Home sellers may be hit with a surprise tax bill.
Sellers may be taxed on the profits, which may be very expensive.
What is the surprise tax?
Single sellers can generally exclude $250,000 from their taxable profit. For married sellers, the exclusion is $500,000. However, those amounts have not changed in 25 years. During the pandemic home prices began to dramatically increase. This has made the current housing market, a seller’s market. However, bigger profits may mean a bigger tax bill. Read more about it here.
Most people are no longer protected from these earning limits, just because of today’s climate. In April, the median price of an existing homes was $391,200. That is nearly a 15% increase from the year prior.
In order to qualify for the exclusion, you must have owned the house and lived in it as your primary home for at least 2-5 years before the sale.
In order to help mitigate the amount of taxable gain:
- Subtract costs associated with the sale of the house, like real estate commissions and transfer and appraisal fees.
- Increase your “basis” — the dollar amount on which the gain is based — by adding to your purchase price the cost of any improvements made to your home over the years.
If you don’t qualify for a full exclusion, you may qualify for a partial exclusion.