Home sales in 2023 hit a low point, with existing home sales totaling 4.09 million, the lowest number since 1995. Experts attribute this drop to factors such as buyer burnout post-pandemic, rising mortgage rates, and low inventory. Despite the dip in sales, the median sales price reached a historical high of $389,800, a 1% increase from 2022, offering some positive news for sellers.
However, the volatility in home sales in 2023 could lead to confusion during tax time for homeowners. The tax code allows 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 under section 121. To claim this exclusion, taxpayers must have owned and lived in their home for two of the five years before selling, meeting both ownership and residency tests.
Determining your main home for tax purposes involves looking at various factors like where you receive mail, vote, file taxes, work, and more. You can only have one main home at a time, which can include various types of properties like condominiums, co-ops, mobile homes, or houseboats. The exclusion can be used multiple times in a lifetime, with no requirement to reinvest the proceeds from the sale in another property.
When reporting the sale of a home, taxpayers must include any proceeds on their tax return, even if the gain is excludable. Factors like basis, which includes the original purchase price and any significant improvements, play a role in determining the overall gain from the sale. Calculating your gain involves subtracting the basis from the selling price, and determining the exclusion amount based on your filing status.
Capital gains tax rates may vary depending on how long you owned the home, with long-term rates applying to gains above the exclusion if you’ve owned the home for over a year. Losses from the sale of a personal residence cannot be claimed on taxes, but exceptions may apply under specific circumstances, such as changes in workplace location, health issues, or unforeseeable events.
Looking ahead to 2024, the National Association of Realtors predicts an increase in existing home sales to 4.71 million, a 13.5% improvement from 2023. While some markets are expected to be more active than others, median home prices are forecasted to remain largely unchanged. Homeowners can expect the same capital gains exclusions and rules to apply in 2024, assuming no changes from Congress.
