Selling your home in 2022 could be a Great Tax Move!
Housing prices are hitting all-time highs! It is a sellers’ market almost anywhere in the United States, and especially in Arizona. Many homeowners have seen the value of their primary residence double and even triple over the last decade, making them reconsider their estate planning.
This maybe one of the easiest periods of time ever to sell your house – but, who wants to go through the hassle of moving? You may want to if you understand how the tax laws affect the capital gains tax.
If you wait until 2023 or later to sell your home you may be subject to tax law changes that could affect your estate planning in a very negative way. So, should you sell your house now?
There are 5 primary reasons you should consider selling your house in 2022:
- Real estate values are at all-time highs for residential housing.
- It is a seller’s market, so this will make it easier for you to sell your home with less hassle or delay.
- The appreciation of your home may already exceed the section 121 exclusion amount. ($250K single, $500K MFJ-Married filing Joint)
- The current long term capital gain tax rates of 15% to 20% are historically a bargain. Think of them as tax rates on “Sale”.
- If the government raises the capital gains tax rates to 39.6% as proposed, you will likely have to pay a much higher tax rate. If you wait too long to sell your home, the sale proceeds could push you into a much higher tax bracket and higher tax rate.
Let me be clear, I am only speaking about your “primary residence”. These tax breaks do not apply to a second home.
If you have owned and lived in your “primary residence” for 2 out of the last 5 years, you can use a section 121 exclusion. Section 121 of tax code applies to the taxation of capital gain on your primary residence.
If you are married filing joint (MFJ) it will allow you to “exclude” $500K of capital gain income. That means every two years you can sell your primary residence and avoid all the capital gains tax up to $500K worth of capital gain over your cost basis if you are married filing joint (MFJ).
Selling your house now is potentially a huge tax break for many middle-class Americans. You can sell your home and avoid paying a large amount of capital gains tax on the sale due to the section 121 exclusion.
Now, if we throw in the Biden tax plan to increase the capital gains tax from around 15% where it is currently, up to 39.6%, you could be paying twice as much or more in capital gains tax, when you sell your home if your capital gains have exceeded the $500K threshold.
If your gains are more than $500K, why are you waiting? As the real estate market increases in value, you are letting the capital gains tax increase, as the value of your home increases. You are missing the opportunity to grow equity in a new home that would qualify to be tax free in just two years.
On the other hand, if you sell now, you can use the section 121 exclusion to offset the capital gains you have enjoyed on your current home, up to the exclusion amount. Any excess capital gain would only be taxed at the current lower long term capital gains rates, locking in the lower tax rate (say 15%) on that portion of your equity.
By buying a new home in 2022 you reset your cost basis and your required holding period (2 years) until you can use this fantastic tax break all over again in your tax planning.
My wife and I are empty nesters. Our current house is too big for just the two of us. Since we purchased the home in 2012 it has tripled in value.
Our appreciation has now exceeded the exclusion amount. All future growth at this point will be taxable. If we sell the house this year in 2021 and buy a new house – the first $500K of appreciation (capital gain) on the new house will potentially grow income tax free for us. I love this tax break, and I think you will too.
Now is your chance to buy the new home of your dreams and make a tax move all at the same time. Happy Hunting!
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