Methods to keep away from a tax bomb when promoting your private home
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With real estate values rising, many sellers expect a substantial profit from listing their property. However, capital gains taxes can dampen their profits.
Profits from the sale of homes are considered capital gains, which will be taxed at a federal rate of 0%, 15% or 20% in 2021, depending on income.
The IRS offers a homeowner write-off that allows single parents to exclude up to $ 250,000 from profits, and married couples filing together can deduct up to $ 500,000.
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But these thresholds have not changed since 1997, and average home sales prices have more than doubled in the past two decades, affecting many long-term homeowners.
“It’s become a big part of the conversation now,” said John Schultz, CPA and partner at Genske, Mulder & Company in Ontario, California.
While the exception may matter to some homeowners, there are strict guidelines in place to qualify. Sellers must own and use the home as their primary residence for two of the five years prior to the sale.
“But the two years don’t have to be consecutive,” said Mary Geong, a Piedmont, California CPA and agent enrolled on her behalf with the company.
Someone who owns two houses can split the time between the properties, and if their accumulated lifetime in one location is at least two years they can qualify.
In addition, someone can convert a rental property into a primary residence for a partial exclusion for two years. In this case, the depreciation is based on the percentage of time spent there, she explained.
For example, if a single applicant has owned a rental property for 10 years and lived there for two years, they may be eligible for 20% of the $ 250,000 or $ 50,000 exclusion.
“But you need a good record,” added Geong.
Increase base to reduce profits
If homeowners go over the tax exemptions and owe taxes, they can reduce profits by adding certain home improvement items to the original purchase price known as the base, Schultz explained.
For example, according to the IRS, home extensions, patios, landscaping, swimming pools, new systems, and more can qualify as improvements.
Ongoing repair and maintenance costs that do not add value or extend the life of the house, such as B. Painting or fixing leaks, however, do not count.
Of course, homeowners need to demonstrate improvements, which can be difficult after many years. However, if someone lost receipts, there may be other methods.
“The history of property tax can help you look back and recalculate some of it,” said Schultz, explaining how reasonable estimates can be acceptable.
Homeowners can also increase the base by adding certain closing costs like title, attorney or survey fees along with title insurance.
Other tax consequences
There is also the possibility of other tax ramifications when selling a high profit home home.
For example, increasing Adjusted Gross Income can affect eligibility for health insurance grants and result in someone paying back premium credits at the time of taxation.
And retirees who increase income can trigger higher future payments for Medicare Part B and Part D premiums.
“If you’re selling a significant asset, you should be talking to some sort of advisor,” said Schultz.
A financial advisor or tax professional can forecast the possible outcomes depending on a person’s overall situation to help them choose the best move.