In the last few weeks, I have had several inquiries concerning capital gains on the sale of one’s primary residence. There is a multitude of variables that come into play. It would be smart to strategize and determine in advance of selling if there will be any capital gains to be paid.
The first step is to check out those homes that have sold recently (in the last three months) in your area that are similar to yours in terms of bedrooms, baths, EIK, interior square footage, lot size, and condition. Then take that price and do a hypothetical calculation. You can use the following as an example:
∙Comparable sale: $975,000
∙Your original purchase price: -$
∙All capital improvements: -$
∙Married: -$500,000
∙Or single: -$250,000
∙Closing Costs: -$ Lawyer
∙Adjustments for oil/gas: -$
∙Adjustments for R. E. taxes: -$
∙Nassau: Transfer tax: $4 per $1,000 of sale price
∙Queens: City tax 1% of sale price $500,000 or 1.425% above $500,000
Remaining mortgage: -$
Real Estate Taxes paid -$
Mortgage Title: (if paying off) -$250.00
Real Estate Commissions:-
Any advertising costs: (FSBO) –
Staging fees:-
Escrow Fees: (if any)-
When you subtract all your deductions, you may or may not be required to pay any capital gains tax. Another item that will come into play and will be an important factor in calculating your capital gains tax is your marginal tax bracket at the time of your sale. The lower your tax bracket the less you will have to pay in capital gains. The tax can be 0-20%.
Keep in mind this must have been your primary residence for the last two out of five years and not an investment property. You can also deduct repairs and upgrades that you have made, as long as they were done within 90 days of the closing. Make sure you keep all your receipts from any capital improvements that you have made over the years as well as the most recent ones. They will be crucial in the event of an audit by the IRS. Keeping organized and accurate records will save you quite a lot of money, especially if you are a new homeowner; as they will greatly benefit you as allowable
deductions when you are ready to sell.
Mortgage interest on mortgage debt (up to $750,000); unless your mortgage was on or before Dec 15, 2017 then the interest on up to a$1,000,000 mortgage can be taken. Also, your local real estate and state tax (S.A.L.T.) up to a maximum of $10,000 can also be deducted.
However, if itemizing you will need to compare it with the standard Deduction(which has doubled in recent years to $25,900) to determine which method will provide a greater benefit.
If you paid any points to get your original or re-financed mortgage, these are also allowable deductions. If you had put down less than 20% for
your purchase price and paid points to receive private mortgage insurance, they would also be deductible from your sale price; but there
are limitations, so discuss with your CPA. Also, any points on your mortgage to reduce the actual cost, or interest rate, would also qualify as a deduction, too. Home equity interest is an allowed deduction only if used for home improvements. However, your primary and home equity loans combined cannot exceed $750,000 for interest to be deductible.
Any green improvements, solar panels, heaters, and heat pumps have an allowable tax credit of 22%, but that will end at the end of 2024.
Also, if you have a spouse that has passed away, the IRS allows you to still take the $500,000 exemption for capital gains as long as the sale takes place within a 2-year period of the death. There is a stepped-up basis that is utilized when a spouse passes. You should seek the advice of your CPA to understand and gain the most clarity in the process.
I have detailed the majority of deductions and exemptions, but consult your CPA and/or financial planner for greater insight into your specific allowable expenses.
There are also ways to defer capital gains by not selling your home, but by renting it out for at least two years, then it becomes an investment property. It is critical to keep records of the rent that you collect to prove it was rented in the event of an audit. You can then decide to sell it using an allowable IRS 1031 deferred Tax Exchange process.
Once you sell the property after two years and one day, the money received is held by your attorney or 3rd party exchange. You will have 45 days after the closing to locate a replacement investment property and a total of 6 months to finalize the transaction by IRS rules and regulations. You can perform a 1031 Deferred Tax Exchange as many times as you want.
However, there is a holding period of at least one year on the property.
Also, if you have more than one investment property (always put each one in an LLC for minimizing your liability), you might also seek advice
from your CPA and/or financial planner to create a trust. This will further decrease your heir’s tax exposure when the day comes and you
pass away.
One last item is that only $10,000 of local real estate and state and sales taxes can be deducted yearly from your tax return. However, setting up a trust will allow greater deductions on real estate taxes that people and families wouldn’t normally be able to take advantage of to reduce their taxable income. It is important to seek the advice of a CPA and/or CFP to gain the greatest advantage and benefit based on the tax code and regulations to reduce your taxable income when selling.
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