Unlocking Wealth: Navigating the World of Capital Gains

Anya’s Market Bites:

More Americans are facing capital gains taxes on home sale profits due to soaring property values, but experts suggest ways to minimize these taxes.

• Increase in Capital Gains Taxes:

  • In 2023, nearly 8% of U.S. home sales had profits over $500,000, up from about 3% in 2019 (CoreLogic report).

• Capital Gains Tax Exemption:

  • Married couples can exclude up to $500,000 in profit from capital gains tax when selling their primary residence.

  • Single filers can exclude up to $250,000.

  • These thresholds have not been adjusted for inflation since 1997.

• Impact of Rising Home Values:

  • More sellers are facing capital gains taxes due to increasing home values.

  • Profits above the exemption thresholds are taxed at 0%, 15%, or 20%, depending on income.

• High-Cost Areas:

  • Double-digit percentages of home sales with profits over $500,000 were reported in Colorado, Massachusetts, New Jersey, New York, and Washington in 2023.

• Qualification for Exemption:

  • Ownership Test: Must own the home for at least two of the past five years before the sale.

  • Residence Test: Must use the home as a primary residence for any 24 months within the five years before the sale (24 months need not be consecutive).

• Reducing Capital Gains Tax:

  • Home improvements (not routine maintenance) can increase the home's basis, reducing taxable profit.

  • Examples of qualifying improvements include a new roof or home additions.

  • Sellers need proper documentation to prove improvements in case of an IRS audit.

These points highlight the discussion around the escalation of capital gains taxes on home sales, the thresholds for tax exemptions, and strategies for reducing tax liability.

(Source: California Association of Realtors)

All the best,

Anya Derebenskiy

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