Taxpayers are generally allowed to exclude up to $250,000 ($500,000 if Married Filing Jointly) from gains of a home sale. There are eligibility requirements that must be met to qualify, found in IRS Publication 523. For most, those requirements boil down to whether the home was owned and used by the taxpayer for 2 out of the previous 5 years before the sale of the home. The 2 years don’t have to be continuous. You also must not have taken an exclusion for the sale of another home in the 2 years prior to selling your current home.
The exclusion alone might not be enough to exclude all gains. In order to bring those gains within the exclusion range it’s important to increase the basis of the home. Basis is your investment in the property. It includes your purchase cost and certain closing costs and improvements made before selling.
The following closing costs are allowed to be included in the basis:
- Abstract fees (abstract of title fees)
- Charges for installing utility services
- Legal fees (including fees for the title search and preparing the sales contract and deed)
- Recording fees
- Survey fees
- Transfer or stamp taxes
- Owner’s title insurance
Qualifying improvement include:
Additions
Bedroom
Bathroom
Deck
Garage
Porch
Patio
Lawn & Grounds
Landscaping
Driveway
Walkway
Fence
Retaining wall
Swimming pool
Systems
Heating system
Central air conditioning
Furnace
Air/water filtration systems
Wiring
Security system
Lawn sprinkler system
Exterior
Storm windows/doors
New roof
New siding
Insulation
Attic
Walls
Floors
Pipes and duct work
Plumbing
Septic system
Water heater
Soft water system
Filtration system
Interior
Built-in appliances
Flooring
Wall-to-wall carpeting
Fireplace
Your gain is calculated by subtracting your basis from your selling price.
It’s important to keep track of these adjustments. They might make all the difference when it comes time to report your sale.
the Confident Taxpayer 