With home sales rocketing throughout much of the country, you may have decided that now’s the right time to put your home on the market.
However, your home is considered a capital asset, and therefore subject to capital gains tax, a type of tax on profits an investor realizes when he/she sells a capital asset for a price that is higher than the purchase price.
Therefore, if your home appreciated in value, you could be required to pay taxes on the profit. But as a home seller, there are ways you can minimize this capital gains tax, while also maximizing any tax benefits from the sale. So, before you take the plunge and put your house on the market, read the below tips on how to make the most of selling your home.
#1 Exclude Taxable Income
Assuming you’ve owned and used your home as your principal residence at least two out of the past five years, you can exclude from your taxable income the first $250,000 of gain if you’re single and $500,000 if you’re married (and both taxpayer and spouse meet the ownership and use tests).
For example, if you bought a home 10 years ago for $300,000 and sold it today for $900,000, you’d make $600,000. If you’re married and filing jointly, $500,000 of that gain might not be subject to the capital gains tax, but you could possibly be subject to $100,000 of the gain. Watch out for the ownership/use rules of the principal residence exclusion in the case of a blended family. This can sometimes result in only a $250,000 exclusion for a joint filer.
Also, it should be noted that the required two years of ownership and use during the five-year period ending on the date of sale do not have to be continuous. Therefore, if you rented out your home during the first, third, and fifth year of ownership but lived in it for the second and fourth years, you could still take the exclusion (but there could be taxable gain to the extent of depreciation claimed during the rental period).
#2 Deduct Property Taxes
No matter which state you live in, you pay property taxes every year on the basis of your home. You can deduct up to $10,000 per year in property tax as an itemized deduction. If you’re filing as an individual, the total of your itemized deductions needs to be over $18,350 to exceed the standard deduction. If you’re filing jointly as a married couple, the total needs to be over $24,400 to exceed the standard deduction.
#3 Deduct Home Improvements and Repairs
The IRS rewards you as a homeowner for maintaining your primary residence and making improvements over time. Home improvements add to your basis (which reduces the taxable gain on sale of the home) as long as it meets the IRS’ criteria. By their standards, the improvement must “add to the value of your home, prolong its useful life, or adapt it to new uses.” Additionally, the improvement must be in service when you sell the home.
#4 Deduct Moving Expenses for Active Duty Military Personnel
Most Americans can no longer deduct moving expenses on their federal tax return. But if you are a member of the Armed Forces on active duty, you are eligible to deduct moving expenses if your move was due to a military order and permanent change of station. You can deduct your unreimbursed moving expenses for you, your spouse and dependents.
#5 Always Double Check your Settlement Statement
Mistakes are made more often than you think, so closely review the closing statement. It’s also important to have your realtor and closing agent explain items you don’t understand. Pay special attention to property taxes. The property tax bill will be allocated between the seller and the buyer. Only pay the share of the bill that covers the time period when you’ve been the owner.
In addition, certain settlement costs from the sale of your home can be used to reduce the taxable gain. Also, certain settlement costs from the original purchase of your home can be added to your basis in determining the taxable gain. Common examples are commissions and transfer taxes.
Although getting a high price for the sale of your home is what you are looking for, always be aware that the IRS and States may want a piece of the action. By considering the tips above, you may not only avoid a costly tax mistake, but you can maximize your tax benefits on the sale of your home.
For information on figuring out whether you have a gain or loss on the sale of your home, or how to avoid costly mistakes and maximize your tax benefits, contact our team today.
Categories: Tax, Tax Planning, Real Estate
