The real estate market has been a buzzword in recent years, with many homeowners across the country witnessing an uptick in their home values. The National Association of Realtors reports that the median price of existing homes in July of 2023 rose 1.9% from the previous year, reflecting a continuation of property value increases.
If you’re considering selling your property or have recently sold one in 2023, it’s crucial to be acquainted with the home sale tax rules and potential obligations towards capital gains tax and net investment income tax (NIIT).
Capital Gains Exclusion Benefits
For those selling their primary residence and fitting specific criteria, there’s a possibility to exclude a significant portion of your gains from tax. Individuals can exclude up to $250,000 and joint filers up to $500,000.
To avail of this tax benefit:
- The property must have been under your ownership for a minimum of two years within the five years leading up to the sale date.
- The property should have served as your primary residence for at least two years within the said five-year timeframe.
- The exclusion can’t be claimed more than once in two years.
Taxation on Exceeding Gains
Profits surpassing the $250,000/$500,000 limit will be subject to capital gains tax. If the property was under your ownership for over a year, it’s generally taxed at your long-term capital gains rate. Shorter ownership leads to it being considered short-term gain, thus attracting your ordinary-income tax rate.
Second Homes and Vacation Properties
Properties other than your primary residence, like vacation homes, aren’t eligible for the gains exclusion. However, if deemed a rental property, it might qualify as a business asset, offering opportunities like tax deferral through Section 1031 like-kind exchanges.
Net Investment Income Tax (NIIT) Insights
The 3.8% NIIT might be applicable for certain home sales. If you qualify for the aforementioned gain exclusion, that amount remains untouched by the NIIT. However, any gain exceeding that limit could be taxed if your adjusted gross income surpasses specific thresholds.
Other Crucial Tax Notes:
- Maintain thorough records to establish a precise tax basis. This should cover details like the original expense, any subsequent upgrades, and reductions from possible casualty losses or claimed business use depreciation.
- Losses from the sale of your primary residence are generally non-deductible. However, if a home segment is rented or exclusively for business, the loss for that section might be deductible.
In summary, while many might enjoy tax-free gains from their home sales, high-income individuals with luxurious properties might face a tax invoice. For customized advice on tax planning, our team is here to guide you and answer your home sale queries.
The information contained within this blog and website are provided for informational purposes only and is not intended to substitute obtaining accounting, tax, or financial advice from a professional accountant. Please consult a professional regarding your specific situations. Contact our team for more information.