Monday Market Update: The Pain of Capital Gains

Did you know that there are 9 states that don’t tax capital gains? And yep you guessed it – California is not on the list! Just a few weeks ago, Realtor.com® published ‘Your Guide To Understanding Real Estate Capital Gains Tax.’ The article summarizes some great highlights and considerations – but please note this article and the key points below are for informational purposes only. Always consult with a tax professional and financial advisor to understand your exact situation and strategize a plan that’s best for you and your short- and long-term goals. 

What are capital gains?

“The capital gains tax is levied on the profit you make when you sell an asset, like stocks, real estate, or a business.”

How much profit is protected from tax?

“When you sell your primary home, the IRS protects a portion of your profit from capital gains taxes. Single homeowners can exclude up to $250,000 of profit, while married couples filing jointly can exclude up to $500,000. If your profit stays below these limits, you won’t owe a penny of federal capital gains tax on your home sale.”

What year were the last exemptions set?

The current exemptions were set in 1997 – but national median home prices have tripled since then. Bay area prices have quadrupled in many areas. 

What are the 3 criteria to qualify for the exemption? 

Ownership:  You must have owned the home for at least two of the last five years.

Use: You must have lived in it as your main residence for at least two of the last five years.

Timing: You can’t have used this exclusion for another home sale within the last two years.

How many households have surpassed their exclusion limit according to their current equity?

The NAR® estimates that 13.1 million households or 15% of all owner-occupied properties across the US exceed capital gains protections. High appreciation markets (such as San Jose-Sunnyvale-Santa Clara) are estimated to have 63% of homes exposed to capital gains. Sources estimate that tens of thousands of homes in San Mateo County are subject to capital gains. 

Considerations To Reduce Capital Gains

According to Realtor.com®, you may be able to limit capital gains by re-investing your home sale proceeds into another property via a 1031 exchange. Very specific criteria apply so be sure to speak to a 1031 exchange professional. Another strategy is to increase your cost basis though home improvements and renovations. Experts also advise to maximize the married exemption of $250,000 each and note that after a spouse’s death, the surviving spouse may still claim the full amount for up to two years. A ‘step-up in basis’ may allow heirs to inherit the home at its current value. Two years ago, the local publication San Carlos Life outlined some additional strategies you may wish to research. 

Whatever decision you make with regards to staying, selling and/or mitigating capital gains – please do not make it alone. We cannot emphasize enough how important it is to talk to multiple trusted tax and finance advisors to help you create the best plan for you. 

Cheers to a great summer ahead,

Bobbi 

Bobbi Decker
DRE#00607999

Broker Associate, Bobbi Decker & Associates
650.346.5352 cell
650.577.3127 efax
www.bobbidecker.com
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Bobbi Decker & Associates fully supports the principles of the Fair Housing Act and the Equal Opportunity Act. For more information, please visit: http://portal.hud.gov/