This Tax Is Now Hitting More Homeowners

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Surprised homeowner looks at bill
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Taxes are impacting more folks who sell their home, particularly if the property has seen a significant increase in value.

Since 1997, most home sellers have been able to exclude from capital gains taxes up to $500,000 of the profit made when selling a primary home. But that limit has never been indexed for inflation.

As a result, at the end of 2023, 7.9% of home sales were lucrative enough to require owners to pay capital gains taxes on the sale proceeds, according to a recent CoreLogic report. That was 150% higher than the 2017-2019 average.

Thanks to the Taxpayer Relief Act of 1997, homeowners who have a capital gain when they sell their home can exempt up to the following amounts from taxation:

  • $250,000 for single individuals
  • $500,000 for married couples filing jointly

As the IRS states:

“You’re eligible for the exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale.”

However, the rapid rise in home prices during the COVID-19 pandemic and beyond means more homeowners are now exceeding the limits for the capital gains tax exemption.

According to CoreLogic, the states with the largest share of home sales with gross capital gains above $500,000 by the end of 2023 include:

  • California: 28.8%
  • Hawaii: 23.8%
  • Washington, D.C.: 22.1%
  • Massachusetts: 17.9%
  • Washington: 15.2%
  • New York: 13.1%
  • Colorado: 13%
  • New Jersey: 11.7%

That is a big change from the past. Between 2000 and 2003, roughly 38,000 home sales per year — just 1.3% of existing home sales — fell into the category where gross capital gains exceeded the exemption limit.

One way to reduce the number of sales exceeding this limit would be to adjust the limit for inflation. As CoreLogic points out:

“Since 1997, capital gains exemptions on housing have not kept up with inflation or the cost of living. This is unlike many other federal tax provisions, such as the standard deduction or the income tax credit, which have annual inflation-adjustment provisions.”

CoreLogic notes that since 1997, the cost of living has nearly doubled, and average home prices have more than tripled and are on the way to quadrupling. That means an exemption worth $500,000 in 1997 is now worth just $262,000 in today’s dollars.

For more on rising prices and how they impact your tax return, check out “7 Ways Inflation Can Cost You at Tax Time.”

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