With home sale prices on the rise again you may be considering selling your home soon to cash in on a profit.
Although most homeowners find that their home-sale profit is tax-free there are tips you should know to make sure you are getting the most out of your home sale:
Profit may be tax-free. When selling your principal residence one thing to keep in mind is all your money earned from the sale may be tax-free. Taxpayers are often surprised to find that profit from the sale of their home is tax-free. Thanks to the IRS, if you owned and lived in your main home for two out of five years before the sale, you can make up to $250,000 profit on your home sale and you may not have to claim it on your taxes. If you are married your exclusion gets more of a boost. As a married couple, you may be able to exclude up to $500,000 profit.
Don’t forget home improvements. If you enhanced your home with improvements like a new roof, a remodeled kitchen, or a full on backyard with a pool, don’t forget to add what you paid for your home improvements to your cost basis (what you paid for it) to get the adjusted basis. Increasing your cost basis by what you paid for your home improvements to arrive at your adjusted basis will lower your taxable gain. For instance, if you sold your house for $500,000 and paid $200,000 for it, you may think your gain is $300,000, but by making sure you add your $100,000 in home improvements you will reduce your profit below the taxable level, to $200,000.
Realtor and lender fees can reduce your bottom line and taxes. Realtor sales commissions and points you pay on behalf of the seller can really add up, but you can lower your profit by making sure you decrease the proceeds from the sell by any sales commissions paid or points paid on behalf of the seller.
No reporting necessary. If you are lucky enough to sell your home and make a profit you may find, like the majority of taxpayers, that you do not need to report your home sale when it’s time to file your taxes thanks to the gain exclusion rules in place unless you receive Form 1099-S, Proceeds from Real Estate Transactions. You can avoid getting this form if you certify (usually at closing) that you meet the ownership, use and timing tests.
If you sell your house this year there’s no need to worry about knowing these rules. TurboTax will ask you simple questions and give you the tax deductions you are eligible for based on your answers.