Capital Gains Taxes on the Sale of your Home

This blog is primarily about helping people buy and sell homes. Earlier this year, I wrote a four-part blog on ideas for preparing your home for sale by decluttering and dressing your home for a successful sale. While that may be a lot of work, those tasks can help you save a lot of time and expense when you’re ready to sell.

This post is somewhat similar. When you sell your home, Uncle Sam, as usual, wants his cut of the action in the form of Capital Gains Taxes. Although it is not too painful for most of us,  I want you to be aware of the tax and help you understand some of the rules, so you can be prepared. Hopefully you will pay as little in taxes as possible or perhaps make a little more on the sale.

This is a complicated subject, so let me make my disclaimer here. I am a REALTOR, not a financial advisor, CPA or tax expert. The following information is deemed to be accurate, but not guaranteed. This post is not intended to provide tax advice, but rather to make the reader aware of the basic rules that may apply to their specific situation. You are encouraged to reach out to appropriate experts.

Most of the time, when we sell our homes, we sell it for more than we bought it for; we sell it for a profit or capital gain. The tax code requires us to pay taxes on those gains. Capital gains are essentially the appreciation in the value of the home. For the last 25 years or so, the average home in our area has appreciated 5.5% per year. Most homes are a great investment! As an example, let’s say I bought my home for $125,000 (Cost Basis) and sold it for $800,000. Stated in a formula:

Sale Price – (Purchase Price + Improvements) = Capital Gain (Loss)

The appreciation or gain in value is $675,000. This is income, classified as Capital Gains, for the year in which the home is sold. We will discuss adjustments and tax rates further down in the post.

The tax code allows for some immediate relief or exclusions for some of those gains, if you qualify. You can exclude $250,000 as a single filer or $500,000 if you file a joint tax return.

To qualify for the exclusion, you must meet both the “ownership test” and the “use test” as follows:

Ownership Test: You must have owned and used your home as your main residence for at least two years out of the five years prior to its sale and

Use Test: During those five years, the home must have been your primary residence for the required period.

For complete eligibility requirements, limitations, and exceptions to the two-year rule, please refer to IRS “Publication 523, Selling Your Home”, There are additional rules for military, some government personnel and installment sales.

Upon the closing of the sale, the Title company will normally file Form-1099S with the IRS. If they do, you will need to report the sale even if the sale is fully excludable. You report your home sale on your income taxes for the year in which you sold it, using the Form 1040. The home sale is reported on “Schedule D (Form 1040)” and “Form 8949” for your return. However, Capital Gains are taxed at a special rate. Based on your tax filing status, the rate you pay depends on the net capital gain as shown in the table below.

Rate	Single	Married Filing Jointly	Married Filing Separately	Head of Household
0%	$0 – $47,025	$0 – $94,050	$0 – $47,025	$0 – $63,000
15%	$47,025 – $518,900	$94,050 – $583,750	$47,025 – $291,850	$63,000 – $551,350
20%	$518,900+	$583,750+	$291,850+	$551,350+

Some special circumstances:

Surviving Spouse

1. Exclusion: If you’re a surviving spouse and you sell your home within two years of your spouse’s death, you may qualify for the full $500,000 exclusion from capital gains tax. The same exclusion rules apply.
• If you’re a surviving spouse Beyond Two Years, you can exclude up to $250,000 of capital gains from your gross income.
• However, any gain beyond that amount isn’t automatically taxable. It depends on other factors.
2. Step-Up in Basis: When a property owner dies, the cost basis of the property receives a “step-up” under federal law. Depending on the legal ownership of the property, this may mean at the time of your spouse’s death, the new cost basis is the fair market value of the property, and not the original purchase price.

Capital Improvements

The cost of home improvements that increase the value of the home, not just maintain value, may be added to the original purchase price to decrease capital gains. In general, you can’t include any costs of repairs or maintenance that are necessary to keep your home in good condition but don’t add additional value or prolong its life. Examples include painting (interior or exterior), fixing leaks, filling holes or cracks, or replacing broken hardware. However, you may include these costs if they are part of a capital improvement project.

Costs of improvements that add to the value of your home, prolong its useful life, or adapt it to new uses, may be added to the basis of your property. The following chart lists some examples of improvements.

