Have you been juggling your thoughts on how Tax processes could turn out for you this year? This can be a very tough tiring process. As such, here are some tips to help you avoid a tax-related headache this year
This filing season, you may receive a costly surprise if you recently sold your home for a profit.
U.S. homeowners made an average profit of $94,092 in 2021, up 71% from $55,000 two years ago, according to ATTOM, a national property database.
Although many sellers’ profits are below capital gains thresholds, some may get hit with unexpected bills, especially long-term property owners, experts said.
Capital gains are levied at 0%, 15%, or 20% depending on the taxpayer’s taxable income in 2021, as per the CNBC report.
The IRS allows a write-off for homeowners, allowing single filers to deduct up to $250,000 and married couples filing jointly to deduct up to $500,000.
These thresholds have not changed since 1997, and in the past two decades, median home prices have more than doubled, which has affected many long-term homeowners.
“It’s become a huge part of the conversation now,” explained John Schultz, a certified public accountant at Genske, Mulder & Company in Ontario, California.
Homeowners may benefit from the exemption, but there are strict requirements for qualifying. During the five years before the home is sold, the seller must own and live in the home as their primary residence for two out of those five years.
“But the two years don’t have to be consecutive,” explained Mary Geong, an enrolled agent and CPA based in Piedmont, California.
A person with two homes may split time between them, but if they have lived at one home for at least two years, they may qualify.
Also, a rental property can be converted into a primary residence for a period of two years for a partial exemption. She explained that the write-off is based on the percentage of time the taxpayer lived there.
For instance, single filers who own a rental property for 10 years and live there for two years they may be eligible for 20% of the $250,000 exclusion.
“But you need good recordkeeping,” Geong said.
Based on an Increasing Basis
If a homeowner exceeds the exemptions or owes taxes, profits may be reduced by adding certain home improvements to their original purchase price, according to Schultz.
In addition to home additions, patios, landscaping, pools, new systems, etc., may qualify for tax credits, according to the IRS.
Expenses for ongoing repairs and maintenance that don’t add value or prolong the life of the home, such as fixing leaks or painting, are not included.
Read More: Tax Credits for Children: $500 Payments and $175 in Tax Credits
Homeowners must demonstrate how they have improved their homes, which can be difficult after a long period of time. There may be alternative methods if receipts are lost, however.
“Property tax history can help you go back and recalculate some of that,” Schultz said, explaining that estimates should be considered reasonable.
As part of the closing costs, homeowners can also increase their basis by adding title, legal, and surveying fees as well as title insurance.
Insidious Tax Consequences
When you sell a home for a large profit, other tax consequences may also apply.
If someone’s adjusted gross income rises, they can lose eligibility for health insurance subsidies, and they may have to pay back premium credits when they file their taxes.
Additionally, the increasing income of retirees may lead to higher Medicare Part B and Part D premiums in the future.
“If you’re selling any asset of significance, you should be talking to some type of advisor,” Schultz added.
Additionally, tax professionals or financial advisors can help people pick the right move based on their unique financial situation.