Home improvement projects are always exciting—they offer something different, and when done right, they can bright a great ROI. A hot real estate market can make it even more and more enticing to cash in on those upgrades, sell your home, and move somewhere new.
Of course, you can also look to get a few home improvements done this year and enjoy your home even longer. After all, you can always list your home in a few years. But no matter when you intend to sell, it’s crucial to keep a clear tally of all the updates you’ve made.
The Capital Gain Exclusion
When either an individual or a couple sells their home, the tax code allows for a capital gain exclusion. For most people, this means that their home sale will be a non-taxable event. It’s a popular provision that gives individual homeowners $250,000 for their tax exclusion, and then $500,000 for a married couple. In order to claim the gain exclusion, though, you need to be sure that you’re following the correct tax rules.
Maintaining a clear records history of your home’s projects and “timeline” will help ensure you have the right documentation you might need for this tax benefit. Sure, depending on your situation, there may be some other details to sort through. (Because renting out your property has its own tax rules.) Or the tax law might go through changes. The main thing is this: You need to be able to prove the cost of your home. That comes down to the paperwork.
Determining Your Home’s True Value
This probably goes without saying, but it never hurts to have a checklist. You always want to keep the following documents easily accessible for review:
· Closing Documents from Your Home Purchase
· Invoices from Any Home Improvement Projects
· Closing Documents from the Sale of Your Home
· and—Any Other Legal Documents
As you get ready to file your taxes for the year of your home sale, it’s crucial for the IRS (and your accountant) to be able to cross-reference that “sale amount” with the actual closing documents. Otherwise you might open yourself up to some major headaches with an audit down the line.
There are other questions to keep in mind, as well. One of the most common errors with the home sale gain exclusion is that it can only be applied to your tax returns once every two years. Another mix-up can happen when you have a home office. Some people end up needing to depreciate a certain amount of square footage in their home for their business, and that will have unique effects on your home’s value. If a home office or other workspace is involved with your sale, that might stir up some new scenarios with the capital gain exclusion.
Ready to Lower Your Tax Responsibility?
Navigating the tax code is often an extremely complicated process. But on the bright side—it doesn’t have to be when you have the right people with you! A solid team of tax professionals and a CPA firm can work to analyze the different factors in play. Then you’ll be in a much better position to keep your tax liability low.
Need help running the numbers? Just want a second opinion on how your tax return was handled for the previous year? Please don’t hesitate to reach out to NSO and Company. We’re always happy to schedule a time to talk. Give us a call at (317) 588-3131, and we’ll get a consultation on the calendar!