How Biden's capital gains proposal may hit middle-class home sellers in red-hot markets

    asset management news magazine

    President Biden delivers remarks on the COVID-19 response and the state of vaccinations at the South Court Auditorium of Eisenhower Executive Office Building on April 21, 2021 in Washington.Alex Wong | Getty Images

    As home prices soar, some sellers in red-hot markets may face a costly surprise come tax time.

    President Joe Biden will propose in a nationwide address Wednesday a capital gains tax increase for the top 0.3% of households — those making more than $1 million per year.   

    But the proposal may also deliver a tax bill to those selling a home with significant gains.

    More from Your Money, Your Future:

    Here’s a look at more on how to manage, grow and protect your money.

    Social Security beneficiaries got bulk of latest stimulus checksBiden energy, infrastructure plans may be windfall for investorsHow to handle that big tax bill from Uncle Sam

    Wealthy Americans now paying the top capital gains rate could see a hike to 43.4%, from 23.8%. Both rates include a 3.8% levy on net investment income, created by the Affordable Care Act.  

    The tax increases may impact more than stocks, bonds and cryptocurrency, however. Homeowners looking to cash in on sizzling home prices could also receive a bill.

    “The proposed increase in federal as well as state capital gains tax rates could sting [home sellers] on the margins,” said Sharif Muhammad, founder and CEO of Unlimited Financial Services in Somerset, New Jersey.

    Tax exclusion

    Even with median home prices reaching all-time highs, Muhammad said, many sellers avoid paying capital gains on home profits because of a special tax break.

    Single taxpayers can subtract up to $250,000 from their profits, and married filers may qualify to exclude up to $500,000. Anything more is subject to capital gains taxes. 

    There’s a strict IRS rule, though: It must be the seller’s primary home for two out of five years before closing on the sale, with a few exceptions, like a job- or health-related move.

    While many can save on capital gains taxes, home sales in high-dollar markets could bump some sellers over the $1 million income threshold in the year of the sale, especially without the exclusions.    

    “I don’t expect the law to impact