3. Non-taxable gains
If you sell your home, there are certain situations where the profit you make from the sale of your home can be non-taxable.4 This caps out at $250,000 in profits for an individual and $500,000 for joint filers. To be able to claim the profits on the sale of your home as non-taxable, the following criteria must be met:
- The home must be the taxpayer's principal residence.
- The home must have been the principal residence in at least two of the preceding five years.
- The taxpayer must not have claimed this income exclusion for the sale of a different home in the last two years.
4. Home improvements
While you aren't able to deduct the amount you spent on home improvements in the year you spend the money, you should still save relevant receipts. When you ultimately sell your home, some of these costs can be added into what's known as the "cost basis" of your home. For example, if you purchased your home for $300,000 and then spent $25,000 on substantial home improvements, the "cost basis" of your home (for tax purposes) would be $325,000. This is significant because the capital gain you make from selling your home is calculated by subtracting the "cost basis" (what you paid for your home plus what you spent on improvements) from the amount you sell your home for. These receipts could save you money if you make a sufficiently large profit from your home sale to potentially owe capital gains tax.
These home improvement expenses added to the cost basis must substantially increase the value of the home.1 Examples include kitchen upgrades, the addition of a new room, or large landscaping projects.
This article is not meant to provide tax advice. For tax advice specific to your situation, please see a CPA in your locality who can work through your individual circumstances.