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Selling Your Home? Avoid These Costly Mistakes and Pay Less Tax

Selling a home or investment property is a transaction that's loaded with tax consequences. Money Girl interviews Collier Swecker, a real estate professional who's also an attorney and tax law specialist, and breaks down what you need to know.   

By
Laura Adams, MBA
6-minute read
Episode #587
Selling Your Home? Avoid These Costly Mistakes and Pay Less Tax

Sold a Home? 5 Tax Questions You Should Ask

Give yourself a pat on the back—you sold your home! Your sale profit is sitting pretty in your bank account, but with Tax Day quickly approaching, will the IRS take a chunk of your proceeds?

“The majority of America does not need to worry about that,” says Collier Swecker, a Jefferson County, Alabama real estate agent who ranks in the top 1% of agents in his area.

That’s good news, but to make sure you’re in the clear and that you file a tidy tax return, ask yourself these questions relevant to home sellers during tax season:

Question #1: Which home sale documents do I need to file my tax return?

If you sold your home in 2018, these are the documents you’ll need when you file your taxes.

  • Form 1099-S – tells the IRS that you sold your home. If you don’t have to pay capital gains tax, you may not receive this form. See if you qualify for a capital gains exemption below. 
  • Form 1098 – shows how much mortgage interest you paid over the past year. You can add the interest paid on your home to your cost basis, which will lower your taxes. 
  • Closing statement – is a receipt for your home sale listing the costs, which may cut your taxes. 
  • Home improvement receipts – that show dates and amounts spent can be added to your cost basis and reduce your taxes. 
  • Moving expenses - from a job relocation may qualify for a reduced tax deduction. 
  • Documents proving residency – are important to qualify for the capital gains tax exclusion, which requires you to live in the home for at least two of the past five years. These might include utility bills, bank statements, or voter registrations.
  • Home sale documents – including records and receipts to back up any tax benefits you received in the event of an audit.

Question #2: Do I owe taxes on the income from my home sale?

If you’re a single tax filer and your adjusted capital gain on your home sale is $250,000 or less, you qualify for the capital gains tax exclusion. Married filers can exclude gains up to $500,000. The IRS considers profits in excess of these amounts to be taxable income.

“The biggest thing is to make sure that the homeowner has lived in the house two out of the last five years to qualify for that exemption,” says Swecker.

For example, if you’re a single taxpayer who’s lived in your home for five years, and your capital gains from the sale were $300,000, you must pay taxes on $50,000 of that profit. But, if your capital gains were $100,000, you’re in the clear!

Question #3: What’s my adjusted cost basis and capital gain?

To calculate the capital gain from your home sale, you’ll need to calculate your adjusted cost basis for the house. Here’s how to break down the numbers:

  • Take the amount you originally paid for the home.
  • Add the cost of improvements you’ve made that increased the home’s value, such as a new water heater or new floors. (This is where all of those saved receipts come in!)
  • Add expenses from repairs needed due to a casualty, such as a natural disaster.
  • Add special tax assessment for improvements levied by your local government, such as installing streetlights.
  • Subtract any insurance proceeds you received to cover repair costs after a casualty.
  • Subtract anything you already deducted elsewhere.

The number left over is your adjusted cost basis, or how much your home actually cost you. Next, here’s how to figure your capital gain.

  • Take the sale price of your house.
  • Subtract your adjusted cost basis.
  • Subtract any closing costs or fees accrued in the home sale process.

The remaining amount is your adjusted capital gain, which is the profit you made on the sale.

Question #4: Are there any tax write-offs I can use?

You can use capital improvement costs to increase your cost basis, which in turn reduces your capital gain. A lower capital gain means less tax liability.

But the cost of “improvements” doesn’t include routine repairs and maintenance costs. The only improvement costs you can include are those that increased your home’s market value.

“In my own house recently, I had a problem with a window, but I decided that all of them should get replaced,” Swecker says. “Now, that would be an improvement to the house because I went from single pane wood windows to double pane energy-efficient windows.”

But Swecker reiterates that the specific improvements added to your cost basis really only matter if you have to pay capital gains tax.

Question #5: What’s my capital gains tax rate?

To qualify for the capital gains exclusion, you’ll need to meet the criteria of a three-pronged test:

  • You must have lived in the home as your primary residence for at least two of the five years leading up to the date of the sale.
  • You must have owned the home for at least two years.
  • You have not excluded your home sale profit within the past two years. You can only claim the exclusion once every two years.

If any don’t apply or if your capital gains exceed the amount you can exclude, you must pay the capital gains tax.

How Much is the Capital Gains Tax?

Short-term capital gains apply if you’ve owned your house for less than a year before selling it. If your home sale gives you a short-term capital gain, it’ll be taxed at your federal income tax rate.

If you’ve owned your home for longer than a year when selling, you’d be subject to long-term capital gains, which is generally lower than ordinary income tax rates.

Review HomeLight’s comprehensive capital gains tax bracket breakdown to see where you land and find your rate.

See? Taxes on your home sale aren’t that scary. When in doubt, talk to a tax advisor to save the most money this tax season.

Corinne Rivera is a content writer at HomeLight. She writes about every step of the real estate process, from paint colors that add value, to the terms of closing documents, and everything in between. When she’s not creating real estate content, you can find her exploring open houses, watching HGTV, or redesigning her apartment...again.

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About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a trusted and frequent source for the national media. Her book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show. 

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