Getting the right tax advice and tips is vital in the complex tax world we live in. The Kiplinger Tax Letter helps you stay right on the money with the latest news and forecasts, with insight from our highly experienced team (Get a free issue of The Kiplinger Tax Letter or subscribe). You can only get the full array of advice by subscribing to the Tax Letter, but we will regularly feature snippets from it online, and here is one of those samples…
Spring is a popular time for selling a home. Knowing how to calculate tax basis is vital. It can help reduce your gain when you sell. And learning the rules even before you buy a home will make the process of figuring out taxes much easier when you do decide to eventually sell your place.
Lots of home sale profit isn’t even taxed. That’s because of the home sale exclusion. If you have owned and lived in your primary home for at least two out of the five years before the sale date, up to $250,000 of the gain — $500,000 for joint filers — is tax-free. Gain in excess of these amounts is taxed at long-term capital gains rates. Many homeowners won’t crack the $250,000/$500,000 gain exclusion limits. But those living in pricey areas, or who’ve owned their homes a long time, may. If you’re in this boat, you should know what counts toward your home basis so you don’t pay more tax than necessary.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
In calculating gain or loss from a home sale, start with the selling price and subtract selling expenses and the adjusted tax basis of the home. As you can see, the higher the tax basis, the lower the gain from the sale. Figuring out the tax basis starts out easy. Begin with what you paid for the home, including the mortgage if you financed the purchase, and add in certain settlement fees. Tracking these costs is simple if you kept your settlement sheet from the purchase.
Your home’s tax basis doesn’t stay static over the years that you own it. Here are common adjustments to tax basis:
- Additions and improvements: The cost of additions made to your home and improvements that add to its value, prolong its useful life, or adapt it to new uses will increase your home’s basis. Examples of big-ticket items include adding a room, installing new air-conditioning, renovating a kitchen, finishing a basement, or putting in new landscaping or a pool. Smaller-ticket capital improvements also hike basis. These include new doors and windows, duct and furnace work, built-in appliances, water heaters and more. Repairs, maintenance and improvements that are necessary to keep your residence in good condition but don’t add value or prolong its life generally don’t hike tax basis.
- Eco-friendly upgrades: If you are putting in energy-saving improvements that qualify for tax credits or subsidies, you must first reduce the cost of the system by the tax credit or subsidy that you received before increasing your home’s tax basis.
- Prior depreciation write-offs: You must reduce the tax basis in your home by any depreciation deductions you were eligible for if you used a room or other space exclusively or regularly for business or if you rented out your home in the past.
Homeowners who keep good records will find it easier to calculate tax basis. It’s best to keep all your major home improvement receipts and invoices in one folder. If you didn’t keep these records, estimate the costs by looking at old bank statements, or call the company that originally did the remodeling or put in the upgrade.
This first appeared in The Kiplinger Tax Letter. It helps you navigate the complex world of tax by keeping you up-to-date on new and pending changes in tax laws, providing tips to lower your business and personal taxes, and forecasting what the White House and Congress might do with taxes. Get a free issue of The Kiplinger Tax Letter or subscribe.
Related stories
-
Original Medicare vs Medicare Advantage Quiz: Which is Right for You?Quiz Take this quick quiz to discover your "Medicare Personality Type" and learn whether you are a Traditionalist, or a Bundler.
-
Ask the Editor: Capital Gains and Tax PlanningAsk the Editor In this week's Ask the Editor Q&A, Joy Taylor answers questions on capital gains tax rates and end-of-year tax planning
-
Time Is Running Out to Make the Best Tax Moves for 2025Don't wait until January — investors, including those with a high net worth, can snag big tax savings for 2025 (and 2026) with these strategies.
-
Tax Rule Change Could See Millions Lose Health InsuranceThe Kiplinger Tax Letter If current rules for the health premium tax credit (PTC), a popular Obamacare subsidy, aren't extended, 3.7 million people could lose their health insurance.
-
The IRS is in ChaosThe Tax Letter DOGE, departures, data agreements and more are creating havoc at the IRS.
-
Should You Do A Roth IRA Conversion? Nine Things to ConsiderThe Tax Letter Thinking of converting a traditional IRA to a Roth IRA? The Kiplinger Tax Letter Editor highlights nine factors you should consider before making a move.
-
Expiring Business Tax Breaks And Trump's Tax PlanThe Tax Letter Four important business tax breaks are likely to be a part of President Trump's tax plan. We'll break them down for you.
-
AMT and Pass-Throughs Add Complex Layers to 2025 SALT Tax PlanningThe Tax Letter The state and local tax (SALT) deduction is a key sticking point in President Trump's tax plan.
-
Popular Tax Breaks Are in DangerThe Tax Letter A number of tax breaks, including the home mortgage interest deduction, are in peril as lawmakers hunt for revenues to pay for the President's tax plan.
-
Six Hurdles for Trump's Tax BillThe Tax Letter While the odds for a new tax bill in 2025 are quite good, there are some sticking points that President Trump and Congress will have to work through.
-
The IRS is Pursuing Partnerships and Their OwnersThe Tax Letter The IRS has many enforcement priorities, and partnership tax noncompliance is near the top of that list.
