Biden administration proposal will change tax exemption for some home sellers

The longstanding home-seller’s exemption has shielded most of the profits made in home sales from capital gains taxes. Since 1997, Americans have not had to pay tax on profits made in home sales up to $500,000. The Biden administrations proposed tax legislation would remove this exemption for some homeowners.

The home-seller’s exemption shields sellers from paying corporate gains taxes on most of the income made from selling homes. It shields $250,000 of profit for a single home seller or up to $500,000 for a couple filing jointly. Any profit made on the home sale in excess of the $250,000/$500,000 cap is tacked at standard corporate gains tax rates, depending on the seller’s income. For most Americans, this exemption is probably one of the biggest tax breaks they’ll get in their lives, as most homes sell within the $250,000/$500,000 limit.

Like most things involving the IRS, the exemption can get extremely complicated in its particular application. There are different rules surrounding the length of residency in the home and whether or not certain improvements contribute to the baseline value of the home for purposes of the exemption. The exemption also has some differences in community-property states, such as Texas, California, and Wisconsin.

The Biden administration’s new legislation comes at a time when the median profit on homes in the United States is rising. In the First Quarter of 2021, the median profit on a home sale in the United States was $70,050, up from $55,750 in Q1 2020. In some communities, especially in California, the median profit is much higher. The record is in the San Jose-Sunnyvale-Santa Clara metro area, where the median profit this quarter was $575,000 according to research from Attom Data Solutions.

While Joe Biden’s proposed legislation will keep the home-seller’s exemption largely intact, it will remove the credit for certain homeowners. In particular, sellers with an annual income greater than $1 million would have to pay a 43.4% on home sales, even where the gain was lower than $250,000/$500,000.

Provided that the sellers do not have an income in excess of $1 million, the proposed change does not affect the corporate gains tax already in place for home sales not covered by the exemption. These are taxed at a maximum of 23.8%. With the possibility of inflation, however, this exemption could become much less widely applicable, especially with the proposed changes.

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