With today’s rising home prices, sellers are in the driver’s seat, often reaping huge profits. While capital gains taxes can take a bite out of the money you will pocket, there are ways to save if you’re savvy.
Home sales profits are considered capital gains. They are taxed at federal rates of 0%, 15% or 20%, depending on your income.
While the IRS allows individuals to exclude up to $250,000 and married couples up to $500,000 of profit, rising home prices make it more likely that your profit will exceed those benchmarks.
One way to save taxes is to document any home improvements you have done through the years. These can be added to the original purchase price, known as “basis,” lowering your overall capital gains.
“For example, home additions, patios, landscaping, swimming pools, new systems and more may qualify as improvements,” notes a recent CNBC article. “However, ongoing repairs and maintenance expenses that don’t add value or prolong the home’s life, such as painting or fixing leaks, won’t count.”
If you’ve lost receipts over the years, “property tax history can help you go back and recalculate some of that,” according to the CNBC article.
To qualify for the home improvement exemption, sellers must own and use the home as their primary residence for two of the five years preceding the sale. (The two years don’t have to be consecutive.) Also, “someone owning two homes may split time between the properties, and if their cumulative time living at one place equals at least two years, they may qualify,” notes CNBC.
Certain closing costs, such as title, legal or surveying fees and title insurance, can also help offset the taxes.