As home values continue to rise, more Americans are finding themselves in a situation where they owe capital gains taxes when selling their property. This is mainly due to the fact that a growing number of home sales profits exceed the capital gains tax exclusion thresholds. The Section 121 exclusion rule is in place to protect up to $250,000 of profits for single filers and $500,000 for married couples filing jointly. However, according to a recent report from CoreLogic, nearly 8% of home sales in 2023 exceeded the $500,000 limit, compared to only 3% in 2019.

In order to qualify for the $250,000 or $500,000 exemptions, there are strict IRS rules that need to be followed. Any profit above these limits is subject to capital gains taxes, which could be taxed at rates of 0%, 15%, or 20%, depending on your earnings. To accurately calculate your home’s profit and reduce your capital gains tax liability, you must keep track of the cost basis of your home. This includes your original purchase price plus any closing costs associated with the purchase.

There are various costs and fees that can be added to your basis to minimize your capital gains tax liability. These often-forgotten costs include title fees, charges for utility installation, legal and recording fees, surveys, transfer taxes, title insurance, and balances owed by the seller. While these costs may seem insignificant individually, they can have a significant impact on your basis when combined. Additionally, you can also credit expenses from the sale of the property, including real estate commissions and closing costs.

To further increase your home’s basis and reduce your tax liability, you can add the cost of eligible upgrades to your basis. Eligible upgrades are improvements that add value to your home, prolong its useful life, or adapt it to new uses. This includes additions, outdoor or exterior upgrades, new systems, plumbing, or built-in appliances. However, repairs or maintenance needed to keep your home in good condition, such as fixing leaks or replacing broken hardware, cannot be added to your basis.

It is crucial to maintain accurate records of all home improvements in case of a future IRS audit. If you do not have receipts, taking pictures of the improvements and gathering any permits pulled for home projects can serve as proof. By understanding how to calculate your home’s profit and taking advantage of all eligible deductions and credits, you can minimize the tax owed from selling your house. Being proactive and keeping detailed records can save you money and eliminate potential issues with the IRS in the future.

Real Estate

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