Currently, most home-sales are tax-free. However, there are steps you can take to maximize the various tax benefits of selling your house. Many property sellers do have to report the home sale transaction to the IRS. But in case you are but if you are among the exceptions, understanding the rules can help you hold down the right tax bill. Here is how to figure out your benefits, factor in your basis, home enhancements, and more.
Should you pay taxes on the profits, you gained from selling your home?
The answer to this question depends on factors like how long you owned and stayed in the property before the sale. Also, the amount of profit you made will determine whether or not you should pay tax on your profits. If you owned and lived in the property for at least two years of the five years before the property sale and made a profit of up to $0.25 million, then, your profit is tax-free.
In case you are married, and you and your partner file join return, the tax-free profit amount doubles to $0.5 million. The law allows you to exclude this amount of taxable profit from your taxable income. If you sold the property at a loss, then, you will not be required to make deductions for loss. You can always enjoy this exclusion every time you are selling a primary residence as long as you have been owning and staying in it for two out of the five years leading up to your choice to sell it. It would be helpful to work with a reliable Rumson realtor to determine whether or not you qualify for these tax benefits.
How do you qualify for a tax break?
There are three important conditions that you must meet to treat profits associated with the sale of your main home tax-free. These include;
Ownership: The law requires that you should have owned the property in question for 730 days (two years) during the five years before the date you sold the property.
Use: You should have used the property you intend to sell for at least 24 months of the years before the date of home sale.
Timing: You should not have excluded the profits on the sale of another property within at two years before the current home sale.
Deciding whether or not to take the exclusion
Will it make sense to turn down a government’s offer and not to claim your exclusion? Though it is unlikely, sometimes it can make sense if you turn down the offer to protect more gains on another property that you intend to sell soon. Keep in mind that you can use the exclusion as much as you want, but you cannot use it more than once in two years.
Lastly, figuring out the original cost of your property can be challenging. If you bought it from someone, the amount you paid plus certain closing and settlement costs if your original price. It is advisable to hire an experienced real estate agent and a real estate attorney to help you figure out the original price of your property, the right selling price, and the number of gains you are likely to make.