Proving The Capital Gains Exclusion

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Proving The Capital Gains
Exclusion

Most people are aware of a tax code provision that allows a $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.

You're Doing It Wrong

The gain exclusion is so high that many do not keep track of the true cost of their home. This mistake can be costly since the gain exclusion still requires documentation to support the tax benefit.

Doing It Right

To calculate your gain on the sale of your home, subtract your basis from selling price. You determine your basis as follows: add your purchase price (including closing costs) and money paid for improvements to the property; and then subtract any business-related deductions and casualty losses you deducted on a tax return.

You are eligible for the capital gain exclusion if, for at least two of the last five years, you both owned the home and used it as your primary residence.

Keeping Track

Always keep documents that support calculating the true cost of your home. These documents should include:

Closing documents from the original home purchase

All legal documents

Canceled checks and invoices from any home improvements

Closing documents supporting the value when the home is sold

There are some cases when you should pay special attention to tracking your home's value:

You have a home office. When a home office is involved, it can impact the calculation of the capital gain exclusion. This is especially true if you depreciated part of your home for business use.

You live in your home for a long time. Most homes will rise in value. The longer you stay in your home, the more likely the value of your home will rise over time. For example, a sizable gain can occur when an elderly single parent sells their home after living in it for over 40 years.

You live in a major metropolitan area. Certain areas of the country are known to have rapidly increasing property values.

You rent your home. Each year you rent out the home, you take a deduction called depreciation that lets you write off a portion of your basis in the property. But when you later sell the rented home, the depreciation previously taken increases your gain on the sale. Home rental also can impact the residency requirement calculation to receive the home gain tax exclusion.

You recently sold another home. The home sale gain exclusion can only be used once every two years. If you recently sold a home for a gain, keeping all documents related to your new home will be critical.

If you want to know more about how to make sure you get the captial gains exemption, click here to schedule an appointment with one of Gold Standard's seasoned tax accountants.

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