Proper record retention to maximize tax savings
One of the more popular provisions in the federal tax code is the $250,000 capital gains exclusion ($500,000 for a married couple) of any profit made when selling your residence.
But what happens if you rent out your home?
What if you cannot prove the cost of your home?
Your best defense to a potentially expensive tax surprise related to reporting the sale of a residence is proper record retention.
The Problem
Many taxpayers do not have a system in place to track the cost of their home. This mistake can be costly. Remember, this gain exclusion still requires documentation to support the tax benefit.
The Calculation
To calculate your home sale gain, take the sales price received for your home and subtract your basis. This basis is an IRS tax term that equals the original cost of your home including closing costs, adjusted by the cost of any improvements (not repairs) you have made in your home. You might also have a reduction in home value due to prior damage or casualty losses. If the home sold is owned by you as your principal residence in at least two of the last five years, you can usually take advantage of the capital gain exclusion on your tax return.
To keep the tax surprise away:
- Always keep documents that support calculating the true cost of your home. These documents should include:
- Closing documents from the original home purchase
- All legal documents
- Cancelled checks and invoices from any home improvements
- Closing documents supporting the value when the home is sold
There are some cases when you should pay special attention to tracking your home’s value:
- You have a home office. When a home office is involved, it can impact the calculation of the capital gains exclusion. This is especially true if you depreciated part of your home for business use.
- You live in your home for a long time. Most homes will rise in value. The longer stay in your home, the more likely the value of your home will rise over time. One problem we see time and time again, a sizable gain occurring when an elderly single parent sells their home.
- If you live in California or a major metropolitan area.Certain areas of the country are known to have rapidly increasing property values.
- You rent your home. Any time part of your home is depreciated, it can impact the calculation for available gain exclusion. Home rentals can impact the residency requirement calculation to receive the home gain tax exclusion.
- You recently sold another home. The home sale gain exclusion can only be used once every two years. If you recently sold a home at a gain, keeping all documents related to your new home will be critical.
The best way to utilize the capital gains exclusion and defend a tax audit is to keep all home-related documents that support the cost of your property. One way Moskowitz LLP is assisting our clients with record keeping efforts is that we provide at no cost to you, a secure online platform that allows our clients to store all types of records and information such as legal documents, tax returns and source documents, and receipts.
Moskowitz LLP is a tax law and accounting firm that has dedicated over 30 years to representing individuals and businesses with civil and criminal tax problems, cleaning up accounting and tax messes, and providing tax and accounting advisory services. We offer practical and affordable legal, tax and accounting solutions.
Please contact us for a consultation.
Remember a blog post or email blast is not a substitution for obtaining personal legal and tax consultation. This information is not intended to be legal or tax advice nor does it form an attorney-client relationship between us.