In 2023, the housing market experienced a decline in home sales, with the annual pace of existing home sales reaching the lowest number recorded since 1995. Several factors were cited for this decline, including post-pandemic buyer fatigue, rising mortgage rates, and low inventory. Despite the drop in sales, the median sales price for homes in 2023 reached a historical high of $389,800, showing a 1% increase from the previous year. This mix of positive and negative news meant that homeowners were facing volatility in the housing market, leading to potential confusion at tax time.
When it comes to taxes on the sale of a home, not all gains are taxable. The tax code under section 121 allows taxpayers an exclusion of up to $250,000, or $500,000 for married couples filing jointly, on the gain from the sale of a main home. Qualifying taxpayers who have owned and lived in their home for two of the five years before the sale are eligible for this exclusion, regardless of their age. It’s important to meet both the ownership and residency tests to claim the exclusion, and only one home is considered the main home at a time for federal income tax purposes.
There are various factors to consider when determining your main home, including where you receive your mail, where you vote, and where you file your tax returns. Your main home can include different types of properties such as a condominium, a mobile home, or a houseboat. The exclusion can be used multiple times as long as you meet the criteria each time you sell a home. Additionally, there is no requirement to reinvest the proceeds from the sale into another property or investment to qualify for the exclusion. Meeting the residency and ownership tests during different periods within a five-year period is acceptable, as long as you meet both requirements.
Reporting requirements for the sale of a home include filing Schedule D and Form 8949 with your Form 1040, even if the gain from the sale is excludable. You may need to report the sale if you receive an informational income-reporting document like Form 1099-S, or if you can’t exclude all of your capital gains from income. To calculate your capital gain, you start with your basis, which includes the price you paid for the home and any significant improvements. You can include certain repair work as part of your basis if it is done as part of a larger remodeling job, but you cannot include costs of maintenance or improvements with a short life expectancy.
Looking ahead to 2024, the housing market is expected to show improvement with higher existing-home sales predicted. The National Association of Realtors projects 4.71 million existing-home sales in 2024, up 13.5% from 2023. Despite this increase in sales, annual median home prices are anticipated to remain largely unchanged. Homeowners who sell their homes in 2024 can still take advantage of the capital gains exclusions and rules that were in place in 2023, assuming no changes are made by Congress. This means that homeowners who meet the criteria can potentially see a profit from the sale of their homes while avoiding capital gains tax under the exclusion rules.