Giant Tax Break for Home Sellers: Do You Qualify?

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It’s no secret it’s currently a seller’s market – with seller’s making more profits on their homes than ever before. President Biden’s new proposal may make sellers wary of paying higher taxes on long term capital gains, but it only applies to a small demographic.

The Takeaway

The new proposal wouldn’t affect the average home seller. Most people can expect not to see any changes when they sell their next home.

What is the $250k/$500k Tax Exemption? Do I Qualify?

The Biden Administration’s new proposal explicitly preserves the home seller’s exemption, which allows home sellers to bypass taxes when a home is sold for more than the original purchase price. This applies up to $250,000 profit for single filers and $500,000 profit for married couples filing jointly. The tax break benefits a majority of home sellers – since the median return on homes being $70,050 in Q1 of 2021, according to Attom Data Solutions.

To qualify, you must meet both the ownership and use guidelines. This means you must have owned and used your home (as your main home) for at least two of the five years prior to the sell date. The same rules apply to those filing jointly – both spouses abiding by the guidelines. There are many nuances to these guidelines that include divorce, death, military, and others. For complete guidelines for those in unique circumstances, refer to Internal Revenue Service Publication 523.

What’s Changing?

Most sellers with a typical gain below the $250,000/$500,000 threshold will not be affected by President Biden’s proposal. Only home sellers with an annual income above $1 million that sell their home above the $250,000/$500,000 threshold will be taxed at a higher rate. This tax rate is increasing from 23.8% to 43.4%.

If an individual or married couple has an annual income of less than $1 million but sells their home above the exemption threshold, they will be taxed at the standard 23.8% rate for the amount over the threshold – this is not a change from the current structure.

According to the proposal, the increase in rates for those making over $1 million and selling over the exemption threshold will apply to sales after late April 2021.

Check Out These Examples

Sally and Sam have a joint annual income over $1 million.

  1. They sell their house for $650k over purchase price = $150k over the $500k exemption threshold.
  2. The excess over $500k is taxed = $150k.
  3. Under the current law, they would pay $150,000 x 23.8% tax rate = $35k in taxes.
  4. If the new proposal is passed, they’d pay a 43.4% tax rate – $150k x 43.4% tax rate = $65k in taxes.
  5. Sally and Sam pay $30k more in taxes under the new proposal.

Wendy and William have a joint annual income of under $1 million.

  1. They sell their house for $550k over purchase price = $50k over the $500k exemption threshold.
  2. The excess over $500k is taxed = $50k.
  3. Since they make under $1 million, they pay the typical 23.8% tax rate – $50k x 23.8% tax rate = $11.9k in taxes.

John has an annual income under $1 million.

  1. He sells his home for $100k over purchase price = under the $250k exemption threshold for a single person.
  2. John doesn’t have to pay taxes on the $100k per the home-sellers’ exemption.

Looking to Sell?

Homie’s mission is to make real estate easy, affordable and accessible for all. With Homie you pay a low fee, no matter the price of the home, saving you thousands in unnecessary commissions. You’ll also have a dedicated, local agent with you every step of the way. Finally, the way real estate should be. Looking for a real estate agent who can walk you through the ins and outs of selling? We’d be happy to help you!

*This article is written for informational purposes only and does not constitute tax advice. Homie recommends that you consult with a tax professional regarding the potential tax consequences from the changes of the Biden administration.