How a tax law makes us sloppy and creates a tax risk
One of the more popular provisions in the tax code is the $250,000 capital gain exclusion ($500,000 for a married couple) of any profit made when selling your home. As long as you follow the rules, most home sales transactions are not a taxable event.
Your best defense to a potentially expensive tax surprise in your future is proper record retention.
The gain exclusion is so high, that many of us are no longer keeping track of the true cost of our home. This mistake can be costly. Remember, this gain exclusion still requires documentation to support the tax benefit.
To calculate your home sale gain, take the sales price received for your home and subtract your basis. This basis is an IRS tax term that equals the original cost of your home including closing costs, adjusted by the cost of any improvements you have made in your home. You might also have a reduction in home value due to prior damage or casualty losses. As long as the home sold is owned by you as your principal residence in at least two of the last five years, you can usually take advantage of the capital gain exclusion on your tax return.
To keep the tax surprise away
Always keep documents that support calculating the true cost of your home. These documents should include:
There are some cases when you should pay special attention to tracking your home's value:
The best way to protect this tax code benefit is to keep all home-related documents that support calculating the cost of your property.
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The tax information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.
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