capital gains taxes - can they be minimized?

Many American households have substantial home equity - $34.5 trillion - and for those with significant equity, selling a home can free up a lot of cash. However, the potential for a capital gains tax bill can be a concern for many sellers. With proper upfront tax planning, it's possible to minimize or even eliminate capital gains taxes in some cases.

Homeowners can reduce taxes on the sale of their primary residence through an IRS exclusion:

* Single taxpayers can exclude $250,000.

* Married taxpayers filing jointly can exclude $500,000.

* Surviving spouses can also claim the $500,000 exclusion if they sell the home within two years of their spouse's death.

There are limitations to these exclusions:

* They apply only to the sale of a primary residence.

* You must have owned and used the property as your primary home for two of the five years leading up to the sale.

* You cannot take the exclusion if you excluded gain from another home sale within two years prior.

These exclusions may not always be sufficient, as a significant percentage of homeowners could exceed these caps. Congresswoman Marjorie Taylor Greene introduced a bill to eliminate federal capital gains tax on primary residence sales, aiming to increase housing inventory. Even if this bill passes, state capital gains taxes may still apply. While states like Florida, with no state income tax, would not levy such taxes, sellers in other states could face substantial charges. For instance, in New York, long-term capital gains are taxed at ordinary income rates, potentially up to 10.9%.

Upon a homeowner's death, the home's basis is reset to its market value on the date of death. If heirs sell at this price, no capital gain tax is due.

For those unable to completely avoid capital gains taxes, consider tax-loss harvesting. This involves offsetting capital gains with investment losses from stocks, bonds, or mutual funds to reduce overall taxes.

Finally, holding a home for at least a year qualifies you for long-term capital gains treatment, which typically has lower tax rates. For example, a seller willing to delay closing until they've owned the property for over a year can reduce their tax rate from ordinary income to a lower long-term capital gains rate.

For those preparing to or considering the sale of a primary residence, there are additional considerations:

Change Your Home into a Business Property 

Renting your house instead of selling it converts it to business property. This allows for a 1031 "like-kind" exchange, deferring capital gains taxes. Taxes become due upon the sale of the replacement property unless you pass away, in which case your heirs inherit it at a stepped-up basis, avoiding taxes. 

Utilize Seller Financing for the Sale

Consider financing the purchase for your buyer through an installment sale if you do not need the equity from your home to buy another one. This method allows you to spread out the gain and taxes over the mortgage's life, as gains are recognized as capital gains, and interest is taxed as ordinary income with each payment. Additionally, an installment sale could prevent you from moving into a higher tax bracket in the sale year, which might occur if the entire gain were included in your income at once. However, a potential risk of this strategy is the buyer defaulting on the loan.

Find Those Receipts

The adjusted basis of your home is typically determined by adding the cost of capital improvements to your home's purchase price. This includes expenses like a new roof, kitchen remodels, title insurance, and recording fees. A higher adjusted basis reduces your taxable gain or loss upon sale. Many home sellers lack detailed records for decades of improvements, which can impact the accuracy of their adjusted basis. Maintaining good records is crucial and can save you thousands of dollars.

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If you have questions about capital gains and the potential sale of your home, please reach out to Cyndi Cummings at 512-423-6782 or cyndi@cyndicummings.com

Source:

https://www.wsj.com/real-estate/capital-gains-tax-home-sale-dbbc8f63?st=So3L5U