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Tax Planning And Home Sale Capital Gains Issues

Anyone interested in selling their home might worry about the tax implications. Capital gains taxes may or may not be required based on the specifics of the sale. In some instances, the capital gains taxes may be significant. Effective tax planning may help a property seller legally reduce obligations while presenting compelling evidence establishing the validity of claimed deductions.

Addressing the Exemption Rules  

The tax code provides an exemption amount for someone who meets the residency requirements. A qualified single filer may take a $250,000 home sales exemption from the sales price, and if married and the spouse qualifies, the exemption amount rises to $500,000. For some, claiming the exemption amount may substantially reduce or eliminate the capital gains tax on the profits derived from the sale. However, the IRS may challenge the tax filer's two years of primary residency claims. A proper response to any IRS inquiries could involve presenting detailed information that establishes proof during a possible residency audit. 

The Proper Filing Status

An income threshold exists for capital gains taxes. Those making under a specific taxable income amount may not face any tax requirements, but those above the threshold would likely have to pay. Perhaps married couples filed separately in the past. Tax planning may involve filing jointly during the year when the spouses' sold the property. A joint filing might result in a reduced capital gains income threshold, whereas filing separately might not.

Itemizing Deductions

When the taxpayers' taxable income narrows them into the column of those required to pay capital gains taxes, they may face a substantial tax bill. However, the high taxable income may derive from taking a standard deduction. Itemizing legitimate and legal deductions may reduce the filer or filers' taxable income. Sometimes, even slightly decreasing the taxable income levels may place a person in the "zero capital gains" tax bracket.

Tabulating the Cost Basis

Sellers may subtract the "cost basis" from their capital gains tabulation. Many assume the cost basis refers to the home's purchase price, but other legitimate expenses spent on the property on the property could raise the cost basis and lower tax obligation. Effective tax planning could involve determining the allowable, legitimate expenses and adding them to the cost basis.

A Reliable File of Documentation

Making claims to reduce the home sale's capital gains figures might not be enough. If a tax authority requests substantiating proof, presenting the necessary information may avoid problems. Tax planning that keeps detailed records and files ready to prove any claims might be helpful.

To learn more, contact a tax planning service