Well the time has finally arrived. After more than 22 years, Maureen and I have begun the process to sell our home. Our 3 daughters have all established themselves in New York and Boston and a multi-bedroom house seems way too large for the two of us.
We have begun the exhausting and time-consuming task of de-cluttering 22 years of life. We followed the approach of many – which is, if you have closet space you might as well fill them. And fill it we did.
Was there really a need to hold remnants of carpets that we put in various rooms through the years? The answer is quite obvious now – “No”. Hanging on to elementary school projects and high school papers seemed wise at the time, but now all of the items have to go.
There is another fairly important financial aspect regarding selling a home that you have lived in for many years that deals with an issue in the IRS tax code. It is a valuable tax break available to sellers of a personal residence – house, condo, co-op, etc.. It allows for exclusion – meaning you pay no taxes – for certain amount of capital gains on the sale.
The exclusion which currently is capped at $500,000 for married couples who file jointly and $250,000 for singles and married couples who file separate returns. As Maureen and I are married and file a joint return so we will be able to exclude $500,000 in gains from the taxman.
How do you claim this exclusion?
It all starts with the original cost of your home. This is known as cost basis. What can be added to the original cost basis are any home improvements as well as the costs incurred when buying or selling the home such as real estate commissions.
This is where good record-keeping comes in handy. When you improved your home by adding new windows or undertook a large addition, these amounts get added to the original cost basis. In our case, we undertook two large renovations which will be able to offset potential gains from the sale price.
If you are able to sell your home in excess of this cost basis plus the additions, normally these gains would be subject to taxes on the profit. This profit would be taxed as a long-term capital gain tax which – for high income sellers – could be as high as 23.8% federal tax as well as additional state taxes.
Now this is where the benefit comes in for exclusion. A married couple filing jointly can exclude up to half million dollars of profit from any capital gains tax. A valuable tax break indeed.
To qualify for this tax break, the seller must have lived and owned the property for 2 out of last 5 years that ends on the day of the sale. Not consecutive years, just two of the last five years. In addition, sellers can only claim an exclusion every two years.
Maureen and I have begun the process of determining not just the original cost basis of our home, but all of the money that we added to the property in improvements over the last 22 years. I would suggest that everyone create a file that documents these home improvements as they occur through time so the task is easier when the time comes for them to sell.
We are truly sad to be leaving the home that we raised our children, but with any luck, we hope that our sales price allows us to use this valuable tax break in the IRS codes.
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