Many people do not realize that they are in a position to deduct thousands of dollars from their income with the expenses involved in selling their homes. Thanks to recent legislation, homeowners can now take these deductions at any time during the year instead of being limited to one period of two months before and after the sale date. Furthermore, if you sell your primary residence you can exclude up to $250,000 (or $500,000 for married taxpayers who file jointly) from taxable income.
Having a plan before you move can help minimize your tax liability and reduce the stress around moving. Whether you are carefully considering different real estate options or simply want to know what your best option is at this point in time, our expert team can help guide you through the process. We offer a free consultation for all of our clients so that we can create an accurate and individualized plan for their unique situations.
If saving money interests you, you will want to pay attention as we discuss the four top tax deductions for homeowners selling their homes in Colorado Springs.
Capital Gains Tax
Depending on how long you have owned and lived in the property, capital gains tax deductions for homeowners come into play when you sell your principal home in Colorado Springs, which has increased value from the original investment amount known as the basis.
If an investor’s short-term capital losses exceed capital gains, up to $3000 in excess can be deducted from their ordinary taxable income. You cannot deduct the loss on a tax return until you sell the property. However, if your residence is foreclosed upon or sold at either a foreclosure sale or through a trustee sale, the IRS considers it “abandoned.”
Abandoned properties are subject to immediate taxation and must be reported as such for that year. Investors who earn over $200,000 annually and make more than half of their income from real estate investment may issue K-1s instead of reporting income via Schedule E. This often results in individuals having larger deductions against business income.
For most home sales, the basis is simply your cost for buying or building the property. For example, if you bought a home 10 years ago for $250,000 and sold it for $400,000 today (a $150,000 profit), your capital gains are zero and your capital losses are also zero since you have not yet added any non-allowable costs to reduce the price of the home. However, if you add additional costs such as improvements or significant repairs that increase its value before you sell it, these expenses will be part of your cost basis but don’t change the total purchase price. You must determine what this cost is by subtracting all allowable deductions from the initial purchase price.
Be sure to file timely. If you are unable, due to illness or other reasons, to make your tax payment by the April 15th deadline, get a tax extension so you can pay at least 95 percent of the taxes owed in full. Otherwise, if you have not paid in full before June 1st, interest will begin accruing on that unpaid balance.
DETERMINE WHICH CREDITS YOU ARE ENTITLED TO AND THEN APPLY THEM IF POSSIBLE
A TAX credit is different from a tax deduction because it directly reduces the amount of income that is subject to taxation for the year. Since credits reduce your taxable income (and not just your qualified output)
As with non-mortgage debt, the interest you pay on home equity loans is tax-deductible as well. You can deduct the interest on a second or third mortgage so long as it is not used to buy, build or substantially improve your main home. There will be an issue if your mortgage exceeds the fair market value of your house since in that case, based on IRC 163(h)(3), all of the business expenses related to your residence would seem to be nondeductible personal expenses. This limitation does not however apply when computing AMT under IRC 162(a)(2) for regular income tax purposes where “the deductible amount is apportioned over the period during which such amounts and credits are due.
Talk to HBR Colorado about these and other tax deductions homeowners should be aware of when selling your Colorado Springs home. The professionals at HBR Colorado want to help you get the best profit possible. With years of experience, we can help guide you. And if you’re buying another home, HBR Colorado has an inventory of the best properties. Call HBR Colorado at (719) 286-0053 or send us a message to see how we can help you.