In recent years, as home values continue to climb, more Americans are finding themselves in a position where they owe capital gains taxes when selling their property. According to a report from real estate data firm CoreLogic, nearly 8% of home sales in 2023 exceeded the $500,000 limit for tax-free profits, up from roughly 3% in 2019. This trend highlights the importance of understanding how to calculate your home’s profit in order to minimize your tax bill.
Despite the increase in profits from home sales, most Americans do not owe taxes when selling their primary residence due to a special tax break known as the Section 121 exclusion. This exclusion allows up to $250,000 of profits for single filers and $500,000 for married couples filing jointly to be shielded from capital gains taxes. However, any profit above these limits is subject to capital gains taxes, which are levied at 0%, 15%, or 20% based on your earnings.
To reduce your capital gains tax liability when selling your home, it is crucial to accurately track the cost basis of the property. The cost basis includes your original purchase price as well as closing costs from the purchase. By adding often-forgotten costs and fees to your basis, such as title fees, utility installation charges, legal fees, and surveys, you can minimize the amount of profit subject to capital gains taxes. Additionally, expenses related to the sale of the property, such as real estate commissions and closing costs, can also be included in the basis.
In order to further increase your home’s basis and reduce your tax liability, you can include the cost of eligible upgrades and improvements. These improvements must add value to your home, prolong its useful life, or adapt it to new uses. Examples of eligible upgrades include additions, outdoor upgrades, new systems, plumbing, and built-in appliances. However, repairs and maintenance needed to keep your home in good condition, such as fixing leaks or replacing broken hardware, do not qualify as eligible costs for increasing your basis.
To ensure that you have proper documentation for any improvements made to your home, it is important to maintain accurate records. This documentation will be essential in case of a future IRS audit. If you do not have receipts for the improvements, taking pictures and gathering any permits pulled for home projects can help substantiate your claims. By keeping detailed records of home improvements, you can minimize the tax owed from selling your house and maximize your profit.
As more Americans face capital gains taxes on the profits from home sales, it is important to understand how to calculate your home’s profit and reduce your tax liability. By tracking your cost basis, including eligible costs and upgrades, and maintaining accurate records, you can minimize the amount of profit subject to taxation and increase your overall return on investment when selling your home.