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With the value increases over the past several years, you may be facing possible tax implications if you sell your home. But there are ways to reduce, and even eliminate the tax hit on your home sale…..
If you’ve owned and lived in your home as your primary residence for at least two out of the past five years (based on sale date), you can qualify for the Capital Gains Exclusion, which allows you to exclude up to $250,000 in gains from income ($500,000 if filing a joint return).
This exclusion does not require you to use or reinvest your sale proceeds in any way. It provides tax free gains!
** If you have a highly appreciated property which you’ve converted from being a primary home into a rental, you may want to consider selling within three years of that conversion date. Then you can take advantage of the exclusion, while only having to pay tax on any depreciation recapture.
Added notes: you can usually only exclude gains from the sale of one primary home every two years, even if you have more than one house. Losses on the sale of your primary home are not deductible.
In addition to the above exclusion, you can also adjust your basis in the home by any capital home improvements you’ve made. Also, selling expenses adjust your net sales price downward. These items allow you to further decrease possible capital gains!
Rental homes generally don’t qualify for the Capital Gains Exclusion, unless they’ve been converted from being a primary home. However, like primary homes, you’ll want to document those home improvements, as it will help decrease taxable gains!
You may also have Passive Loss carryovers that could come due upon your home sale, which could offset some gains as well. It’s very important this isn’t missed in the reporting of your sale, as it could cost you thousands.
Inherited property, such as residential homes, receives a step-up in cost basis on the date of transfer. For example, if your grandmother bought her home for $50,000 in 1960 and she passes away, giving you the property at a time when it’s worth $700,000, your cost basis on the home is now that $700,000 (“stepped up value”). So if you sell the home for $740,000 and have $40,000 in selling expenses, you’d end up having no net gain…and therefore, no taxes!
It's important to get an appraisal for inherited property around the time of the owner’s passing (time you inherit home). This helps establish the basis of this home for your eventual sale.
Check out our Home Sale Worksheet found on this page of our website. It’ll help you layout the info we need to properly report the sale of your home.
Contact us if you have questions regarding your specific home sale, we’re happy to help!