What Every Homeowner Should Know

Do you know about capital gains tax? Buying or selling a home is a major financial transaction with significant tax implications. Whether you’re a first-time homebuyer, a seller, or someone who has made home improvements, understanding how real estate affects your taxes is crucial. In this post, we’ll explain how real estate transactions impact your taxes, why home improvements matter for tax purposes, and share tips on organizing real estate documents digitally.

When you buy, sell, or rent a property, there are several tax-related aspects you need to consider:

Capital Gains Tax on Selling Your Home

When you sell a home, the profit made on the sale may be subject to capital gains tax. However, homeowners can take advantage of exemptions under the IRS Exclusion of Gain on Sale of Principal Residence. If you’ve lived in the home for at least two of the last five years, you may exclude up to $250,000 of capital gains ($500,000 for married couples filing jointly) from your taxable income.

For example, if you bought your home for $200,000 and sold it for $400,000, the $200,000 profit could be completely excluded from taxes, assuming it qualifies under the primary residence exemption.

Property Taxes

Property taxes are another important consideration for homeowners. These taxes vary depending on your property’s location and value. When buying a home, property taxes are typically prorated between the buyer and seller at closing. It’s essential to work with your Realtor and a tax professional to understand how these taxes will affect your transaction.

Mortgage Interest Deduction

Homeowners with a mortgage may be eligible for a mortgage interest deduction on their federal income taxes. This can be particularly beneficial in the early years of the mortgage when most payments go toward interest. Under the Tax Cuts and Jobs Act (TCJA), mortgages taken out after December 15, 2017, have a cap on the deduction at $750,000 for married couples filing jointly and $375,000 for single filers.

Home Improvements and How They Affect Your Property’s Tax Basis

Many homeowners make home improvements with the idea of increasing their property’s value. But did you know that those improvements could also affect your tax basis?

Home improvements can impact your tax basis, which is the amount of money you’ve invested in the property. Increasing your tax basis lowers the amount of taxable capital gains when you sell.

Home Improvements That Can Impact Your Tax Basis:

• Major Renovations: Remodeling kitchens, adding bathrooms, or finishing basements increase your home’s tax basis.
• Energy-Efficient Improvements: Upgrading to energy-efficient windows or installing solar panels can increase your tax basis, and may even provide tax incentives.
• Structural Changes: Adding square footage or converting an attic into livable space increases the property’s tax basis.

What Doesn’t Count as a Home Improvement?

• Repairs: Basic repairs like fixing leaks or replacing broken windows are considered maintenance and don’t affect your tax basis.
• Cosmetic Upgrades: Changes like new flooring or backsplash usually don’t increase your tax basis.

Check out this insightful article on how to prioritize your home improvement projects and maximize your return on investment! Remember to keep receipts and records for all home improvements—these can significantly affect your tax calculation when you sell.

Tips on Organizing and Storing Important Real Estate Documents Digitally

Staying organized with your real estate documents can save you time and money. Here are some tips for keeping them secure and easily accessible:

Use Cloud Storage Solutions

Platforms like Google Drive, Dropbox, or OneDrive make it easy to store documents digitally. Upload contracts, closing statements, and property disclosures to have them readily available when needed.

Create Organized Folders

Set up a folder structure based on your needs. For example:

• Sale or Purchase Documents (contracts, loan docs, closing statements)
• Home Improvement Receipts (renovations, repairs)
• Tax Documents (property tax bills, capital gains tax info)

Digitalize Physical Documents

Use apps like Adobe Scan or CamScanner to quickly convert paper documents into digital files. This way, you won’t lose track of important paperwork.

Backup Everything

Regularly back up your documents to avoid losing valuable information. Many cloud platforms automatically sync, but also consider backing up to an external drive.

Keep Documents Secure

Use strong passwords and enable two-factor authentication for cloud accounts to keep your files secure.

Other Important Considerations

Home Office Tax Deductions: If you use part of your home as a workspace, you might qualify for the home office deduction, which allows you to write off a portion of your property expenses.

Rental Properties: If you rent out your property, rental income is taxable, but you can deduct related expenses such as property management fees, repairs, and depreciation. Keep detailed records of all rental-related expenses for tax purposes.

Final Thoughts

Understanding how real estate transactions affect your taxes is key to making informed decisions, whether you’re buying, selling, or making improvements. By keeping accurate records, staying organized, and knowing what to expect come tax time, you can save money and avoid surprises. Consult with a tax professional or financial advisor to ensure you’re maximizing your benefits and minimizing any potential tax liabilities related to your real estate transactions.

Need help finding your real estate tax documents? Contact our office today!