The home sale tax trap from 1997 could cost long-time owners thousands when they sell. If you have owned your home in Staten Island or Brooklyn for a long time, there may be a capital gains tax bill waiting when you sell, and most owners have no idea it exists. Here is how the rule works and what to do about it.
What is the home sale capital gains tax exclusion?
When you sell your primary residence, current federal law lets you exclude up to $250,000 of profit if you are single, or $500,000 if you are married filing jointly, as long as you owned and lived in the home for at least two of the last five years. Profit above that amount can be subject to capital gains tax.
Why is the 1997 exclusion a tax trap for long-time homeowners?
Those $250,000 and $500,000 limits were set in 1997 and have never been adjusted for inflation, even though home prices have roughly tripled since then. As a result, more long-time owners are exceeding the cap when they sell, and many have no idea the tax exists until they are already at the closing table.
How many homeowners could owe capital gains tax when they sell?
The National Association of Realtors estimates nearly one in three homeowners could already owe capital gains tax if they sold today, a figure they expect to rise sharply over the next decade as prices keep climbing against a cap that has not moved since 1997.
Could Congress change the home sale tax rules?
There are proposals in Congress. The More Homes on the Market Act would double the exclusion and index it to inflation. The No Tax on Home Sales Act would eliminate the federal capital gains tax on primary residences entirely, an idea President Trump has spoken in favor of. Important: these are proposals still in committee, not law. Nothing has passed yet.
How can Staten Island and Brooklyn homeowners protect themselves?
Three steps. First, know your gain, which is your profit after purchase price, capital improvements, and selling costs, not your sale price. Second, keep records of every improvement, since they raise your cost basis and lower your taxable gain. Third, if you may be near the cap, talk to a tax professional before you list. This is general information, not tax advice.
Watch the full episode on YouTube: The Home Sale Tax Trap From 1997
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Disclaimer: This content is general information, not tax or legal advice. Consult a licensed tax professional about your specific situation before selling.
