One of the most frequent questions we receive is about capital gains tax as it pertains to real estate. Fortunately, it’s not too hard to figure out approximately how much will be owed when you sell. There are some great exemptions to consider as well. Let’s discuss!
Broadly speaking, capital gains is the tax you pay on the profit (or gain) you make when you sell a long-term asset that has increased in value, as real estate clearly has. The tax rate varies from $0 for income up to $44,625, to 15%
on capital gains if your yearly income is between $44,626 and $492,300. Above that income level the tax rate climbs to 20 percent.
Let’s say that Elizabeth and Philip bought their beautiful home 40 years ago for $100,000. In 2023, their house is worth $1,800,000. First they’ll need to calculate their “basis,” which is the price they paid for the home plus the cost of any major improvements and cost to sell the house (escrow, etc.). Then, they can add the married couple exemption of $500,000. This exemption is for a couple who has lived in a home for a minimum of 2 of the last 5 years.
So the math for the two of them looks like this:
$100,000 –initial purchase price
+$500,000 –cost of improvements (new deck, remodeled kitchen and baths, new metal roof)
+$150,000 –cost to sell (escrow, title insurance, broker compensation, excise tax)
$750,000 –Basis
+$500,000 – tax exemption for a married couple
$1,250,000 – total amount exempt from capital gains tax
$1,800,000 – anticipated sales price of home in 2023
-$1,250,000 – total exempt amount
$550,000 – amount that is taxed according to capital gains
We have one more wrinkle that can be helpful. Let’s say that Philip passed away in April 2021, when their home was worth $1,650,000. That value becomes Elizabeth’s stepped-up basis. Her math now looks like this:
1,800,000 – 2023 Sales Price
-1,600,000 – Stepped up Basis (value at the time of Philip’s death)
-$150,000 – Cost to sell
-$250,000 – Tax exemption for a single person
$0 – Taxable Gain
In this scenario, Elizabeth won’t pay any capital gains taxes at all. Reconfiguring the starting house value is the tiny silver lining that she received from the IRS when Philip passed away.
Do you have more questions? If you need to talk to a CPA regarding your own tax situation, call Nika Toce at Hutchinson and Walter, CPAs, at 425-455-1620. Do you want to know how much your home is currently worth? If you have real estate questions, give us a call. We’re here to help!