SELLING your house can lead to a substantial windfall, if you understand the tax rules.
A personal finance expert pointed out you can lose thousands of dollars from the sale to taxes if you don’t know about the rules of the Internal Revenue Service (IRS).
TikToker Jazmin Bautista created a video showing how tax exemptions on home sales work
Jazmin Bautista, known as Meet.Jaz on TikTok, explained to her nearly 383,000 followers, that the IRS allows you to exclude profit from home sales up to $250,000 from your taxable income.
If you file a joint tax return with your spouse, you can exclude up to $500,000.
However, to qualify for the write off, you need to have lived in the house as your primary residence for at least two of the five years leading up to the sale.
In practice, this means if you bought your home less than two years ago, you should wait until at least the two year mark to sell or else you’ll lose thousands in capital gains taxes.
To illustrate this, Jazmin said if you make $94,000 on a house sale, but fall short of the two year requirement, you will have to pay.
Since that income is subject to long term capital gains taxes, you would have to pay 15% in taxes, meaning your actual earnings on the sale would be closer to $80,000.
Home sale tax tips
Note that you can only apply for this exemption once every five years, so multiple home owners or house flippers won’t be able to use sale profits as a tax-free cash source.
Whether or not you’ve been in your home for two years, you can also save on capital gains taxes by tallying up big home improvement costs.
Assume you bought a house for $100,000 and sold it a year later for $200,000 – your profit and taxable income gain from the sale would be $100,000.
But if you spent $20,000 on kitchen renovations prior to the sale, you boosted the cost basis of your house by the same amount and ultimately reduced your taxable income from the sale to $80,000.
If you didn’t qualify for the exemption and had to pay a 15% capital gains tax, keeping the receipts from renovation would cut your tax burden from $15,000 to $12,000.
If you’re planning to buy a home soon, check out these four need-to-know tips before you make a purchase.
And here are seven ways that you can get discounted or free home repairs.