Although you may have just recently purchased your home, the time to start planning for capital gains tax is now. Currently the Federal Government taxes capital gains on home sales where an excess of $250,000 is gained for individuals and $500,000 for couples. For example, say you (a single person) bought a home for $300,000 and sold it for $400,000. That is a $100,000 gain and generally no capital gains tax is due. However, let’s say you bought your home for $300,000 and sold it for $600,000. Capital gains tax would indeed be due on the $50,000 gain ($300,000-$250,000=$50,000). However, what many people don’t know is that any costs you have to improve a property can offset the amount that is taxed.
For example, say you added a garden shed to your property for a cost of $2,000. That $2,000 is a capital improvement and can be used to increase your cost basis (your initial investment in the property), decreasing your liability. However, if you are simply repainting your house, fixing the furnace, or replacing the dishwasher, that all counts as normal maintenance, not an improvement, and cannot be counted towards your cost basis.
Light annual accounting will make easy work of your taxes when you sell AND this is great information to have for your future listing. Annually, make a list of any improvements you have made to your home and make copies of all your expenses. Then just keep this annual report and the receipt copies in a special folder that stays in your filing system year in and year out until it is time to sell. You can read more about this in the IRS Publication 523.
A little planning to offset some of that tax now will benefit you when it is time to sell. Questions? Contact me at (206) 790-0081 or send an email: email@example.com.