![](https://realestateinvestingnewsonline.com/wp-content/uploads/2024/03/A-Guide-to-Reduce-Capital-Gains-Taxes-When-Selling-Your-Home-750x420.png)
Did you sell your home in 2023? Well, brace yourself because your big payday might come with a tax surprise. Selling your home can sometimes mean shelling out for capital gains taxes, and the bill can catch you off guard if you need more preparation.
In the ever-changing world of real estate, it’s not uncommon for homeowners to make a pretty penny when they sell their properties. Even though U.S. home sales dropped in 2023, many homeowners still walked away with some cash. But here’s the kicker: those profits could cost you in taxes, depending on how much you made.
____________________________________________________________________________
- Selling your home can trigger capital gains taxes, potentially leading to a tax bill if your profits exceed IRS limits for tax-free gains.
- Single homeowners can shield up to $250,000 of home sales profit from capital gains taxes, while married couples filing jointly can exclude up to $500,000, provided they meet IRS eligibility requirements.
- To reduce your tax bill, consider increasing your home’s basis by adding the cost of specific improvements, but keep detailed records to prove your case in case of an audit.
______________________________________________________________________
A Guide to Reduce Capital Gains Taxes When Selling Your Home
According to ATTOM, a big player in the property database game, the median profit for selling a single-family home in 2023 was around $121,000. That’s a drop from the previous year’s $122,600, but it’s still nothing to sneeze at.
Now, here’s where things get tricky. Sometimes, the profits from selling your home can exceed the limits set by the IRS for tax-free gains. And it’s a shock for sellers when they realize they might owe some taxes on that windfall. Don’t panic just yet! The good news is that the tax laws are designed to encourage homeownership, which means there are ways to soften the blow.
For starters, if you’re a single homeowner, you can shield up to $250,000 of your home sales profit from capital gains taxes. And if you’re married and filing jointly, that exclusion doubles to a whopping $500,000. Sounds pretty sweet. But of course, there are some rules you’ll need to follow to qualify for those exclusions.
First off, you’ve gotta pass the “ownership test.” That means you must have owned the home for at least two of the past five years before selling it. And if you’re married and filing jointly, only one spouse needs to meet that requirement. Then there’s the “residence test,” which says that the home has to be your primary residence for at least 24 months out of the five years before you sell it.
But wait, there’s more! You might still be eligible for a partial exclusion if you sold your home due to unavoidable circumstances, like a job change, health issues, or unforeseeable events. However, there’s a catch: you generally can’t get the tax break if you’ve already claimed the exclusion for selling another home within two years of your closing date.
Now, let’s talk about how you can lower your tax bill if your home sale profits exceed those IRS exclusions. One way to do it is by increasing your home’s “basis,” or original purchase price. You can bump up your basis by adding the cost of specific improvements you’ve made to the property that have “prolonged its useful life,” according to the IRS.
Consider home additions, updated systems, landscaping, or new appliances. But here’s the kicker: repairs and maintenance generally don’t count towards increasing your basis. So, keep detailed records of any improvements you make to your home because you’ll need them to prove your case if you ever get audited.
And regarding audits, here’s a pro tip: complete the paperwork. Sure, the IRS gets a
copy of Form 1099-S after you sell your home, but you’ll need documentation to prove any changes to your home’s basis. Failing to keep records of your home improvements throughout your ownership is a common mistake that could cost you big time come tax season.
So, there you have it, folks! Selling your home can be lucrative but comes with its fair share of tax headaches. But don’t fret! Following these tips and staying on top of your paperwork can minimize your tax bill and keep more hard-earned cash in your pocket.
Join our newsletter to receive the latest updates on the real estate market.
Leave a Reply