The house values have been rising, you have a lot of equity in your house, you sell and you realize the income from the house! But then, the tax man cometh! Now what? And what could you have known before the sale to protect you from the tax bill?
What Are These Taxes?
Until 1997, home sellers did not have to pay taxes on the profits from the sale of their home if they bought another home of equal or greater value within two years of the sale of the house. That changed with the Taxpayer Relief Act of 1997 changed the rules. So now, the home seller can deduct $250,000.00 ($5000,000.00 for couples) of the home sale profits from their income. However, the sellers must have lived in the home for at least 2 of the 5 years prior to the sale. And even though the sale prices of home sales has skyrocketed, the amount of the income deduction has not.
All About The Basis
So how do you determine the actual profit, income, you have made on the sale of your house? The “basis” is the most important tool. The “basis” is the amount that you purchased your house for. Let’s say you sell for $500,000.00 and you paid $200,000.00 for it. Your profit is $300,00.000, and you can only deduct $250,000.00, for a single person, from your income. You’re now paying income taxes on that $50,000.00 of non-deductible profit. If you sold a house before 1997 and rolled the money into your new home and took the tax exemption on the purchase of your new home, then your current tax basis could be lowered by all or a part of that rolled over exemption.
You can use certain qualified improvements to your home to increase your basis. You can deduct the cost of improvements that have increased the value of your home from the profit by using them to increase your basis. Improvements that can increase your basis are room additions, updated kitchens, and new plumbing. Unfortunately, general repairs do not increase your basis.
Make sure that you consult your accountant if you are unsure of how to address any profit you may realize in the sale of your home.
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Legal hassle and financial unpleasantry often go hand in hand. If you have found yourself in that spot, give Moseman Law a call. We help clients like you deal with hassles so you can live your best life.