The $500,000 Tax Exemption for Home Sellers
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Here's your money briefing for Tuesday, June 8th. I'm J.R. Whelan for The Wall Street Journal. This is a good time to be selling a home. Sellers are benefiting from a red-hot housing market, often getting a lot more for their home than what they previously paid. And in a lot of cases, that gain is tax-free.
This exemption keeps people from owing a lot of tax on the sale of their home. And a lot of people save a lot of money in their homes. And so this is a welcome break for them.
But rules regarding when you can sell your home and still get the tax break can be tricky. Coming up, our tax reporter Laura Saunders will explain how it works and how a Biden administration proposal could hit some sellers with the biggest gains. That's after the break.
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In a hot housing market with buyers often overbidding, sellers are seeing gains well above the price they originally paid. In the first quarter, the median gain was more than $70,000, close to a new high, according to the real estate data tracker, Adam. Those gains would normally be taxable, but a longstanding exemption means that sellers can avoid having to hand over a big chunk of that money to Uncle Sam. But like a lot of tax rules, things can get complicated really quickly. So we asked our tax reporter, Laura Saunders, to come on the show and break it down for us. Laura, thanks for being here.
What is the $500,000 home-sale tax exemption and who benefits from it?
Thanks for having me.
So Laura, there's a lot to digest in this tax exemption. So could you first explain how home sellers will be taxed without the exemption?
In the United States, a lot of people save a good bit of money in their houses. And say that you bought a house for $400,000 many years ago and you sell it for $700,000. That would mean that you would have a gain of $300,000. Now there are nuances and exceptions, but $400,000 selling for $700,000, gain of $300,000, that would be taxed at capital gains rates. And those rates currently are up to 23.8% and could go higher. And the fact that this exemption exists means that most people who sell most houses they live in in the United States don't owe that tax.
So how exactly does the exemption change the math for home sellers?
Well, it changes it in a good way. There is an exemption of $250,000 of profit that is gain for single filers and $500,000 of gain that is profit for married couples filing jointly. So that means that most home sellers in the U.S. won't owe capital gains taxes on the sale of their primary residence.
And as we know, home prices have been going up a lot in recent months. It seems like this exemption could really be important for a lot of people.
Oh, I think it's very important. Certainly without it, people would owe tax or maybe a lot of tax. It's a very hot seller's market. But yes, this exemption keeps people from owing a lot of tax on the sale of their home. And a lot of people save a lot of money in their homes. And so this is a welcome break for them.
And this applies to anybody who's selling a home?
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