An increasing number of home sellers are incurring capital gains taxes—here are strategies to lower your tax bill.

• As home values rise, more sellers face capital gains taxes. Married couples can exclude up to $500,000 and singles $250,000 from taxes. To reduce taxable profit, homeowners can adjust their home's basis by adding costs of significant improvements, not routine maintenance.

More homeowners are facing capital gains taxes due to rising property values, but there are strategies to lessen the impact, according to financial experts.

In 2023, about 8% of U.S. home sales generated profits over $500,000, a significant increase from roughly 3% in 2019, data from CoreLogic shows. This percentage rise is noteworthy because of a specific tax benefit that allows married couples to exclude up to $500,000 of profit from capital gains taxes, and single filers up to $250,000, when selling their primary residence.

These exemption limits, however, have not been adjusted for inflation since 1997, as noted by Jaime Quinones, a certified financial planner with Stockade Wealth Management. The lack of indexing means more sellers are now liable for capital gains taxes, which can range from 0% to 20% depending on income.

In high-cost regions, the proportion of home sales surpassing the $500,000 profit mark reached double digits in 2023 in states like Colorado, Massachusetts, New Jersey, New York, and Washington.

To be eligible for the capital gains tax exemption, homeowners must pass certain IRS tests. The "ownership test" requires owning the home for at least two of the five years prior to the sale. The "residence test" requires the home to be your primary residence for at least 24 months during those five years, though the months need not be consecutive.

To reduce potential capital gains tax, financial planners suggest leveraging home improvements to increase the home's "basis" or original purchase price. This adjustment lowers the profit realized on the sale. Qualifying improvements might include significant additions like a new roof, but not routine maintenance such as plumbing repairs.

After a sale, homeowners need to keep records of these basis adjustments to substantiate them in the event of an IRS audit, as all closing details and gross proceeds are reported to the IRS via Form 1099-S.

Source: CNBC