The Northern Virginia real estate market is filled with buyers and there’s not a lot of inventory out there. This creates a seller’s market, which means prices are high and bidding is common. Of course, you want to make the most you can from the sale of your home, but what are the tax implications? The following are some key points about selling your primary residence.
The IRS Wants to Know
The rules about taxing a home sale have changed over the years, but one thing has not: you need to report it. When you close on the sale of your house, the closing agent is going to be submitting a form to the IRS. So, even if you don’t owe a cent on the sale, the IRS will be looking for information about the sale on your return.
You May Owe Taxes, But Don’t Overpay!
When you sell your primary residence, you are expected to pay capital gains tax on the money you make off the sale. Unfortunately, if you lose money on the sale of your primary residence, you don’t get to take that loss on your taxes. But in a seller’s market, chances are you are looking at a profit, so you may owe taxes. However, there are a number ways that the taxable amount is reduced:
- Original Value: It seems obvious; you don’t pay taxes on the amount of the sale that reflects the original value of the house. You only pay on the capital gains.
- First $250,000: Over the years, the rules about deducting the first $250,000 ($500,000 for a joint filers) in capital gains have become much more liberal. Most of the prior restrictions about first time homeseller, age and application of gains towards another home have gone away.
- Improvements: The IRS has a list of home improvements that can be deducted from the capital gains on the house. Be careful, not everything is included, for instance ordinary maintenance is not deductible unless it was part of a larger improvement project.
- Some Closing Costs From Purchase: Some, but not all of the fees associated with the purchase of your home can be applied to the base value of your home helping to reduce the capital gain on the sale. If you were thinking about getting rid of the closing documents from that purchase, don’t! You might miss out on some tax savings.
- Some Closing Costs From Sale: As with the purchase costs, there are some closing costs associated with the sale that can be deducted. Again, be careful. A fresh paint job and some basic repairs won’t be deductible, so be strategic in any improvement projects with an eye towards an eventual sale of the house.
A CPA is an Invaluable Partner
When looking over the closing document in a home sale, it can feel like there are a million different line items. Knowing which of these items represents a tax deduction is neither easy nor obvious. You should consider working with a CPA who will review the entire transaction, line by line, to make sure your don’t miss any deductions. Your CPA can also give you some important advice about any taxes you do owe. For example, you may need to consider filing a quarterly tax payment. So, it’s important to check in with them about your home sale before tax season so that you can do some planning.
At the McGruder Group CPAs, we love to dig into the details of real estate transactions to make sure our clients don’t get hit with a higher tax bill than necessary. If you are considering a home sale, or you have recently sold your home, contact us to talk about tax planning.