You get tax-benefits when you are selling your primary residence, and it is essential to know when & how can you get those tax breaks.
Tax Tips for Selling Your Milford CT House
Capital Gains Tax Exemption
You pay this deduction only if the sales value of your property exceeds $250,000 or $500,000 if you are married. Because of this threshold, most homeowners do not even have to report the sale of their home. You can apply for Capital Gains Tax exemption, every time you sell a house that fits the criteria of being a primary residence.
- You must have lived in the home for 2/5 years. Those two years do not have to come before the sale of your home.
- You should not have gained a tax benefit for another property in last two years.
- If you are married and are filing a joint return, then it is necessary that both spouses spend at least two years in the home.
- There are some exceptions in case of divorce. The time your spouse spent in the home can be considered too. For example, you lived in that home for one year, and your spouse lived there for one year. Add these years, and you become eligible for Capital Gains Tax exemption.
- Your temporary absence from property does not count. Let’s say you left home for a vacation or a business tour, but came back in 15-30 days. Your absence from the house will not be considered and those 15 days will be counted in the mandatory 2-year period.
- Do not buy or exchange another primary residence in last two years.
There are cases when you do not qualify for Capital Gains Tax exemption. You might not have lived in the home for at least two years. In that case, you might be eligible for a reduced exclusion.
Here is how it works.
There are some circumstances beyond your control. Sudden job change, divorce, and illness are a few examples. You are eligible for the reduced exclusion if you faced an emergency that forced you to move out of the house. You must still meet the condition of selling your primary residence. That means, you faced a genuine hardship and you were using that home as your residence.
The tax-benefits in this strategy varies from case to case. For example, if the sales value of your home is $275,000; the first $200,000 might be exempted, and you will pay tax on the remaining $75,000.
You cannot get a reduced exclusion more than once in 2 years.
Reporting the Sale of Your Property
How do you report the property sale to the IRS? Most likely, your brokerage, closing agent or the mortgage company will give you the form 1099-S. If your property qualifies for tax-exemption, you should contact the agent before 15th February and show him that the sale of your home is tax-free. In some cases, you might still get the form. That means the IRS will also get a copy. Do not panic. You do not have to pay the property tax. Be ready to show documents in case the IRS asks you for the evidence.
How to Calculate Your Tax Amount?
You pay the sales profit on the adjusted value of your home. Here is the formula for calculations:
Adjusted Basis= Original Price + Cost of Value Added Renovations
Original price of your home should not include the closing costs.
Value-added renovations include roof fixtures, the addition of rooms, green improvements or improvements made to the structure of your home. Landscaping and painting are not considered significant renovation projects.
You should also deduct the depreciation, casualty loss or any tax-benefit that you get for using natural energy resources. So, the adjusted basis is the current market value of the house after subtracting any tax benefits. In the case of inherited property, the adjusted base will be the value of the property at the time of death.
When calculating, this number, make sure not to include any casualty loss paid by your insurance company.
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