You may be aware that the 1997 Taxpayer Relief Act permits most homeowners to exclude up to $250,000 of the gain realized on the sale of a principal residence (couples may exclude up to $500,000). Unfortunately, this is not a benefit to everyone since homeowners can no longer use the technique of purchasing a new residence at least equal in value to their old home. Instead, all gain over and above the exclusion amount is immediately taxed on the sale of the home. Avoiding this pitfall requires careful planning.
Homeowners who have more than $250,000 in potential gain or can project that amount of gain when they eventually sell in the future, should keep careful records of expenses and improvements in order to reduce their eventual tax. Although married couples are entitled to exclude $500,000 in gain, divorce, death, and other situations make it imperative to plan based upon the $250,000 figure “just in case.”
The kinds of expenses you need to be concerned with are those that increase the tax basis of your home and therefore decrease taxable gain. The expenses fall into two basic categories: those incurred at the time you buy your home and those made for improvements that materially add to the value of your home or prolong its life. Just making the expenditures is not enough. You must keep receipts, canceled checks or other proof. Otherwise, you risk being limited to your original cost when you sell.
Acquisition Costs to Include:
- Inspection fees (termite, structural or radon)
- Transfer taxes
- Notary fees
- Legal fees
- Closing costs
- Deed and mortgage recording charges
- Appraisal and evaluation fees
- Title search costs
- Title insurance premiums
- Survey costs
Improvements, Alterations, Replacements, and Additions that Typically Reduce Gain Include:
- New roof
- Additions (porch, deck, terrace, patio or garage)
- Bathroom renovation
- Kitchen remodeling
- Fences and gates
- Sprinkler system
- Central heating or air conditioning equipment
- Heating oil tank
- Insulation
- Intercom system
- Vinyl siding
- New gutters, leaders, and drain pipes
- New stairs, walkways or driveway
- In-ground swimming pool
- Storm windows, doors and screens
- Telephone and cable outlets
- Electrical wiring, service panels, and outlets
- Septic tank (new or replacement)
- Conversion of basement or attic to living space
- Moving or paneling of walls or partitions
- Fireplaces
- Trees, shrubs, and topsoil
- Security system
- Closets, cupboards, or room dividers
- Window replacement
Expenses that keep your home in good repair usually will not reduce your gain, unless they are part of an extensive remodeling or renovation plan.
If you would like further information regarding this topic or any other tax related issue, please contact Henssler Financial at 770-429-9166 or experts@henssler.com.
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
