
- Increase your home’s basis by tallying home improvements. Adding living space, renovated kitchens, new roofing, and upgraded HVAC can increase your home’s base and lower taxable gains. Keep detailed records and receipts as proof.
- Review closing costs itemized on Form 1099-S and look for any deductible fees for professionals like attorneys, inspectors, or home stagers. These can further reduce your taxable profits.
- If you’re married, consider transferring partial home ownership to your spouse before selling. This effectively raises the tax-free exclusion limit. Consult a tax pro to ensure you do this properly.
- If possible, sell your home after owning it for at least 2 years. This qualifies you for preferential long-term capital gains tax rates of 0%, 15%, or 20% instead of higher short-term rates.
Proper planning can reduce capital gains taxes and keep more of your home sale windfall.
Track your home improvements, understand the deductible closing costs, and review all your options.
A tax professional can help maximize your tax exclusions and deductions.
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