As home sale prices surge, a tax bill may follow

It has been a seller’s market for houses in recent years, particularly in the pandemic. But bigger profits for homeowners may, in some cases, mean a large tax bill.

For decades, most Americans have been shielded from paying capital gains taxes on the sale of their homes unless their profits exceeded certain limits. But the surge in housing values means that more homeowners could see taxable windfalls when they sell, especially if they have owned a home for a long time, accountants say.

Whether you’ll owe tax on the sale of your main home depends on several factors, including your eligibility for the capital gains “exclusion,” an amount you can subtract from your taxable profit when you sell. The exclusion allowed by current tax law is based on your tax- filing status: $ 500,000 for a married couple filing a joint return and $ 250,000 for a single filer.

But it’s becoming easier to exceed those amounts, which haven’t changed since they were set in 1997. The typical sales price for a previously owned singlefamily home more than doubled in just the last decade, to $ 353,600 last year, according to the National Association of Realtors. As a result, the association sees a growing potential for capital gains taxes, said Evan Liddiard, a certified public accountant and director of federal tax policy for the association.

That could make some homeowners reluctant to sell, further squeezing an already tight supply of properties, Liddiard said. Evidence so far is anecdotal, he said.

The worry is particularly acute in high- priced markets on the coasts, said Greg White, an accountant in Seattle. “If you are in San Francisco, Seattle, New York or Boston,” he said, “it’s easy to go over the $ 500,000 limit.”

To qualify for the exclusion, you must have owned the house and lived in it as your main home ( the Internal

Revenue Service also calls it your “primary residence”) for at least two of the five years before the sale closes. You can have just one main home at a time, for tax purposes. It’s generally the address where you spend most of your time and that’s listed on documents like your tax return, voter registration card and driver’s license.

The two years don’t have to be consecutive; you can have had a different main home for part of the fiveyear period.

Here’s an example: Say you bought a house 10 years ago for $ 300,000 and sold it for $ 600,000 in 2021, for a gain of $ 300,000. If you are married, you would probably owe no capital gains tax because the gain is less than $ 500,000. If you’re single, however, you may owe tax on the $ 50,000 that exceeds the $ 250,000 cap.

There are steps you can take to reduce the amount of your gain that is taxable.

First, you can subtract costs associated with the sale of the house, like real estate commissions and transfer and appraisal fees.

You can also increase your “basis” — the dollar amount on which the gain is based — by adding to your purchase price the cost of any improvements made to your home over the years. The improvements must be projects that add to the value of the house and extend its useful life. Replacing the pipes in your house would qualify, but swapping out a shower head would not, said Michael Durant, a senior accountant at Prager Metis in New York City.

If you added a room, remodeled your kitchen or replaced a roof, all those costs can be added to your basis, which helps to shrink your gain and the associated tax, said Isabel Barrow, director of financial planning at Edelman Financial Engines, a financial planning and wealth management firm. She suggested that homeowners maintain a spreadsheet showing the date and cost of any improvements. Homeowners should save receipts, invoices and design plans to justify an increase in their property’s basis.