Don’t get sucker-punched by capital gains taxes when you sell your home.
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Understanding how home sale profits are calculated — and how you can legally reduce your tax bill — could save you money and stress if you’re planning to cash in on the current home price boom. Those exclusion limits haven’t changed in 25 years, while home values have nearly tripled. The median home sale price when the law passed was $145,800, according to the Federal Reserve Bank of St. Louis. The median was $428,700 in the first three months of this year. Median means half of homes sold for less and half for more.
Why your tax basis matters Your first step in determining your gain is to identify the amount you realized from the sale. That’s the sales price minus any selling costs, such as real estate commissions. Then, figure your tax basis. That’s generally the price you paid for the home, plus certain closing costs and improvements. The higher the basis, the lower your potentially taxable profit.
Your tax basis might be lower than the purchase price, however, if you previously deferred gain on a home sale, says CPA Mary Kay Foss of Walnut Creek, California. Say you sold a house before 1997 and rolled a $175,000 profit into the new house — the one that cost you $200,000. The initial tax basis of your home would be just $25,000. Now, if you realize $600,000 from the sale, your capital gain would be $525,000, even with the $50,000 kitchen remodel.
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