Your home could lower your taxes
In California, your home is likely to be one of, if not your most significant and profitable investment. But with profit comes tax liability. The tax man (or woman) always has their hand out, and we bet you’d rather keep your hard-earned money. We’re not tax experts and none of us were at a Holiday Inn Express last night, but here’s what we know:
When you sell real estate, there are tax consequences. If you live in Marin County, your house could easily be worth multiples of your original investment. If you bought it twenty years ago, it may well have gone up over 3500% and you had better believe your uncles in DC and Sacramento will want a piece of that action. Obviously, you’d like to keep as much as possible.
These days, you have to pay taxes on the profit made at the time of each sale, with the following exception...If you have owned and resided in the house for two consecutive years or a total of two non-consecutive years during a five-year span, you can exempt $250,000 ($500,000 for married or joint tax return) keeping at least that much out of the clutches of the IRS.
You can also reduce your tax liability by keeping track of money spent that will increase your basis, a measure of your total investment in the property. Your taxable gain is calculated on the amount of the sale, less your basis and any qualifying expenses of the sale, like commissions and certain closing costs. Qualifying items that can increase your basis are called “capital improvements;” maintenance items don’t count. And increasing your basis will reduce your taxable gain. You can’t deduct for painting or buying a better lawnmower, although you can expense these for income property. What we’re looking at are capital improvements, things that add value, like additions or upgrades, say, a kitchen remodel, a swimming pool, or a new roof, all things that you can’t take with you when you sell, although that’s not the acid test for capital improvements.
Here’s a list of things to consider.
Keep good records and let your tax advisor tell you which ones you can deduct.
Lawn & Grounds: landscaping (new, not maintenance), driveway, walkway, fence, retaining walls, swimming pool, irrigation system
Exterior: upgraded windows or doors, new roof, new siding
Insulation: attic, walls, floors, hot water pipes, duct work
Systems: furnace, central air, new duct work, central humidifier, central vacuum, built-in air/water filtration, new or upgraded wiring or electrical panel, home security, septic system, water heater, water softener, whole house fan
Interior improvements: built-in appliances, kitchen or bathroom modernization, flooring, fireplace (added new or retrofitted with an insert)
While this is not an exhaustive list, it should give you a good idea of what might qualify. Save your receipts! The IRS may want to verify the authenticity of anything that reduces their take.