Real EstateHow to calculate capital gains taxes when selling your...

How to calculate capital gains taxes when selling your home


Westend61 | Westend61 | Getty Images

As home values climb, more Americans owe capital gains taxes when selling property. But knowing how to calculate your home’s profit could reduce your bill, experts say.

Most Americans do not owe taxes for selling a primary residence because of a special tax break — known as the Section 121 exclusion — that shields up to $250,000 of profits for single filers and $500,000 for married couples filing together.

However, more U.S. home sales profits now exceed these thresholds, according to an April report from real estate data firm CoreLogic. Nearly 8% of sales exceeded the $500,000 limit in 2023, up from roughly 3% in 2019, the report found.

More from Personal Finance:
More home sellers are paying capital gains taxes. Here’s how to reduce your bill
Inflation is slowing. Here’s why prices still aren’t going down
Fewer homeowners are remodeling, but demand is still ‘solid’

There are strict IRS rules to qualify for the $250,000 or $500,000 exemptions. Any profit above those limits is subject to capital gains taxes, levied at 0%, 15% or 20%, based on your earnings.

Capital gains brackets use “taxable income,” which is calculated by subtracting the greater of the standard or itemized deductions from your adjusted gross income.

Reduce capital gains by increasing ‘basis’

“It is important to track your cost basis of the home,” which is your original purchase price plus closing costs from the purchase, according to Thomas Scanlon, a certified financial planner at Raymond James in Manchester, Connecticut.

You can reduce your home sale profit by adding often-forgotten costs and fees to your basis, which minimizes your capital gains tax liability.

For example, you can start by tacking on fees and closing costs from the purchase and sale of the home, according to the IRS. These may include:

  • Title fees
  • Charges for utility installation
  • Legal and recording fees
  • Surveys
  • Transfer taxes
  • Title insurance
  • Balances owed by the seller

These could be small amounts individually but have a significant effect on the basis when tallied.

The average closing cost nationwide is $4,243, according to a report from Assurance, but fees vary widely. In the priciest state, New York, the average is $8,039, while California is a close second at $8,028.

“You also get credit for the expenses for the sale of the property,” added Scanlon, who is also a certified public accountant. That includes your real estate commissions and closing costs.

However, there are some fees and closing costs you cannot add to your basis, such as home insurance premiums or rent or utilities paid before your closing date, according to the IRS.

Similarly, loan charges such as points, mortgage insurance premiums, the cost to pull your credit report or appraisals required by your lender will not count.

The ‘best way’ to reduce capital gains taxes

You can further increase your home’s basis by tacking on the cost of eligible upgrades, experts say.

“The best way to minimize the tax owed from selling a house is to maintain an accurate record of home improvements,” said CFP and enrolled agent Paul Fenner, founder and president of Tamma Capital in Commerce Township, Michigan.

An improvement must “add to the value of your home, prolong its useful life or adopt it to new uses,” according to the IRS.

For example, you can increase your basis with additions, outdoor or exterior upgrades, adding new systems, plumbing or built-in appliances.

However, you cannot tack on repairs or maintenance needed to “keep your home in good condition,” such as fixing leaks, holes or cracks or replacing broken hardware, according to the IRS.

Housing market still trending at lowest levels in new and active listings: HousingWire's Mohtashami

Of course, you will need documentation for any improvements used to increase your home’s basis in case of a future IRS audit.

If you do not have receipts, “at the very least, take pictures,” and gather any permits pulled for home projects, Scanlon from Raymond James said.

Don’t miss these exclusives from CNBC PRO



Original Source Link

Latest News

Venice’s ‘tourist tax’, labeled a ‘miserable failure,’ might not break even this year

Faced with the threat of sinking and an economy that crowds out local people, Venice launched a measure...

Copy Trading Platform Pros and Cons

Margex is a cryptocurrency exchange platform founded in 2019 focusing primarily on derivatives trading. However, it also offers...

Economic feel-bad factor hangs over the UK election

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly...

7 Best Barbecue and Hot Sauce Subscription Boxes (2024): Small Batch, Award-Winning, Monthly

Boxes are $34 with $8 shipping and with the option of delivery every month, three months, or six...

Trump Confirms He’s A Russian Asset By Claiming Putin Will Release Evan Gershkovich If He Wins

Trump claimed that Putin will release detained Wall Street Journal reporter Evan Gershovich only if he wins the...

Two real-world tests of quantum memories bring a quantum internet closer to reality

In the quest to build a quantum internet, scientists are putting their memories to the test. Quantum memories,...

Must Read

Mikayla Campinos on Life as a Young Influencer – Hollywood Life

Early in 2021, Mikayla Campinos’s surprising road to...

10 Fun Facts About Louisville, KY

Known for its rich history and thriving arts...
- Advertisement -

You might also likeRELATED
Recommended to you