As Home Sale Prices Surge, a Tax Bill May Follow

There are steps you can take, however, to reduce the amount of your gain that is taxable.

First, you can subtract costs associated with the sale of the house, like real estate commissions and transfer and appraisal fees.

You can also increase your “basis” — the dollar amount on which the gain is based — by adding to your purchase price the cost of any improvements made to your home over the years. The improvements must be projects that add to the value of the house and extend its useful life. Replacing the pipes in your house would qualify, but swapping out a shower head would not, said Michael Durant, a senior accountant at Prager Metis in Manhattan.

If you added a room, remodeled your kitchen or replaced a roof, all those costs can be added to your basis, which helps to shrink your gain and the associated tax, said Isabel Barrow, director of financial planning at Edelman Financial Engines, a financial planning and wealth management firm.

Ms. Barrow suggested that homeowners maintain a spreadsheet showing the date and cost of any improvements. Homeowners should save receipts, invoices and design plans to justify an increase in their property’s basis.

Here’s how it could work, continuing with the hypothetical single seller who exceeds the $250,000 cap by $50,000. Say you paid a 6 percent real estate commission ($36,000). You would subtract that from the selling price, reducing it to $564,000. Perhaps you spent $15,000 to upgrade a bathroom; you would add that to the price you paid for your home, raising your basis to $315,000. The gain would then be $249,000 ($564,000 minus $315,000), below the exclusion for a single filer — so you’d owe no tax.

Most people who have lived in a home for a long period have made significant improvements, whether it’s building a swimming pool, installing blinds or adding a generator, said Melanie Lauridsen, senior manager of I.R.S. advocacy and relations with the American Institute of Certified Public Accountants. The improvements count, she said, “even if you paid for it a long time ago.”

If you don’t qualify for the full exclusion, there are exceptions that may make you eligible for at least part of it. Say you bought a home but have to sell it within two years because of a job relocation, an illness or disability, or another unforeseen event that forces a move. You may be able to claim a partial exclusion. The I.R.S. provides a worksheet, but it’s best to get professional advice to make sure you get the details right, Ms. Barrow said.

Source: | This article originally belongs to Nytimes.com