 

Realistic Examples from Southern Frederick County:

Filer Type:	Married Filing Jointly	Married Filing Jointly	Single (Widower)	Single (Divorced)
Purchase Price:	$55,000	$254,960	$38,530	$177,000
Step-up	0	0	$333.495	0
Sale Price:	$560,000	$800,100	$600,000	$560,000
Capital Gains:	$505,000	$545,140	$266,505	$383,000
Exclusion:	500,000	$500,000	250,000	$250,000
Improvements:	$35000	$75,000	0	$65,000
Net Capital Gain:	$-30,000	$-29,860	16,505	$68,000
Capital Gains Rate:	N/A	N/A	0%	15%

*These examples are actual purchase prices; the rest of the numbers may be actual or reasonable estimates.

Of course, you will need receipts and documentation to substantiate the costs of these improvements. If you think you may need them, try reaching out to the company that performed the work to see if they can provide you with the information. Like decluttering and showcasing your home, gathering and organizing these receipts can be done long before you decide to sell, making the home sale and income tax season far less stressful.

I want to stress again: this is a highly complex tax topic, and we have only just covered the most common aspects of the law. I highly recommend that you consult a competent tax professional or refer to official IRS publications for specific guidance.  

If it would be beneficial to you to know the current market value of your home, offer a free service called a “Real Estate Review.” I can review with you the basis of the estimate and even provide a signed letter stating my opinion of the value.

I hope this has been beneficial to you. Please let me know how I can help you today.

Overcoming the Difficulties of Decluttering

 

This is the second of four posts on decluttering and preparing your home for sale. In the previous post we identified some of the common benefits and difficulties when it comes to decluttering. In this post, we will focus on overcoming the difficulties of decluttering.

The Cost of Clutter

Part of overcoming the difficulties is having a positive mindset. I want to consider a mindset that we should focus on as we tackle getting rid of items in our homes. Clutter can have significant costs, both monetary and non-monetary. Keep in mind the following points:

Space Cost- Every square inch of your home comes with a price tag. Whether you rent or own, you pay for the space. Clutter consumes valuable real estate, affecting your living environment and overall costs.

Storage Unit- This cost is easy to identify. If you are storing property in a rental storage unit, unless those items have a return on investment,  you probably should get rid of them or return them to your home and remove even more from the home.

Loss of Living Space- Clutter can make your home feel small and cramped. You may not need a larger home, perhaps you just need to reclaim the space you have, eliminating the time, energy and expense of buying a new home.

Time and Maintenance Costs- The more you have, the more time you need to spend cleaning, organizing, and maintenance. When clutter is excessive, you can spend excessive time trying to find items you think you have. Likewise, you can get Decision Fatigue where you need to constantly make decisions on what to keep or discard. This can be very draining.

Emotional costs- Clutter can increase stress levels which in turn can impact family

relationships.

For your enjoyment, I found this humorous little video you may enjoy about knowing where things are – King of Queens.

Overcoming Obstacles to Decluttering

Decluttering is not just an exercise to go through. It can return real value to your home and family. Making each choice a business decision rather than an emotional one can make the effort much easier. Below are nine roadblocks and action points to help you as you declutter.

1.     Inertia- Just getting started is often the greatest challenge.

What to do- The trademark for Nike is apropos here  - “Just do it.” What could be plainer or more obvious? However, it can still be a daunting task and we really don’t want to do it, even though we know we need to.  Here are two potential suggestions to help you get started or help your partner to get started.

a.     Set some goals for the task. When the task is accomplished, give yourself a small reward (lunch or dinner out). Set an easy goal at first to get started, more difficult ones later with a nicer reward.

b.     Get someone to be a coach or an accountability partner; someone you would not really want to disappoint. Ask them to call or come by and ask how it is going.

c.     It can be a bit more fun if there is a little competition involved.

2.     Keeping items “just in case”- I struggle with this, especially in my workshop. I can always find a reason for keeping stuff. We often hold onto things we love or don’t use, fearing we might need them in the future. However, most of the time, these items remain unused.

What to do- If you don’t have a concrete idea of when you will need this, toss it. Unless it is truly unique, if you find you need it later, order it on Amazon and it will be here in a day or two. Most things we hold onto are not expensive. Alternatively, put the item in a box with a toss date (maybe a month or two away). If it is still there, into the trash it goes – without looking again.

3.     Keeping items to use “someday”- Like number two above, we often hold onto things with good intentions of using them someday.

What to do- Once again, you should have a specific plan, including a schedule of when to use it. If you have had that plan for the last 5-10 years and it has not been used, face it, you are not going to do it.

4.     Too much clutter- The overwhelming presence of numerous items can make decluttering difficult. Where do we start?

What to do- Two great ways to get started-

a.     Start with some big stuff. Take a stickie pad and go around the house and put stickies on larger items that are obvious picks. Call 1-800-GET JUNK or another junk removal service and have it removed – be ruthless.

b.     Pick a room, such as a bedroom (not primary bedroom) and get rid of stuff. You can move items to a more appropriate area in the house, but you can NEVER put it back into a room that has been decluttered unless it obviously belongs there. Then get rid of something else.

