For generations, homeownership has been billed as the hallmark of the American Dream. However, for high earners, it can also be a way to reduce taxes, receive more favorable capital gains treatment, and invest in their family’s future. Below, we discuss a few benefits of homeownership that can have an outsized impact on households with high incomes.
Tax Deductions
In 2024, the standard federal tax deduction for married couples filing jointly is $29,200.1 For those with less than $29,000 in itemized expenses, the standard deduction makes sense, but higher income often comes with higher deductions, including mortgage interest, property taxes, certain business and medical expenses, and other costs.
The more mortgage interest you pay, the more you can deduct. While this doesn’t mean you should go out and spend as much money as you can just to save a few thousand dollars on your tax bill, it is one consideration when you’re trying to get your taxable income as low as possible (or if you’re hoping to move from the top bracket where 37 percent of income is taxed).
By the same token, if you’ve shied away from certain markets or communities because of a higher-than-average property tax rate, you may want to consider the deductibility of these taxes. Living in a high-tax neighborhood can have other benefits, including better school systems and community amenities. So if you’re on the fence, the ability to deduct property taxes to reduce your taxable income can be a major benefit.
Shielding Capital Gains
When you sell a home, you’ll generally owe taxes on your profit: the amount you receive from the sale minus the amount you originally paid. However, the sale of your primary home is a huge exception to this rule.
According to IRS rules, if you’ve owned your home and used it as your primary residence for at least two years out of the last five years, you can exclude up to $250,000 of capital gains (if single or head of household) or $500,000 (if married filing jointly).2
For example, if you purchased your home for $100,000 in 1990 and sold it for $600,000 in 2024, you won’t owe any capital gains taxes if you’re married and file taxes jointly. But if you’d bought $100,000 worth of Apple or Microsoft stock in 1990 and sold it for $600,000 in 2024, you’d owe capital gains taxes on the full $500,000 increase in value. This favorable tax treatment makes homes different than any other investment.
Inheritance and Stepped-Up Basis
If you’d like to keep your home in the family or are interested in reducing the taxability of your future estate, you may be able to ensure your heirs benefit from a “step-up in basis.” This means when someone inherits your home from you, the home’s original value will be adjusted to the current market value at the transfer time.
Using the example above, if instead of selling for $600,000, you passed the home to your child, and they sold it for $600,000, they wouldn’t be able to benefit from the capital gains exclusion. Instead — assuming the home was valued at $600,000 when you passed it to your child — the basis would shift from $100,000 to $600,000. If your child kept the home and sold it 10 years later for $750,000, they would owe taxes only on the $150,000 increase in basis, not the overall increase from the original purchase price.
Important Disclosures:
This material was created for educational and informational purposes only and is not intended as tax, legal or investment advice. If you are seeking tax, legal or investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by WriterAccess.
LPL Tracking # 564647
Footnotes
1 “IRS provides tax inflation adjustments,” IRS, https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2024
2 “Sale of your home,” IRS, https://www.irs.gov/taxtopics/tc701
