Donald J. Trump has been musing lately about making one of the best tax breaks for homeowners even better.
Currently, when you sell your principal residence, you generally get to exclude part of your sale profit from tax. A single home seller won’t owe tax on up to $250,000 of sale profits. It’s a $500,000 free-from-tax sale profit for married jointly filing home sellers.
The plan to make all primary home sale profit actually is in a bill, H.R. 4327, introduced by Georgia GOP Rep. Marjorie Taylor Greene.
When asked what he thought of the proposal, Trump said, “We’re looking at that, and it’s going to be — it could be a very big positive. But I think it’s going to be a great incentive for a lot of people that really need money.”
Opposition to home sale tax change: Trump’s observation that the tax law change could help people who “really need money” is disputed by those who are opposed to totally eliminating tax on home sales.
Tax and real estate experts note that most of the home sellers who end up paying a tax bill are those with property on the higher end of the market. And while home prices have increased recently, most owners of moderately priced houses find that the current capital gains exemptions cover their profits.
For example, the median price of a home sold in June was $435,300, according to the National Association of Realtors, which is for the tax change. The share of homes priced above $750,000 that sold during the month was 17 percent.
The other homeowning sector that could benefit are senior citizens who’ve owned their homes for several decades and now are looking to downsize. The years of inflation and increasing home valuations means that they literally are property rich, but are hesitant to sell because much of their profit would be eaten up by tax due on the amounts over the exemption limits.
Tax change could backfire: Increasing the available supply of homes for new buyers often is cited a reason for the tax change. But eliminating the home sale profit tax could actually prompt some people not to sell.
Many times owners decide to sell when their home’s value is nearing the level that would produce capital gains tax. They put it on the market to so they could sell while under the exemption level. However, without that tax to worry about, they might decide to stay in the home longer.
Others worry that if there’s a rush of sellers, especially in hot markets, investors might grab up the homes, acing out individual buyers.
Both situations, they say, would make homeownership even harder for lower-to-middle-income potential buyers.
Lost revenue concerns: Then there’s the lost federal revenue. Eliminating tax on any home sale profit would definitely dent the U.S. Treasury’s balance, especially as owners of expensive homes unload their properties.
Reducing any federal tax, especially for a limited segment of taxpayers, is not a good look when Congress and the White House just pushed through the One Big Beautiful Bill Act. Most economists forecast the new law’s changes will cost Uncle Sam $3.4 trillion over the next 10 years, growing to more than $4 trillion when accounting for additional interest owed on the national debt.
Instead, some have suggested that a better option would be increasing the exemption amount, for example, doubling the $250,000 for singles and $500,000 for couples limits.
This would cover those who do find their sale profits exceed the current amounts, but still collect some tax from the wealthy who sell their multi-million dollar mansions.
Political outlook murky: Right now, Congress is about to leave on its annual August break. There’s no indication that Greene’s bill will get any special attention when lawmakers return to Washington, D.C., this fall.
But Trump’s apparent support of the tax change could provide some impetus. Several of his throw-away campaign remarks — no tax on tips or Social Security and changing the state and local taxes (SALT) deduction cap — found their way (sort of) into the OBBB.
Plus, lawmakers reportedly are looking to move on a second tax bill this year. Greene’s proposal, or a version of it, might find its way into that legislation.
Current home sale tax benefits and rules: Until that happens, though, we’re operating on the home sale profit tax rules that have been in pace for around three decades. Here’s an overview.
When you sell your main home and have a gain from the sale, if you’re a single taxpayer, you may be able to exclude up to $250,000 of that gain from your income. Married homeowners who file joint tax returns may be able to exclude up to $500,000.
Of course, the Internal Revenue Service has some rules on when these exclusion amounts apply. The key ones are the tax code’s home ownership and use rules.
During a five-year period ending on the date of the sale, you must have owned the home and lived in it as your main residence for at least two years.
Here’s a bit more of a breakdown of that 5 and 2 yearly requirements.
- You must own the house for at least two years. Married couples need to note who’s on the deed. If it’s just one spouse, then that owner must meet this ownership time. But both of you must live in the house the requisite length of time, two years, to pass the use test.
- You must live in the house as your primary residence for two of five years before you sell it. The good news here is that that the two years don’t have to be consecutive. But unlike the ownership rule for a married jointly filing couple, the requirement on the time living there applies to both spouses, even if only one is the owner.
Note, too, that you can’t have used this home sale tax break for at least two years. This limit was created to keep house flippers from serial selling at a rapid pace and avoiding capital gains tax on their profits.
Married couples again need to be careful here. If either spouse sold a home and used the capital gains tax exemption within the last two years, then the couple can’t take advantage of it again on their jointly sold home.
Reducing taxable profit: Okay, you meet the owning and residing in requirements, but now you’re worrying about a potential tax bill.
You can ease or erase this concern by making sure your profit stays under the exclusion threshold for your filing status.
First, don’t be confused by those six-figure dollar exemption amounts. They refer to the profit on your home’s sale, not the price you get for it. So, selling your home for $600,000 doesn’t automatically mean you’ll owe tax. But you do use that sale price to figure your taxable profit.
You start by subtracting your home’s basis from the sale amount. Your residence’s basis basically is what you paid for the house plus any improvements.
That means the material upgrades you made to your house, while not being a direct tax savings when you shelled out the money to the contractor, can help you when you sell. They add to your basis, and the larger that amount is, the less your profit for tax purposes.
Here’s where those good records you kept of qualifying house work, such as a room addition or substantial landscaping help. If you’re near the trigger point on your home sale profit limit, those added basis costs could save you thousands in potential capital gains taxes.
In the case of the $600,000 you got for your former residence, as long as your basis is enough to get you under your filing status’ exemption threshold, then you won’t any capital gains tax on your home sale.
You can read more about the home sale exclusion, as well as some exceptions to the basic rules in my post Home can be where the harbor is, along with the residential sale tax break. You can find more guidance in IRS Publication 523, Selling Your Home.
Home sale loss isn’t of any tax help: Sometimes owners must sell their homes at a loss. That’s always unfortunate.
The best scenario in these cases is that the sellers at least get some cash for the property, and hopefully enjoyed the time they lived in the house.
But for tax purposes, you’re out of luck.
While some capital asset sale losses are deductible against gains, that’s not the case with residential sales. Your home sale loss is not tax deductible.
You also might find these items of interest:
- Home landscaping and tax tips for Earth Day
- Popular home-related tax benefits already in the tax code
- Tax difference between home repairs & home improvements
- Protesting an exorbitant home value appraisal could lower your property tax bill
