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"dunkel sam" Discussed on WSJ Your Money Briefing
"Director of sustainability at nova chemicals and jeremy wallich partner at mckinsey. These experts on sustainability are at the forefront of research and innovations to help us achieve ambitious climate and circularity goals. Subscribe today so you don't miss this and other engaging discussions on how we can address one of the most practical challenges of our time Hot housing market with buyers often overbidding sellers or seeing gains. Well above the price they originally paid and the first quarter. The median gain was more than seventy thousand dollars close to a new high. According to the real estate data tracker atom those gains would normally be taxable but a standing exemption means that sellers can avoid having to hand over a big chunk of that money. Dunkel sam 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. 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 four hundred thousand dollars many years ago and you sell it for seven hundred thousand dollars that would mean that you would have a gain of three hundred thousand dollars now. They're nuances and exceptions. But four hundred thousand selling for seven hundred thousand gain of three hundred thousand that would be taxed at capital gains rates and those rights currently are up to twenty three point eight percent and could go higher and the fact that this exemption exists means that most people who sell most houses. They live in the united states. Don't that tax she. How exactly does the exemption change the math for home sellers. Well it changes it in a good way. There is an exemption of two hundred fifty thousand dollars of profit that is gained for single filers and five hundred thousand dollars of gain that is prophet for mary couples filing jointly. So that means that most home sellers in the us won't capital gains taxes on the of their primary residence and as we know home prices have been going up a lot in recent months. Seems like this exemption could really be important for a lot of people. I think it's very important. Certainly without it. People would owe tax or maybe a lot of tax. The very hot sellers market but yes. This exemption keeps people from doing 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. Missile this applies to anybody. Who's selling a home. Yes if it's their home and they've lived there It's you know if it's a rental property or something like that. It's not your home to to get this exemption which congress granted you need to have owned the house for two years and lived in it for two years the living part doesn't have to be continuous. It's not two years straight. It could be a month here a month there. The rules get a little bit tricky about what is residents the homeowner needs to live in the house and use it as his residence If you have a duplex and you ran out half of the home then the part that you live in gets the exemption but the part that you rent out is that's a rental property it doesn't get the exemption all of this is explained in. Irs publication five twenty three and if people are interested. I urge them to get it. Because it's really pretty clear now. They're also some tricky rules about this exemption. Regarding improvements that homeowners have made to their house before selling. Can you walk through those well. That's really important too. Because this exemption was passed by congress in one thousand nine hundred ninety seven it was not indexed for inflation in some markets people are bumping up against the exemptions limits. So people look for ways to lessen their profit so they'll lessen their taxes or maximize their exemption and One thing you get to do is including your basis. That is the point at which you start to measure gain you including your basis things like improvements to the home if you added on if you did major landscaping things like that. If you put in new age fax systems or something all those costs can be used to raise your basis and lower. Your profit also thinks like some certain legal fees or your brokers commissions and this. This could be more important. As i said people selling high end properties start to bump into the limits of the two hundred fifty thousand or five hundred thousand dollar. You don't get to raise your basis due to repairs only improvements and so the improvement would be adding on to the house. Repair would be just a new paint job inside but there are nuances here as well. I urged people to go to publication. Five twenty three and look at the difference between repairs and improvements for instance. I would think that putting a new roof on your home would be a repair but the irs allows you to call it an improvement. And that's much better now. What happens if the net gain on the sale of a home exceeds the exemption meaning. Your prophet was more than two hundred and fifty or five hundred thousand exemption level in that case You owe capital gains tax on the amount above that and some people in higher brackets might even a three point eight percent surtax on that part of the game. So it's important to understand this exemption and you can get it as often as every two years but is one of the largest single tax breaks that most people will ever have so is a good idea not to mess it up and to get good tax help before you do a sale not after okay so if somebody moves a couple of times and they sell their primary residence they can get this exemption more than once. Yes they can. That was not true under the law before nineteen ninety-seven but you can take this break as often as every two years if you meet all the requirements and before we go some listeners might have heard about president biden's plan to change the capital gains tax rate with the changes he's proposing affect the exemption for many people. Well it probably wouldn't affect the change for many people but it certainly would affect that change for some people who who live in high cost who have large gains on their homes. Maybe because they've lived in for a long time the rule there is that a portion of the game. That's able that is above one million dollars. If you have total income of a million dollars you might have to pay at like a forty. Three point. Four percent rate on that portion. So if you had a gain in part of it was below a million and part of it was above a million. You'd pay the extra on the part above a million all right. That's wall street journal reporter laura laura. Thanks for coming on the show. Thanks so much for having me in that money briefing. Im jr waylon for the wall street journal..