If you sold a home in 2023, part of your profit could be subject to capital gains taxes. Single homeowners can shield up to $250,000 of home sales profit from capital gains taxes and married couples filing jointly can exclude up to $500,000, provided they meet IRS rules.
You can also increase the home’s “basis,” or purchase price, by tacking on the cost of certain improvements.
Despite a slump in U.S. home sales, many homeowners made a profit selling property in 2023. Those gains could trigger a tax bill this season, depending on the size of the windfall, experts say.
In 2023, home sellers made a $121,000 profit on the typical median-priced single-family home, according to ATTOM, a nationwide property database. That’s down from $122,600 in 2022.
If you’ve owned the property for more than one year, profits above $250,000 and $500,000 are subject to long-term capital gains taxes, levied at 0%, 15% or 20%, depending on your 2023 taxable income. (You calculate “taxable income” by subtracting the greater of the standard or itemized deductions from your adjusted gross income.)
Capital gains tax rates for 2023
The table shows U.S. capital gains tax rates for 2023 according to the IRS.
Long-term capital gains rate Taxable income
SINGLE FILERS
0% $0 to $44,625
15% $44,626 to $492,300
20% $492,301 or higher
MARRIED FILING JOINTLY
0% $0 to $89,250
15% $89,251 to $553,850
20% $553,851 or higher
Who qualifies for the capital gains exemptions The “ownership test” says you must own the home for at least two of the past five years before your home sale — but that’s only required for one spouse if you’re married and filing jointly. There’s also a “residence test,” which requires the home to be your primary residence for any 24 months of the five years before sale, with some exceptions. (The 24 months of residence can fall anywhere within the five year period, and it doesn’t have to be a single block of time.)
Both spouses must meet the residence requirement for the full exclusion.
A partial exclusion may also be possible if you sold your home because of a workplace location change, for health reasons or for “unforeseeable events,” according to the IRS.
Generally, you can’t get the tax break if you received the exclusion for the sale of another home within two years of your closing date.
How to reduce your home sale profits
If your capital gain exceeds the IRS exclusions, it’s possible to reduce your profits by increasing your home’s original purchase price or “basis". You can increase your home’s basis by adding certain improvements you’ve made to the property to “prolong its useful life,” according to the IRS.
For example, you could tack on the cost of home additions, updated systems, landscaping or new appliances. But the cost of repairs and maintenance generally don’t count.
Of course, you’ll need detailed records to show proof of capital improvements, because estimates don’t work when it comes to an audit.
After a home sale, the IRS receives a copy of Form 1099-S, which shows your closing date and gross proceeds. But you need paperwork to prove any changes to your home’s basis. Failing to keep home improvement records throughout ownership is a common mistake.
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