Home values around the country are soaring. The median price tag on a single-family home in the U.S. jumped 23% since last year. While it seems like a huge advantage for sellers, there’s one factor that may put a damper on your profit: capital gains taxes.
Your home is a capital asset, so the capital gains tax is what you pay on its appreciation from the time of purchase to the time of sale. The exact amount will depend on your income, your tax filing status and how long you’ve owned the home. And it could mean handing over more than you’d like to Uncle Sam.
The good news? There are some fairly simple strategies to help minimize the capital gains you’ll have to pay on a home sale.
Determine if you’re eligible for an exclusion. If you’ve owned your home for at least two years, then up to $250,000 of profit is tax-free — or $500,000 for married people filing jointly. But to qualify, there are other requirements that must be met:
- You must live in the home for the majority of the year.
- You must provide proof of residency (voter registration, utility bills, a tax return, etc.).
- It must a reasonable distance from your job.
- For married filers, you and your spouse must claim the same residence.
Factor in adjustments to the cost basis. Did you put on an addition? Renovate the kitchen? Install new central air conditioning? All of these home improvements increase the cost basis of your home. Your cost basis includes the price and acquisition costs of your home, plus a laundry list of property-related expenses. So if you purchased your home for $400,000 and sell it for $500,000 five years later, it may sound like you have a $100,000 capital gain. But if you spent $50,000 on renovations, your cost basis will be $450,000, lowering your taxable gain to $50,000.
Sell when your income is at its lowest. If you were recently laid off, took a pay cut or newly retired, it might work to your advantage. Because your capital gains tax is determined by your tax bracket, a dip in income could have a positive impact on how much you’re expected to pay.
No one wants to pay high taxes on a home sale...
Your home is likely your life’s biggest purchase. When the time comes to sell it, make sure you’re getting back every penny you’re entitled to receive. Reach out to the experts at Magone & Co at (973) 301-2300, and we’ll schedule a no-obligation confidential consultation to explain your options.