Wealth Planning Insights
Capital Gains on Selling Your Residence
Jeffrey A. Speight, CFP®, January 2024
If you are thinking of selling your residence in 2024, it is good to keep in mind the capital gains considerations before you put it on the market.
As mortgage interest rates continue to drop, we anticipate a pickup in both home buyers and home inventory in 2024. For the past 18 months, anyone with a <4% mortgage on their home has not been keen on moving to a new house with a 8+% mortgage, unless it is out of necessity. As mortgage rates continue to decline, the gap between the new and existing mortgage rates is decreasing.
Personal exemption
The IRS gives a sizeable capital gains tax exemption for the sale of a primary residence, if certain conditions are met. For instance, homeowners may take an exemption of up to $250,000 (single filers) and up to $500,000 (married filing jointly). The exemption is available to those who meet two conditions: 1) they owned their home at least two years and 2) they lived in that home (as their primary residence) for at least 2 of the 5 years prior to the sale.
Exemption example
A married couple purchased their primary residence in 2015 for $800,000. They have lived in the home continually since purchase and made $200,000 of improvements. If they net $2,000,000 from the sale after selling costs, their gain on the home sale is $1,000,000. Since they owned their home at least 2 years and lived in it for more than 2 of the past 5 years, the IRS allows them to reduce their taxable capital gain from $1,000,000 to $500,000.
Caveats and considerations
While many homeowners meet the basic requirements listed above, there are other caveats. The capital gains exemption can only be used once every two years AND for one home at a time.
With the notable appreciation in home values since Covid-19, this exemption can significantly reduce your tax bill in the year of the sale.
Additionally in Texas, beginning at age 65, the school portion of your property tax is capped. If you purchase and move to a new home, you do not have to start over. Instead, your over 65 exemption ratio from your previous home is portable and can be applied to your new homestead. Typically done at closing, you will want to make sure you fill out a county appraisal district form to elect your new home as your homestead.
As always, talk with your advisor to discuss how this may apply to your particular situation.