As the value of homes continues to rise, more and more Americans are finding themselves facing capital gains taxes when selling their property. The Section 121 exclusion provides a shield of up to $250,000 for single filers and $500,000 for married couples filing jointly. However, recent data indicates that a growing number of home sales are exceeding these thresholds.
To calculate your home’s profit, it is crucial to track your cost basis, which includes the original purchase price and closing costs from the purchase. In addition to these costs, you can also add forgotten expenses and fees to your basis to minimize your capital gains tax liability. These may include title fees, charges for utility installation, legal and recording fees, surveys, transfer taxes, title insurance, and balances owed by the seller.
In order to further increase your home’s basis and reduce your tax liability, you can include the cost of eligible upgrades. These upgrades must add value to your home, prolong its useful life, or adapt it to new uses. Examples of eligible upgrades include additions, outdoor or exterior upgrades, new systems, plumbing, and built-in appliances.
It is important to keep accurate records of home improvements in case of a future IRS audit. Documentation for improvements used to increase your home’s basis should include receipts, permits pulled for home projects, and photos if receipts are not available. Remember that repairs and maintenance needed to keep your home in good condition do not qualify for increasing your basis.
While certain fees and closing costs can be added to your basis, there are expenses that do not qualify. Fees such as home insurance premiums, rent or utilities paid before the closing date, loan charges like points and mortgage insurance premiums, and appraisal costs required by your lender cannot be included. It is essential to understand what expenses can be added to your basis to ensure you are maximizing your tax savings.
Knowing how to calculate your home’s profit and how to maximize your basis can significantly reduce your capital gains tax liability when selling your property. By keeping detailed records of your costs, fees, and improvements, you can ensure that you are taking full advantage of all available tax breaks. Consult with a financial planner or tax professional for personalized advice on how to minimize your tax bill when selling your home.