Tax Free Profits When Selling Your Home
You may be able to sell your home, making significant profit, tax free. Married couples, filing jointly, may be able to realize a gain of up to $500,000, tax free, on the sale of their principal residence. The exclusion is limited to no more than $250,000 for all other filers. Generally, you must have owned the property and used it as your principal residence for two of the past 5 years. To take advantage of this big savings opportunity, you need to meet several conditions, so be sure to discuss with a tax professional and coordinate with your real estate agent. You may be entitled to a partial exclusion if you come up short on the ownership and use test time frames.
Future Savings by Improving Your Home
When it is time to sell your home, any gain that cannot be excluded is taxable, but it is possible to minimize the gain for tax purposes. The gain is equal to the sale price of your home minus the basis.
Sale Price of Home
Minus Cost Basis
So increasing the basis will reduce your gain and your taxes. So, how do you increase your basis? Basis includes your purchase price and some transaction costs plus improvements. Improvements you make to the home get added to the basis. The cost of your kitchen remodel can be added to your home’s basis. So can new windows. Just repairing a broken window does not count as an improvement, it’s a repair. To get the benefits of increased basis, be sure to understand the differences between improvements and repairs, keep thorough records and discuss with a tax expert. The potential savings are worth the effort.
Tax Credits for Energy-Efficient Improvements
The Residential Energy Efficient Property Credit provides a tax credit of up to 26% of the costs of energy-efficient improvements made to your home in 2020. (22% credit for improvements made in 2021) Potentially qualifying improvements include: solar electric, solar water heating, fuel cell, geothermal heat pump and small wind energy property.
The Nonbusiness Energy Property Credit provides a credit of up to $500 on energy efficient-property expenditures, made before 2021, on your principal residence. The requirements of the energy credits are specific and technical.
Mortgage Interest Deduction
The interest you pay on your mortgage may yield tax savings. Interest paid on up to $750,000 of debt used to buy, or substantially improve, your principal residence and one other residence may be deductible. There are some conditions and limitations that apply to this potentially valuable deduction. If you incurred all the debt to buy or improve the properties before 12/16/17 you may be able to deduct interest on up to $1,000,000.
Mortgage Discount Points
Did you pay ‘points’ to buy down your mortgage interest rate? You may be able to deduct the points. The points must have been paid to reduce the loan rate and listed as such on your closing documents. They cannot have been paid as a loan origination or other fee, and you cannot borrow the points paid. There are a few requirements to get this deduction, so consult a tax advisor.
Mortgage Insurance (PMI)
Mortgage insurance premiums may be deductible. The deduction gets phased out for adjusted gross income over $100,000 and is eliminated for AGI over $109,000. This deduction may be available retroactively. Discuss the deduction with your tax advisor. Discuss removing PMI with your real estate agent.
Home Office Deduction
Self-employed taxpayers may be able to save by deducting expenses they have for a home office. You must be self employed, and use the space regularly and exclusively for work or possibly inventory/product sample storage. If you meet these requirements and a few others, you may be able to deduct direct expenses and indirect expenses that can be allocated to the business use. There is also a simplified method based on square footage. Be sure to thoroughly document everything.
Property Tax Deduction
The property taxes you pay may be deductible. The taxes must be based on property value, among other requirements. Fees for services, such as sewer or sanitation, do not qualify. The total deduction for all state and local taxes, including income and property taxes, is limited to $10,000.
This site contains general information for taxpayers. Each situation depends on its unique facts. Do not rely on this content as a sole source of information. Seek professional tax advice before taking any action based on this information.