You’ve sold your house, packed up, and the moving van is pulling out of the driveway – whew! But the tax-related paperwork associated with selling your home has just begun.
While it’s fresh in your mind, get a head start now on gathering the papers you’ll need for next year’s tax return. No need to wait until April 15th!
In New York State’s Westchester, Rockland, and New Jersey’s Bergen counties, where home prices have risen over the years, chances are you sold your home for (much) more than what you paid for it. And while you don’t get a deduction for a capital loss on the sale of a primary residence, you do have potential capital gains taxes to pay on any profit at tax time next year.
While there are too many exceptions and caveats to cover here, these are the basic calculations to determine the dollar amount subject to capital gains:
- Home sale price less selling expenses equals the amount realized from the sale.
- Subtract from that your adjusted basis (what you paid for your home plus capital improvements over the years).
- The result is your gain or loss.
- If you sold at a loss — or if your gain is less than the applicable exclusion – see below — your work is done.
If you have a gain, please read on. And be sure to have your accountant review your calculations.
Reduce taxes on the sale of your house: Organize your paperwork!
The objective is to reduce any gain (and the taxes owed on the gain). This can take some digging, so prepare to invest the time and effort to get the greatest tax advantage. The taxpayer bears the burden of proof.
Start by locating documentation of what you paid for your home. This can be found on your closing documents or on the publicly available deed (contact your County Clerk’s office to find out how to locate this online). Make this simple calculation: selling price less purchase price — to see if it is worthwhile assembling your capital improvement information.
Every two years, home sellers get an exclusion, as follows: the IRS allows a single person to exclude the first $250,000 of any gain ($500,000 for those married filing jointly) if you and your home meet a set of eligibility tests including ownership and residency requirements and the reason for your move. (Refer to IRS Publication 523, Selling Your Home, updated each tax year, for these and other valuable information and worksheets. https://www.irs.gov/pub/irs-pdf/p523.pdf )
If this exclusion erases your gain, you are “free to go.” If not, focus on your “total basis,” which includes what you paid for your home plus capital improvements.
Document capital improvements: Paperwork is your friend.
As a financial organizer / daily money manager, I do the information-gathering and calculations for my clients. When I do, I page through dusty files for paperwork associated with home projects over the years. Source materials include: receipts and contracts, credit card and bank statements. I put this data into a spreadsheet with several columns including: the type of improvement, date, name of contractor, and if there is a receipt for the project in the file. The good news is that the time spent sleuthing capital improvements is rewarded in the form of tax savings. I provide the information I have assembled to my client’s accountant for review.
What does the IRS consider a capital improvement? Work that adds to the value of your home or extends its life, NOT repairs and maintenance.
Here’s an example: Painting your home every few years or replacing carpeting would not be considered a capital improvement, but if you did these as part of a larger project to add an addition to your home, consider including it. Projects that increase your home’s value (installing central air conditioning) or extends its life (new roof) are considered capital improvements, assuming they are still part of your home at time of sale.
But wait – there’s more!
Don’t put your calculator away just yet. Tax credits and breaks you benefited from during your years in residence, such as energy credits or depreciation taken for a home office or renting part of your home, must be added back. They decrease your cost basis. This information can be found in your old tax returns or from your tax preparer.
Now that you have your total cost basis, it’s time to calculate the home selling price less selling expenses.
More recent receipts can provide a tax benefit. Create a second spreadsheet to document selling expenses. Examples can include a fresh coat of paint used to prepare your home for sale, as well as legal fees pertaining to the sale. Of course, exclude packing and moving bills. For “do-it-yourself” projects, count the cost of materials, but not the value of your labor. A website worth exploring is costbasis.com, click on the “Other Assets” tab, then “Personal Residence” in the pull down menu.
Partial exclusions of capital gains are available based on the primary reason for sale, such as if it is work-related, health-related, or due to an unforeseeable like the death of a spouse. As always, your accountant is your best resource.
As you settle into your new abode, start a file and set up a spreadsheet – or at least files — for documenting improvements you have probably already begun making there. After all, you might move again one day. And have to again calculate any potential capital gains. Consider yourself forewarned!
Photo credit: 2574719 © Marina Bashkirova – Dreamstime.com