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As the value of homes continues to rise, more and more Americans are finding themselves owing capital gains taxes when they sell their properties. This can be a significant financial burden, but there are ways to reduce the amount you owe by properly calculating your home’s profit.

The Section 121 Exclusion

The Section 121 exclusion is a special tax break that shields up to $250,000 of profits for single filers and $500,000 for married couples filing jointly when selling a primary residence. However, with more U.S. home sales profits exceeding these thresholds, it is essential to understand how to navigate the IRS rules to qualify for these exemptions.

Any profit above the $250,000 or $500,000 limits is subject to capital gains taxes, which are levied at rates of 0%, 15%, or 20%, based on your earnings. To accurately calculate your capital gains, you need to track your cost basis of the home, which includes your original purchase price plus closing costs.

To reduce your capital gains tax liability, it is crucial to maximize your basis by adding often-forgotten costs and fees to the original purchase price. These may include title fees, charges for utility installation, legal and recording fees, surveys, transfer taxes, title insurance, and balances owed by the seller.

Another way to increase your home’s basis and minimize your tax liability is by adding the cost of eligible upgrades. These improvements must add value to your home, prolong its useful life, or adapt it to new uses. Examples include additions, outdoor or exterior upgrades, new systems, plumbing, or built-in appliances.

It is essential to keep accurate records of all home improvements that contribute to increasing your basis. In case of a future IRS audit, you will need receipts, permits pulled for home projects, and even photos to prove the value of the upgrades. Repairs or maintenance needed to keep your home in good condition cannot be added to your basis.

Selling your home can result in a significant tax bill, but by carefully tracking your cost basis, adding eligible costs and fees, and documenting all improvements, you can reduce your capital gains tax liability. Consult with a financial planner or tax professional to ensure you are taking full advantage of all available deductions and exemptions when selling your home.

Real Estate

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