Homeowners receive a generous exclusion on the gain of their principal residence up to $250,000 for single taxpayers and $500,000 for married taxpayers filing jointly. Most people probably consider the gain or profit in a home to be the difference between the purchase price and the sales price.
IRS allows a taxpayer to lower the sales price by the selling expenses before calculating gain. Normal expenses like real estate commission, title policy, attorney fees, and other sales expenses may be included if they are normal and customary.
Another significant adjustment is that capital improvements made during the holding period can be added to the cost basis. Normal maintenance like repairs are not considered improvements. IRS says that if the expenditure materially adds value (features) to the property, or appreciably prolongs the useful life of the property, or adapts a portion of the property to a new use, it can be considered a capital improvement.
Examples could include replacing a heating or air conditioning system, storm windows, new permanent landscaping like trees or shrubs or completing an unfinished basement. They don’t necessarily have to be high-ticket items but can include things like adding dead bolts, ceiling fans, video doorbell and other items. For more information, see IRS Publication 523.
The total amount of the money that is spent on capital improvements increase the cost basis of the home which in turn will reduce the amount of gain when sold. With the average person staying in a home for 10 … 12 years, the total improvements could be significant.
As an example, let’s say a single taxpayer sold their home for $350,000 more than they paid for it. If their selling expenses were $25,000 and they had made $75,000 of capital improvements during the holding period, the gain would be $250,000 and within the limits for a single taxpayer to exclude all of it instead of having a $100,000 gain.
It is necessary to be able to prove the amount spent and for that reason, a routine should be established to keep the receipts and cancelled checks for all expenditures on their principal residence. Even if the owner is not sure whether they qualify as an improvement, by having the receipt available at the time of sale, a tax professional can help a homeowner with the determination.
In addition to receipts and cancelled checks, a contemporaneous register listing the date, description and amount spent will provide accurate information for calculations and serve as evidence should it be needed in the future.
There is more information in the Homeowners Tax Guide that is available for download.
If you would like any professional residential Real Estate advice, contact us at Paramount Real Estate Services. 1008 12th St. SE Salem, OR 97302 503-851-1645
Also, to mobilize us right away to help you move, visit us here:
Is there seriously more talk of another tax credit? Please… the last ones only prolonged the inevitable and ultimately dug our hole deeper. The previous tax credits cost the American Tax Payers, which are mostly middle income earners, $23.5 Billion! Out of the 1.8 Million home buyers that took advantage of the first program, 950,000 bought back in 2009 when the $6500 tax credit was in play. If you bought during that time, and was considered a “first time home buyer”, then remember that you have to pay that money back. The IRS designated that $500 per year to be paid back over a 13 year term. It was basically a free loan.
Now that the tax credits are over, we have a $23.5 Billion bill and the headache gets worse. Existing home sales are down considerably and we are heading into our typical slow period of long Winter months. Job growth is nothing where it should be and consumers are not confident with the track that we are on. As states continue to threaten to cut the budget; that specifically hurts markets like ours where many of our residents are state workers. So, take your ibuprofen and drink lots of water because the headache continues.
We are entering into the middle of Summer even though we haven’t had much of a Summer thus far in the Pacific Northwest. We finally are receiving some nice weather and people are taking advantage of that. Sales are slumping a little since the tax credit has been ceased. Although, we are getting reports of increased fraud. You would think that the IRS would require a purchase contract to be submitted, along with the HUD 1, since they instituted the April 30th deadline to be under contract with a seller. Well, they apparently don’t have any policies in place to verify that and buyers are going into contract after the April 30th deadline and still receiving the tax credit. As a tax payer, how does that make you feel? Hopefully they can get that under control soon and start thinking a few steps ahead.