Tuesday, February 18, 2014

Tax planning for future sale of your home

Brittany Dehaven Hall for BusinessSavannah.com writes: There are tax implications to consider when you sell your home. Even if you’re not planning to sell in the near term, proper planning can help you down the road when you do find yourself in such a situation.
Gain on the sale of a home is considered a taxable capital gain. This is calculated as the excess of the sales price over your basis in the home. Basis is generally the amount you originally paid plus eligible closing costs, but as we will discuss later, there are ways to increase your basis.
If you acquired your home other than by purchasing it, your basis calculation could be complicated and you may want to consult your tax adviser for help.
The good news is there is an opportunity to bypass federal income taxes on up to $250,000 of gain when you sell your residence if you file your return as a single taxpayer and up to $500,000 if you are married and file a joint return (MFJ).
This can create considerable tax savings if you have planned properly.
Basic requirements
The full $250,000 ($500,000 MFJ) exclusion of gain mentioned above is available for a home only if you owned and used it as your primary residence for at least two years out of the five years before you sell it.
Additionally, you can only claim the exclusion once every two years. You may be eligible for a reduced exclusion if you sell the home because of a change in your place of employment, health or certain unforeseen circumstances.
You may lose some of the benefit of the capital gain exclusion if you sell a residence you used as a vacation home or rental property. Under a rule that took effect in 2009, the portion of your gain that is allocable to the time you didn’t use the home as your principal residence may be taxable.
Maintain records
Each dollar you spend on capital improvements to your residence increases your basis in the home. The higher your basis, the lower your taxable gain (if any) when you sell the home.
Capital improvements such as installing a fence or adding a bonus room can significantly increase your basis over the years. Keep receipts for these types of expenditures in a file with your other home-related records.
Expenses to maintain your home such as repainting, repairing gutters or pruning tree limbs are not capital improvements and do not increase the basis of your home. If your improvement is a replacement (for example removing old carpet and replacing it with new carpet), then you must remove the cost of the replaced property from the basis of your home.
If you own more than one home, it’s important to have a record of the time you spend in each location. The home you use for the majority of the time during the year is considered your principal residence for that year.
Only your principal residence qualifies for this gain exclusion; there is no exclusion available when you sell a second or vacation home. It is still important, however, to keep detailed records and receipts of capital improvements you’ve made to your second home over the years in order to maximize the amount you can claim as basis.
Adjustments to the Exclusion Amount
Married couples may take advantage of the full $500,000 exclusion on a joint return if:
• Both spouses have used the home as a principal residence for at least two of the five previous years;
• Either spouse has owned the residence for at least two of the five previous years; and
• Neither spouse has claimed the gain exclusion on a residence sale within the prior two years.
When a couple doesn’t meet one of these conditions, the maximum exclusion amount is calculated separately for each spouse.
If you are planning to get married and sell one or both of your homes, you should consider the tax implications. It may be possible, for example, for each of you to exclude as much as $250,000 of gain on the sale of your individual residences on a joint return, assuming you meet the basic requirements.
The $500,000 ceiling is available only to married individuals who file a joint tax return (with the exception of a surviving spouse who sells the residence within two years of his/her spouse’s death).
If you intend to sell your home because of an impending divorce and the gain may be more than $250,000, it may be advantageous from a tax standpoint to complete the sale in a year when you file a joint return.
These are just a few of the considerations that could affect your tax planning. Let your tax preparer know if you intend to sell your residence so they can help you achieve the best tax results.
Brittany DeHaven Hall is a senior accountant at Hancock Askew & Co. LLP. She can be reached at 912-234-8243 or bhall@hancockaskew.com.