Kentucky homeowners who sell their homes may encounter unexpected capital gains taxes due to a federal exclusion rule established in 1997, which remains unindexed to inflation. As home values rise, 14.1% of homeowners exceed the $250,000 exclusion for individuals, and 1.9% exceed $500,000 for joint filers. Home prices have increased over 260% since 1997, meaning many sellers now owe taxes on profits they believed were tax-free. The state additionally taxes capital gains as ordinary income, further increasing the financial burden on sellers, especially retirees.
According to the National Association of REALTORS®, 14.1% of Kentucky homeowners exceed the $250,000 capital gains exclusion for individual filers. Another 1.9% have surpassed the $500,000 limit for joint filers.
The current capital gains exclusion allows homeowners to avoid tax on $250,000 of profit-or $500,000 for couples-when selling their primary residence. That policy was designed in 1997, but it's never been indexed to inflation.
Many are families who've held onto their homes through market cycles, or retirees looking to cash in after decades of ownership.
Sellers who exceed the $250,000 cap face taxes on an average of $82,052 in additional gain. For those over the $500,000 limit, the average taxable gain jumps to $128,112.
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