Taxes when selling a home
Q: I’m selling my home. Will I owe taxes on any profit from the sale?
A:
If you have owned and lived in your main home for at least two out of the five years leading up to the sale, up to $250,000 of your gain ($500,000 for joint filers) is tax-free for federal income tax purposes. Any excess gain is taxed at longterm capital gains rates.
Many homeowners won’t crack the $250,000/$500,000 gain exclusion limits when they sell.
But others, who live in areas where home prices have soared or who have owned their home for a long time, are finding out to their glee and dismay that their home sale profits will exceed those tax-free limits.
If you’re in this situation, acquaint yourself with what counts toward your home’s tax basis (generally the initial cost, plus certain closing expenses and improvements) to make sure you aren’t paying more income tax than necessary.
Calculating tax basis starts out easy. You begin with what you paid for the home. If you financed your home purchase, add in the mortgage amount.
You then add certain settlement fees and closing costs. It’s much easier to track these costs if you kept your settlement sheet from when you bought the home.
If you inherited your home, then the home’s initial tax basis is generally stepped up to its fair market value on the date of the previous owner’s death. It’s very important to get the house appraised to show the value on that date.
Your home’s tax basis doesn’t stay static over the years. Some items increase basis, while others reduce it.
The cost of any additions you make to your home, as well as improvements made over the years that add to the value of your home, prolong its useful life or adapt it to new uses, will hike your home’s tax basis.
Here are examples of big-ticket items that increase basis: adding a room, garage, deck or patio; putting in new landscaping, a fence or a swimming pool; renovating your kitchen or bathrooms; finishing your basement; installing a new heating or central air conditioning system; and putting on a new roof or siding.
Smaller-ticket capital improvements also hike basis. These include duct and furnace work, new storm windows and doors, built-in appliances, putting in a security system, installing a water heater or central humidifier and more.
The cost of repairs, maintenance and improvements that are necessary to keep your home in good condition but don’t add to its value or prolong its life generally don’t increase tax basis.
If your college freshman is coming home for the Thanksgiving holiday, carve out some time to talk turkey — as in how the money is holding up in the bank account, and how frequently the credit card is being swiped.
It’s been about three months since the start of the semester, making it an ideal time to review and tweak the budget, along with going over credit card charges.
And if your freshman wants to head back to campus with a car come January, it’s best to start checking insurance rates and the fees for parking spots near the dorm.
I remember well my father sitting me down over the holidays to review my discretionary spending and asking tough questions, such as why I was making frequent trips to the record store and a nearby pancake joint. He also explained that I would need to tap my own funds going forward for non-school-related purchases, since there was only so much money to cover personal care and other cost-of-living items.
I followed the same practice when my kids came home for the first time since the start of the fall semester. First, I wanted to make sure they had enough in their account to cover the basics. And secondly, I was looking to tighten up frivolous stuff — late-night pizzas and apple fritter runs — that were draining money.
Tired of getting the “please send money” texts from your son or daughter?
As best you can, go back over the last three months of spending to see where the money has gone. Was too much set aside to cover personal items? Can your student get by without the daily $8 smoothie? Is she picking up the dinner tab as a way to become popular and make new friends?
Draw the line on what expenses Mom and Dad will cover and what will be on your teen’s dime. If your teen has overused a credit card, that may be a sign that he or she is not ready to handle it responsibly and it needs to be put on ice — at least temporarily.
The goal is to get your student on track to handling money responsibly.
If you are sending your college freshman with a car for the start of the winter semester, review your auto policy to make sure you are fully protected.
If you haven’t done so already, notify your insurance company and let them know where your student is attending — a school in a large urban area or a college in a rural community, for example — and what they’ll be driving.
Generally speaking, if the vehicle is already on your policy, it can be kept on it assuming the student’s permanent address remains the family address. In addition, ask your agent about discounts for good grades.
In a recent column, I wrote that mail-order pharmacies are probably the best bet for getting prescriptions filled, especially based on price. But there’s another approach worth considering when your student is ill or injured, says Henry Kozak, a part-time pharmacist at the student health center at the College of William & Mary in Williamsburg, Virginia.
“One area you failed to mention is the pharmacy that may be part of the campus student health center,” Kozak wrote in an email. “I work at a college student health center pharmacy, where we dispense medications, counsel students on their medications — including over-the-counters — and provide much more service than either a chain or mail-order pharmacy. The student can also schedule an appointment to be seen by the in-house staff, along with any nursing-related care that may be needed,” such as vaccines, allergy shots. and wound care.”
Final thought: Don’t wait to have the kitchen table conversation about finances until your student is practically out the door to head back to school.