You may be aware that most homeowners are able to exclude up to $250,000 of the gain realized on the sale of a principal residence. Married couples filing jointly may exclude up to $500,000. Homeowners need to keep very good records of expenses in the event that their gain is greater than the exclusion amounts.
The kinds of expenses we’re talking about increase the tax basis of your home and therefore decrease taxable gain. They fall into two basic categories: those incurred at the time you buy your home and those made for improvements that materially add to your home’s value or prolong its life. Just making the expenditures is not enough. You must keep receipts, canceled checks or other proof.
Acquisition costs to be alert for include:
- Inspection fees (termite, structural, radon),
- Transfer taxes,
- Notary fees,
- Legal fees,
- Closing costs,
- Deed and mortgage recording charges,
- Appraisal and evaluation fees,
- Title search costs,
- Title insurance premiums, and
- Survey costs.
Improvements, alterations, replacements, and additions that typically reduce gain include:
- New roof,
- Additions (porch, deck, terrace, patio, garage),
- Bathroom renovation,
- Kitchen remodeling,
- Fences and gates,
- Sprinkler system,
- Central heating or air conditioning equipment,
- Heating oil tank,
- Intercom system,
- Vinyl siding,
- New gutters, leaders, and drain pipes,
- New stairs, walkways or driveway,
- In-ground swimming pool,
- Storm windows and doors, screens,
- Telephone and cable outlets,
- Electrical wiring, service panels, and outlets,
- Septic tank (new or replacement),
- Conversion of basement or attic to living space,
- Moving or paneling of walls or partitions,
- Trees, shrubs, and topsoil,
- Security system,
- Closets, cupboards, or room dividers, and
- Window replacements.
Not all home-related expenses will reduce your gain. Expenses that keep your home in good repair usually won’t reduce your gain unless they are part of an extensive remodeling or renovation plan.
Congress has made some very important changes to the home sale. In both cases, timing and careful records of that timing are crucial. Generally, use of the $250,000 or $500,000 exclusion requires that you own and use the property as a principal residence for periods totaling two out of five years before its sale. The Mortgage Forgiveness Debt Relief Act of 2007 allows a surviving spouse to continue to use the $500,000 exclusion if the jointly owned residence is sold within two years after the death of the individual’s spouse.
The Housing Assistance Tax Act of 2008 also introduced another change in which recordkeeping especially attuned to timing becomes important. For vacation homeowners and owners of rental property, the home sale exclusion can no longer shelter appreciation in the property attributable to periods before being used as the owner’s principal residence.