Tax Exclusion when Selling your Primary Residence
In 1997, Congress revised the tax code when selling a primary residence. They said that if a taxpayer lives in a home 2 out of the last 5 years, that a single taxpayer can receive $250,000 profit tax free from the sale of that home; or a married couple filing jointly could receive up to $500,000 tax free. That was a wonderful change implemented back in 1997. Yet, skyrocketing home values have exposed more homeowners to a higher tax burden since the exemptions have not changed in the past 27 years.
For example, I recently spoke with a homeowner in Northern California who called and was hoping that she could do a 1031 Exchange with Security 1st Exchange. Once I found out that she and her husband were currently living in the property, I explained how Section 1031 is only for investment properties, not properties held for personal use. The homeowner then shared with me how she and her husband had purchased the home in 1985 for $180,000. They want to sell and downsize, but the property is worth about $1.2 million today. If they were to sell today, their CPA has informed them that their capital gains tax would be at least $110,000. At that tax liability, the homeowners are concerned about not having enough money to purchase a new primary residence with a shortage of properties on the market, and prices are continuing to increase.
Currently, there is a bill pending in Congress called the “More Homes on the Market Act”. This bill, co-authored by Rep. Jimmy Panetta (D-CA) and Rep. Mike Kelly (R-PA), would increase the capital gains exclusion from $250,000 to $500,000 for single files, and from $500,000 to $1 million for married couples filing a joint return. After these increases, the bill would also index the exclusion so that it keeps pace with inflation.
In 2022, NAR estimated, “In California, as many as 95 percent of single homeowners and 68 percent of married ones who purchased their homes before 2000 could face capital gains tax if they sold their home this year. Nationwide, the numbers are 52 percent and 25 percent respectively. Each year, inflation will continue to take its untiring toll, adding thousands more homeowners to these columns of vulnerability.”
If you feel the exemption for the sale of your primary residence should be increased, you should reach out to your representative in the House.
https://www.nar.realtor/washington-report/nar-endorses-bill-to-increase-home-gain-exclusion
https://narfocus.com/billdatabase/clientfiles/172/2/4583.pdf