How to Minimize Capital Gains Tax When Selling Your Home

Are You Concerned about Taxes When Selling Your Home? Don't Panic. Capital gains tax may seem intimidating, but with careful planning and the right information you may owe less than expected or even none at all!

Let's make things easy so that you can understand exactly how to keep more money in your pockets.

What Is Capital Gains Tax?

Capital gains tax (CGT) refers to the tax you must pay when selling something--like your home--for more than you originally paid for it. Assuming you bought it for $500,000 and later sold it for $1 Million, your profit (or "gain") would amount to $500,000.

Sounds perfect, doesn't it? That is until your tax bill arrives! Don't panic just yet though--many homeowners qualify for exemptions that can significantly reduce or even completely waive this tax burden.

Home Sale Exclusion

If you have lived in your home for at least two of the five years preceding its sale, then you could qualify for the IRS capital gains tax exemption:

If your profit falls within these thresholds (up to $250,000 if filing alone and $500,000 if filing jointly) no capital gains tax is due; but what happens if it exceeds these levels? Strategy becomes necessary.

1. Keep Track of Home Improvements

Have you updated the kitchen, installed new roofing or windows with energy-efficiency features or made other home upgrades that could reduce taxable profit? 1. Record Home Improvements
If so, these upgrades could not only increase home value but could help lower taxable profits as well.

The IRS allows homeowners to add the cost of home improvements into the original purchase price; this process is known as "adjusting your cost basis".

Example: If you purchase your home for $500,000 and invest $50,000 in renovations, your cost basis would increase to $550,000; when sold for $1,000,000, only $450,000 of that gain would be subject to taxes.

Note that regular maintenance, like painting or fixing a leaky faucet, does not count. Only improvements that increase value or extend the life of the property count.

2. Understand Maintenance Deductions (for Rental Properties)

While maintenance expenses for your primary residence aren't deductible when considering capital gains tax purposes, things change once the home has been put up for rent.

Homeowners who convert their property to rental status may be eligible to deduct up to $10,000 annually for maintenance and repairs expenses, which can reduce taxable gains upon selling.

3. Consider Converting Your Home into a Rental

Converting your home into a rental could unlock several tax benefits, including depreciation and maintenance cost deductions, which may offset gains you would otherwise need to report when selling.

Of course, this strategy won't suit everyone; its success depends on your long-term goals, local market conditions and whether or not you feel comfortable serving as a landlord temporarily.

4. Offset Gains With Capital Losses

If you have sold other investments at a loss - such as stocks or real estate--then using those losses as capital loss deductions can help offset gains on home sales gains, thereby decreasing overall tax liability and decreasing your overall tax bill.

Your Capital Gains Game Plan

Are You Preparing to Sell a Home and Want to Minimize the Tax Bill? Assuming That

Reconfirm that you meet IRS exclusion requirements by living in your home for at least two out of the last five years; keep meticulous records on any major home improvements; and consider turning it into a rental to unlock depreciation and maintenance deductions.
Combine any capital losses from other investments with any gains to create savings down the line. A little preparation now could result in big savings later.

Ready to Sell? Let's Strategize.

Deciding to sell is a big decision, and understanding its financial repercussions is vitally important. I offer services tailored specifically to maximize profit while minimising tax burden if that is your aim.

Reach out and schedule a consultation session - together, we'll explore your goals, explore your finances and devise a plan that helps you move forward confidently with more of your hard-earned equity in hand.