5.     Emotional attachment to possessions- Sentimental value often makes it hard to part with some items.

What to do-

a.     Reflect and Acknowledge- Begin by acknowledging the emotional significance of each item. Take a moment to reflect on why it holds meaning for you. Sometimes, simply recognizing the attachment can help you decide whether it’s worth keeping.

b.     Implement the “Three-Box” Method- You might want to consider the 80/15/5 rule and a maximum box size.

i.      Box 1 (Keep)- Place items that you genuinely cherish and cannot part with in this box. Consider only keeping 5% of the items and determine a maximum box size. It all must fit into that box(s).

ii.     Box 2 (Donate/Sell)- Items that are still in good condition but no longer serve you can go here. Consider donating or selling them. This may be approximately 15% of the items.

iii.   Box 3 (Trash)- Broken, unusable, or worn-out items belong in this box. Be honest about their condition. This amounts most items, maybe 80% of the stuff.

c.     Create a Memory Box (Box #1)- For sentimental items, create a designated memory box. Limit the space—once it’s full, you can’t add more. Choose only the most meaningful items to include.

d.     Take Photos- If an item triggers memories but doesn’t need physical space, take a photo of it. You’ll preserve the sentiment without cluttering your home.

e.     Set a Time Limit- Give yourself a deadline. If you haven’t used or thought about an item in a specified period (e.g., six months), it’s time to let go.

Look at it this way; decluttering doesn’t mean erasing memories. It’s about creating space for new experiences and allowing your home to breathe.

6.     Fear of judgment from others- Sometimes we worry about what others will think if we declutter or get rid of certain items. We may be thinking “A dear friend or a child gave this to me.”

What to do- Look back at 5 above “Emotional attachment to possessions.” The issues are really the same:  use the same strategies.

7.     Lack of time- Busy schedules can hinder decluttering efforts. Combining this with too much clutter can make it seem overwhelming.

What to do-

a.     Start small – allocate 10-15 minutes a day. That time will add up quickly.

b.     Declutter as you go-

1.     After laundry, assess clothes before returning them to the closet.

2.     While washing dishes, identify items you no longer love or need.

3.     Clear out expired or unwanted items from the fridge and pantry during meal planning.

4.     Buy One, Discard One – Buy a new shirt – donate one.  Buy a new book – give one (or two) away.

5.     Save Receipts Digitally

6.     Shred Junk Mail Immediately

7.     Toss Items When They Break – fix them immediately or toss.

c.     Keep a Donation Box Handy

d.     Use a Checklist or Challenge-

1.     A declutter checklist keeps you on track and provides ideas for items to let go of.

2.     Consider a daily declutter challenge with simple tasks to tackle each day.

Consistency is the key.

8.     Scarcity mindset- Holding onto items due to a scarcity mindset (fearing you won’t have enough) can hinder decluttering.

What to do-

a.     Acknowledge What You Don’t Miss- Reflect on items you’ve previously cleared out and didn’t miss. Recognize that letting go of certain things doesn’t negatively impact your life. This realization can empower you to declutter more confidently.

b.     Practice Regular Decluttering- Routinely move items out of your home. Regular decluttering prevents accumulation and helps you maintain a clutter-free space. Consider setting aside time each month to assess and remove unnecessary items.

9.     Financial guilt- Feeling guilty about decluttering items you spent money on is common.

What to do-

a.     Reorient your thoughts-

1.     Recognize Sunk Costs- The money spent acquiring the item is gone. Understand that the money spent on an item is a sunk cost—it’s already gone. Keeping something you don’t need will not bring the money back. Rather, reflect on the present and future benefits of decluttering.

2.     Opportunity Cost- Think of the opportunity costs of holding onto things, particularly when you are planning on moving. By decluttering, you create space for new experiences, mental clarity, and a more organized environment.

In Conclusion

We have covered quite a few strategies to commence decluttering your home. Congratulations on reading this blog and considering how to get started with this rewarding project. If you want it, we are here to help. We are happy to visit with you to provide an unbiased view of the situation and share thoughts on how best to get started. We know of various resources available to help with the heavy work. Perhaps we can help in other ways too. Start early. Call or text me at 301-873-2106 or email me at BReynolds@lNF.com for a complementary, non-judgmental, no obligation appointment.

Our next post will focus on going from decluttering to preparing to showcase your home for sale.