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How to sidestep a tax bomb when selling your home


With soaring prices record home equityYou might expect to make a profit selling your home. However, unexpected tax bills could result from the windfall. 

Even though home profits declined slightly, typical single-family sellers still managed to make a $103,000 gross profit in the first quarter of 2022. according to ATTOMThe national property database. 

Many people dodge taxes by making profits below the tax rate capital gains thresholds, others — especially long-time homeowners — may have a costly surprise, experts say. 

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Profits from home sales are capital gains and subject to federal tax at 0%, 15%, or 20% for 2022 depending upon taxable income.

IRS allows homeowners to write off up to $250,000. Married couples who file together may subtract as high as $500,000.

These thresholds are the same as 1997. However, median home sales prices more than doubled in 20 years, which has a significant impact on many homeowners who have been long-term residents. 

“It’s become a huge part of the conversation now,” said John Schultz, a CPA and partner at Genske, Mulder & Company in Ontario, California.

The exemption can be very significant for homeowners. However, strict criteria must be followed to get it. For the first two years of their ownership, sellers must use the house as their main residence.

Mary Geong is a Piedmont-based CPA, and an enrolled agent for the firm.

Splitting time among two houses is possible. However, if the cumulative amount of time they spend at one property equals or exceeds two years, then they might be eligible.

A partial exclusion may also be granted if a person converts a rental property into a primary residence within two years. She explained that the percentage of time they spent there would be the basis for the write-off.

If a single person files for a divorce and owns 10 years worth of rental properties, but lives in the property only for two years, then they could be eligible to receive 20% or $50,000.

Geong stated, “But good recordkeeping is essential.”

Increase purchase price

It is important that homeowners show proof of any improvements. This can sometimes be difficult after years. If receipts have been lost, you may still be able to use them.

Schultz pointed to the fact that “property tax history” can be used to recalculate some property taxes, explaining why reasonable estimates could still be possible. 

Some closing costs may be added by homeowners to increase their basis, including title, legal, or surveying fees along with title insurance.

Tax issues other than tax

Retirement income could lead to higher payments in the future, and retirees might be able to earn more. Medicare Part B and Part D premiums.

Schultz explained that any person selling any important asset should consult an advisor.

An advisor financial or tax professional may be able project the possible outcome based on a person’s entire situation in order to assist them with making the right choice.