Rising inflation and historic market interest rates have influenced the U.S. housing market several ways, like growing home prices in American markets. As a result of market conditions, homeowners looking to sell their primary residences can expect to make a significant profit after placing their homes on the market in most areas of the country.
If you’re considering selling a home, you’ll want to carefully consider the tax consequences of this significant life choice before committing to a plan of action. If you don’t examine how making this sale will affect your 2022 taxes, you won’t be able to make proactive decisions that can minimize your liability come early 2023.
In this article, the dedicated financial team at Ferguson Timar examines some of the broader tax consequences of selling a home in 2022. Once you’re familiar with the general trends and potential repercussions of selling a primary residence in this market, connect with our team to discuss the ins and outs of your unique situation. By being proactive about your tax planning, we can maximize your profits now and minimize liability later.
Claiming the Capital Gains Exclusion
Home sales profits are classified as capital gains. If you sell a primary residence in 2022 and a capital gain results from that sale, you may be in a position to exclude a maximum of $250,000 of that specific gain from your reported income. In addition, if you are married and filing jointly, you can potentially exclude up to $500,000 of that gain. This Internal Revenue Service publication explains how such gains are excluded for 2021 tax filings and will give you a solid idea of how to exclude this gain when it is time to prepare your 2022 return.
Report the sale on your return (via Schedule D and Form 8948) if required, even if you’re eligible to take this exclusion. In addition, refer to special installment sale rules if your sales contract allows any portion of the sales price to be paid in a later year.
Generally speaking, you should be eligible to benefit from this exclusion if you’ve owned and used the home you’re selling as your primary residence for an aggregate amount of time that equals a minimum of two years out of the five years immediately before the home sale date. You will not be able to claim this exclusion a second time if you claim it on behalf of another qualifying residence within two years prior to the most recent primary residence sale.
What if Your Capital Gain Exceeds the Exclusion Allowance?
Suppose the capital gain resulting from the sale of a qualifying residence exceeds the $250,000 exclusion cap for individuals and $500,000 exclusion cap for married couples filing jointly. In that case, you may be facing significant capital gains tax liability on the remainder of the gain. Thankfully, there are things that you can do to reduce your liability amount.
You can proactively minimize your capital gains liability by adding qualifying home improvements to the original purchase price of your primary residence. Ongoing maintenance and repairs that neither prolong the residence’s life nor add to its value don’t “count” as qualifying home improvements for minimizing liability. However, improvements that add value or life expectancy to a residence—such as additions, landscaping, and newly installed systems—often qualify as improvements that can be added to the purchase price and reduce the liability that will be incurred when your capital gains exceed the caps noted above. Such improvements serve to add “basis” to the purchase price. Title fees, surveying fees, and other closing costs can also add basis and minimize eventual capital gains liability.
Seek Personalized Tax Planning Assistance Today
Selling a primary residence in a booming market can have significant tax consequences when it comes time to file your 2022 return. Connecting with the experienced financial team at Ferguson Timar will allow you to benefit from client-focused tax and financial guidance tailored to maximize your profits and minimize your tax liability. Contact us today to learn more.
We look forward to speaking with you.