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Big homes/Condos threatened with higher taxes

  • Single filers may exclude up to $250,000 of capital gains on home sales profits, while married couples may subtract up to $500,000.
  • However, median home sales prices have more than doubled over the past two decades, pushing some long-term homeowners over the thresholds.
  • Sellers may lessen the tax bite by reducing profits with past home improvements, among other tactics, experts say.
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Boston condos

 
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With soaring home values, many sellers expect a sizable profit when listing their property. However, capital gains taxes may put a damper on their windfall. 

Home sales profits are considered capital gains, taxed at federal rates of 0%, 15% or 20% in 2021, depending on income.

The IRS offers a write-off for homeowners, allowing single filers to exclude up to $250,000 of profit and married couples filing together can subtract up to $500,000.

But these thresholds haven’t changed since 1997, and median home sales prices have more than doubled over the past two decades, affecting many long-term homeowners. 

“It’s become a huge part of the conversation now,” said John Schultz, a CPA and partner at Genske, Mulder & Company in Ontario, California.

While the exemption may be significant for some homeowners, there are strict guidelines to qualify. Sellers must own and use the home as their primary residence for two of the five years preceding the sale.

“But the two years don’t have to be consecutive,” said Mary Geong, a Piedmont, California-based CPA and enrolled agent at the firm in her name.

Someone owning two homes may split time between the properties, and if their cumulative time living at one place equals at least two years, they may qualify.

Moreover, someone may convert a rental property to a primary residence for two years for a partial exclusion. In that case, the write-off is based on the percentage of their time spent living there, she explained.

For example, if a single filer owns a rental property for 10 years and lives there for two, they may be eligible for 20% of the $250,000 exclusion or $50,000.

“But you need good recordkeeping,” Geong added.

Increase basis to reduce profits

If homeowners exceed the exemptions and owe taxes, they may reduce profits by adding certain home improvements to the original purchase price, known as basis, Schultz explained.

For example, home additions, patios, landscaping, swimming pools, new systems and more may qualify as improvements, according to the IRS

However, ongoing repairs and maintenance expenses that don’t add value or prolong the home’s life, such as painting or fixing leaks, won’t count. 

 
Inflation’s impact on real estate amid strong existing home sales data
 

Of course, homeowners need to show proof of improvements, which can be difficult after many years. However, if someone lost receipts, there may be other methods.

“Property tax history can help you go back and recalculate some of that,” Schultz pointed out, explaining how reasonable estimates may be acceptable. 

Homeowners may also increase basis by adding certain closing costs, such as title, legal or surveying fees, along with title insurance.

Other tax consequences

There’s also the possibility of other tax consequences when selling a home with a large profit.

For example, boosting adjusted gross income can affect eligibility for health insurance subsidies, and may require someone to pay back premium credits at tax time.

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Big homes/Condos threatened with higher taxes

So, they want to penalize people who live in homes larger than 3,000 square feet.

One of Capitol Hill’s most experienced and powerful legislators is drafting a”carbon tax” bill that would do precisely that. Rep. John Dingell (D-Mich.), chairman of the House Energy and Commerce Committee, expects to introduce comprehensive climate change reform legislation once Congress returns next month.

Besides imposing hefty new federal taxes on gasoline, the forthcoming bill will, in Dingell’s words, seek to “remove the mortgage interest deduction on McMansions – homes over 3,000 square feet.” Dingell said he recognizes that proposals like these will be highly controversial, but he believes they are essential to achieving the environmental goal of reducing carbon emissions by 60 percent to 80 percent by the year 2050.

It’s just a sneaky way to raise tax revenue, of course. And it targets a small group of people who we all love to hate: the ridiculously wealthy. (As an alternative, may I suggest we charge another tax on people who drive Hummers?)

Why don’t I support it?

I don’t think it’s fair, basically.

There is already a limit on the amount of loan interest you can deduct on your federal tax return.

Either allow the deduction or get rid of it, don’t start messing with the limits.

More: Tax could cut big-home deductions – By Kenneth R. Harney, The Boston Herald

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Updated: Boston Real Estate Blog 2021

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