How Biden’s Capital Gains Proposal Could Hit Medium-Sized Home Sellers in Burning Markets

President Biden speaks on April 21, 2021 in the South Court Auditorium of the Eisenhower Executive Office Building in Washington on the COVID-19 response and vaccination status.

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As house prices rise, some sellers in red-hot markets could get a costly tax time surprise.

President Joe Biden, in a nationwide address on Wednesday, will propose an increase in capital gains tax for the top 0.3% of households – those who make more than $ 1 million a year.

But the proposal can also provide a tax burden for those selling a home with significant profits.

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Wealthy Americans, who are now paying the highest rate of capital gains, could jump from 23.8% to 43.4%. Both rates include a 3.8% investment income tax created by the Affordable Care Act.

However, the tax hikes can have more of an impact than stocks, bonds, and cryptocurrency. Homeowners keen to take advantage of sizzling property prices could also be billed.

“The proposed increase in capital gains tax rates at the federal and state levels could sting [home sellers] on the sidelines, “said certified financial planner Sharif Muhammad, founder and CEO of Unlimited Financial Services in Somerset, New Jersey.

Tax Exclusion

According to Muhammad, even if median house prices hit an all-time high, many sellers avoid paying capital gains from house profits because of a special tax break.

Individual taxpayers can deduct up to $ 250,000 from their profits, and married applicants can exclude up to $ 500,000. Everything else is subject to capital gains tax.

However, there is a strict IRS rule: it must be the seller’s primary residence for two out of five years before the sale is closed with a few exceptions, such as: B. a job or health related move.

While many can save on capital gains taxes, home sales in high dollar markets could put some sellers above the $ 1 million income threshold in the year of sale, especially without the exclusions.

“I don’t expect the law to affect many people, but selling in some markets could earn someone over $ 1 million in annual income,” said Leona Edwards, a Nashville, Tennessee-based CFP and financial advisor at Mariner Wealth Advisors .

For example, in the Los Angeles area, the average list price increased 24.8% year over year, according to realtor.com, with the median list price being $ 1,199,000.

Make sure you plan things with enough lead time to offset the windfall and possible tax implications.

Sharif Muhammad

Unlimited financial services

Those who have bought during dips in the past 20 years, like after the Great Recession, may be affected by the tax hike.

For example, let’s say a single home seller makes $ 200,000 a year. If they bought a home for $ 250,000 and sold it for $ 1.5 million, they could have an annual income above the $ 1 million threshold even if they excluded $ 250,000.

Combined with state taxes, the total capital recovery rate in California could be more than 50%, according to estimates by the Tax Foundation.

Proactive tax planning

Although some sellers may receive an invoice, there are ways to ease the burden.

Before moving, follow exclusion rules if you’re planning a sale, Edwards said.

“You can get burned if you keep a home for rent and sell it later,” she said.

Muhammad said sellers could lower their bills through what is known as tax loss harvesting, which uses some investment losses to offset profits.

Sellers may also consider renovations they’ve made, such as: B. Renovations, which can reduce profits by increasing the original purchase price of the home called the “cost base”.

However, tax planning should not be done in a silo.

“Make sure you plan things with enough lead time to offset the windfall and potential tax implications,” he said.

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