If you're selling a home, the value may have risen significantly since you bought it. Watch the video above or read the transcript below to learn about capital gains taxes and exclusions for real estate.
Video transcript:
Tracy Byrnes: Well, the real estate market is on fire these days. People are buying and selling homes and making tons of money. So how do you save on your tax return when it comes time to file? Lisa Greene-Lewis, TurboTax expert and CPA, is here with us right now. People are making some pretty serious gains out there. I can't say I'm one of them, but they're going to have to do something with this gain come tax time. What do they need to know?
Lisa Greene-Lewis: Yeah, so if you sell your principal residence where you live, you're able to get an exclusion of your gain up to $250,000 if you're single, $500,000 married filing jointly. Like you said, Tracy, there have been some huge gains out there. So you want to lower that gain as much as possible.
And when you sell, you want to make sure that you include anything that you've done to upgrade your home and to your cost basis. Like, if you bought a home, and you built a pool in your yard or did a bunch of landscaping or did an add-on in your home, you want to make sure you add that in your cost basis to lower the gain so that you can get that $250,000 exclusion if you're single, or $500,000 married filing jointly.
Tracy Byrnes: So those are the sweet spots. So if your gain is — God bless — $750,000, and you're married, you want to try really hard to go find the improvements you've made to bring that down. Basically, increase your original cost or the cost of the home, but people should know just because you put a coat of paint on the walls, that doesn't count. It has to be the big things, right?
Lisa Greene-Lewis: Right, it has to be something that is a permanent structure on your home that, like you said, it can't be just repairs or painting upgrades. If you use TurboTax, TurboTax will walk you through reporting your sales transactions, and it'll also walk you through what you can include in your cost basis so you maximize your savings.
Tracy Byrnes: So siding, windows, roof, all those things, add them up, and then the other thing too people always ask is, do I have two years to roll my gain into the next home? That's long gone, isn't it?
Lisa Greene-Lewis: Yes, that's gone, and one thing to also remember, you have to be in your home at least two of the five years that you own your home in order to get this gain exclusion.
Tracy Byrnes: And that's really important too. So if you bought a home and sold it a year later, you're out.
Lisa Greene-Lewis: Yes, that would mean that you can't exclude the gain if you weren't in your home two of the five years.
Tracy Byrnes: And just so people know, what are they taxed? What is the tax rate, that gain? Because it'll show. It'll have to be put on your tax return. Is it their individual tax rate that applies to that gain, or is it the capital-gains rate?
Lisa Greene-Lewis: It will be the capital-gains rate, which typically is lower than your individual rates. So that could be from 0%, 15%, or 20%.
Tracy Byrnes: Yeah, so this is really important. So we're a little over midyear, start gathering those documents that you know -- or if you are planning on doing work to your home before the end of the year, keep all those receipts so that you have proof when you file your return in April. Lisa Greene-Lewis, TurboTax expert, thank you for all of that.
Lisa Greene-Lewis: Thank you for having me.
Editor's Note: The content was reviewed for tax accuracy by a TurboTax CPA expert for the 2022 tax year.
