Reduce your capital gains tax bill when selling your home
If you sold a home, part of your profit could be subject to capital gains taxes. Single homeowners can shield up to $250,000 of home sales profit from capital gains taxes and married couples filing jointly can exclude up to $500,000, provided they meet IRS rules. You can also increase the home’s “basis,” or purchase price, by tacking on the cost of certain improvements. Keep reading to learn more about how to reduce your capital gains taxes when selling your home.
Who qualifies for the capital gains exemptions
Single homeowners can shield up to $250,000 of home sales profit from capital gains taxes and married couples filing jointly can exclude up to $500,000, provided they meet IRS eligibility.
The **ownership test** says you must own the home for at least two of the past five years before your home sale — but that’s only required for one spouse if you’re married and filing jointly.
There’s also a **residence test** which requires the home to be your primary residence for any 24 months of the five years before sale, with some exceptions. (The 24 months of residence can fall anywhere within the five year period, and it doesn’t have to be a single block of time.) Both spouses must meet the residence requirement for the full exclusion. If you rented out your home before selling, this gets tricky as you have add to the gain any depreciation you should have taken even if you did not. This is when you really need a tax professional's help.
A partial exclusion may also be possible if you sold your home because of a workplace location change, for health reasons or for “unforeseeable events,” according to the IRS.
Generally, you can’t get the tax break if you received the exclusion for the sale of another home within two years of your closing date.
How to reduce your home sale profits
If your capital gain exceeds the IRS exclusions, it’s possible to reduce your profits by increasing your home’s original purchase price or “basis,”. For our clients selling their home, we first figure out the easy math if they are under the exclusion. If not, then we do the harder math of adjusting basis and tracking selling expenses.
You can increase or adjust your home’s basis by adding certain improvements you’ve made to the property to “prolong its useful life,” according to the IRS. For example, you could tack on the cost of home additions, updated systems, landscaping or new appliances. But the cost of repairs and maintenance generally don’t count. If you are in a condo or co-op, assessments specially for capital improvements count towards these adjustments.
You can also deduct selling fees such as closing costs, agent commissions and staging.
After a home sale, the IRS receives a copy of Form 1099-S, which shows your closing date and gross proceeds. But you need paperwork to prove any changes to your home’s basis and selling costs.
Taxes on Profit
Once we know if there is any taxable profit, then we look at the long term capital gains. The rates are 0%, 15% or 20% depending on your total income. The amounts that fall into each bracket is adjusted each year.
The Bottom Line
Even if you usually do your own taxes, the year you sell a house is the year you need professional tax help. The extra cost could pay for itself to ensure you pay the correct tax.
