Mid-Year Tax Planning When Selling Your Primary Residence
BOSTON (CBS) - The real estate market has been busy this spring. If you sold your house this year gather up all of your house paperwork for you will need it when you file your tax return next year.
And you will need to go way back to when you first purchased the house and then begin the search for documents for any major improvements you made to the house like adding a new porch or storm windows.
We get a tax break when we sell our home. If your home has been your primary residence for two of the last five years you can exclude from capital gain on the sale up to $250,000 if you are a single taxpayer and $500,000 if you are married and filing jointly. You are eligible to use this tax break every two years.
This tax break was intended to help older taxpayers who were downsizing and had lived in their current home forever.
For example; a couple bought a place in Jamaica Plains in 1983 and paid $75,000 for a grand old Victorian. The kids are now grown and a five bedroom house is much too big for them. They put it on the market and it sells for $775,000. A potential capital gain of $700,000. But during the 30 years they lived there they replaced all of the windows, added a two-car garage, a master bedroom, two bathrooms, a sun porch and paved the driveway.
These are considered improvements and their cost can be added to the basis of the house. They tally up all of their expenses and its $250,000. They can add that to the $75,000 to come up with the real cost of their home at $325,000.
They subtract this number from their selling price along with the realtor's fees of $31,000 to get the real capital gain of $419,000. They are under the $500,000 exclusion so they will owe no capital gain taxes on the sale.
One more thing: This exclusion is for your primary residence and not your summer place on the Cape. To make it work for a summer place, sell your primary residence and use the exclusion there. Then move into the summer place on the Cape and live there for at least two years and you can use the exclusion again.
If you had a loss on the sale you do not get to take it on your tax return. I know it's not fair, but taxes don't have to be.
