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How to get the biggest tax break when selling your home

Whatever your reason for moving, there’s a tax credit that could save you money when you sell your home. While this will be explained below, it is vital that you speak with your accountant before filing your taxes to make certain that everything falls within the bounds of local and federal tax laws.

The tax break applies to those selling their personal home — single-family house, condo or co-op — and allows sellers to pay no taxes to the Internal Revenue Service up to a certain amount. The exclusion is capped at $500,000 for married couples who file taxes jointly and $250,000 for singles and married couples who file taxes separately.

How to claim tax exclusion on a home sale

To qualify for the tax break, you must have lived in your home for two of the past five years. This period doesn’t have to be consecutive—just two years total. If you qualify, start with the original cost of your home — the cost basis — and add the cost of any home improvements and any costs incurred when buying or selling the home, like real estate commissions.

Accurate record keeping will come in handy when you need proof of expenses incurred over the years. The new windows you installed may now be able to offset potential gains from the sale price, but only if you can show how much you paid for them.

If you’re able to sell your home for more than the cost basis plus improvement costs, those profits would normally be taxed as a long-term capital gain tax and an additional state tax. But with the new house selling tax break, a married couple filing jointly can exclude up to $500,000 of profit from any capital gains tax.

What home improvements are included in the tax break?

As you begin to tally the amount you’ve spent on home improvements, it’s a good idea to use the worksheets offered by the IRS.

Below are some of the improvements that can be added to your cost basis:

  • Interior: Built-in appliances, kitchen modernization, flooring, wall-to-wall carpeting, fireplace, central air conditioning
  • Exterior: Storm windows/doors, new roof, new siding, satellite dish
  • Lawn and Grounds: Landscaping, driveway, walkway, fence, retaining wall, swimming pool
  • Additions: Bedroom, bathroom, deck, garage, porch, patio
  • Upkeep: Normal repairs and maintenance that keep your home in good working order, like painting, fixing a leak or filling a hole
  • Altered upgrades: Improvements you made and then later changed or removed
  • Temporary upgrades: Home repairs that have a life expectancy of less than one year

Below are some of the improvements that cannot be added to your cost basis:

Itemize the improvements before you decide to sell your home. Be sure to include your home improvement investments in your cost basis before filing your tax returns.