TL;DR

Have you lived in your home for 10 years or more? If you said yes, then you should be aware that if you sell your home, you could owe capital gains tax at the end of the transaction. Why? The tax-free limit on home sale profits hasn't changed since 1997, even though home values have doubled. Before you list your home, have a conversation with your agent so you aren't surprised come tax time.

You've lived in your home for 10+ years, home values have gone up a lot, and you've decided to sell. It could be because you're relocating, have decided to downsize, or maybe you just want to cash out on all that equity. It's all fun and games until you visit your CPA and they tell you that you owe a crap ton of taxes. That's the capital gains tax surprise. And it's catching a lot of people off guard right now.

Here's Why…

When you sell your home, the IRS allows you to keep the first $250,000 in profit completely tax-free — and if you're married, it's $500,000. This limit was set in 1997 and has never been updated.

As you're likely aware, home values in Hillsboro have more than doubled since then. So that exclusion that seems like it's giving you lots of breathing room from capital gains tax? Yeah, you've blown right past that with your home's value.

For example: let's say you bought your home in Hillsboro in 2009 for $260,000 and today it's worth $560,000. The gain is $300,000, and if you're single, you've just blown past the tax-free exclusion by $50,000 — and the IRS wants their cut. Depending on your income, that cut could be anywhere from a few thousand dollars to over $10,000 in federal taxes. And don't forget about those Oregon state taxes too.

NAR (National Association of Realtors) estimates that approximately 29 million homeowners are already over that cap — and the majority of them have no idea.

So What Can You Do About This?

First, find out how much equity you have. Knowing the real number of what your home is worth today will help you see what your potential gain looks like. This is the part I can help you with. The second part you're going to need your CPA or accountant for, so you understand what your tax burden could be before you make any decisions.

Second, the tax bill shouldn't be the thing that stops you from moving. It means that you need to know the full picture before you decide what to do. There are strategies out there that can help with the taxes, and your tax person can walk you through them.

Third, there could be some relief coming. NAR is lobbying Congress hard to raise that cap, and there's been some real momentum this year. This has some people waiting to see what will happen, while others are running the numbers now so they've got an idea of what to expect either way. Both options are valid — and let's be honest, life doesn't wait for Congress to do something. If you need to move, you need to move, and knowing what your situation looks like is helpful.

The Takeaway?

Before you list your home, you need to have an idea of what you're going to make and how much it's going to cost you. The last thing you want is to be sitting at the closing table and find out you're going to have a giant tax bill.

If you've been in your home for 10+ years and you'd like to know how much equity you might have, send me an email at maryann@nexthomepdx.com and we'll set up a time to chat.

This blog post is for informational purposes only and is not tax or legal advice. Please talk to your CPA about your specific situation before making any decisions.