Tax savings when you sell a home

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Q. I plan to sell my home this year. What do I need to know about capital gains taxes or other taxes? I’ve owned it for 32 years and I plan to buy a condo out of state when I move.
— Moving out

A. There’s plenty to know about capital gains taxes and the sale of your home.

Normally, when a capital asset — a stock, bond, artwork or real estate — is sold, the owner will owe capital gain taxes on the amount over which the selling price exceeds the purchase price, less any transactions costs, said Taylor Thomas, a certified financial planner with Round Table Wealth Management in Westfield.

The amount you pay will depend on many factors, Taylor said.

For starters, Taylor said, the federal capital gain tax rates range from zero to 20 percent. In 2016, a taxpayer will not be subject to federal capital gain taxes as long as they are in the 15 percent income tax bracket: single tax payers with less than $37,650 of ordinary income and joint taxpayers with less than $75,300.

Once ordinary income rises above these thresholds, a 15 percent rate will be applied until a taxpayer(s) has income of $415,050 or greater (if filing as single) or $466,950 or greater (if filing joint or as a qualifying widow(er)), at which point the 20 percent rate will apply, Taylor said.

“In addition to capital gain taxes, the gain may also be subject to the Net Investment Income Tax (NIIT) of 3.8 percent if modified adjusted gross income for single and joint filers is over $200,000 and $250,000, respectively,” he said.

There is a tax exemption in the amount of $250,000 or $500,000 for single and joint filers who have lived in the residence being sold for two of the last five years.

Taylor offered this example: If you are not married, purchased the home 32 years ago for $100,000, lived in the home during all 32 years (or at least two of the last 5), then sell it for $400,000, you will owe capital gains taxes on about $50,000 of gain. This could result in a federal tax bill from $7,500 to $11,900 depending upon what other income you have. It should be noted that if this property was rented during any of the last five years the tax exemption will be prorated.

In addition to federal taxes, Taylor said, you will also be subject to New Jersey capital gain taxes at a maximum 9 percent tax rate.

On the bright side, New Jersey offers the same tax exemption as the federal tax code.

Now for the important question: How can you reduce capital gain taxes due?

There are plenty of strategies.

Start by making a list of improvements that you have made to your home over the past 32 years, and be sure to have copies of receipts, invoices and credit/debit card transactions in case the IRS audits your return.

Improvements, as described by the Internal Revenue Service (IRS), must have a “useful life” of more than a year.

“Improvements include things such as a bathroom addition, landscaping, sprinkler system, a soft water system, central air, new flooring, a satellite dish, an alarm system, attic insulation for example,” Taylor said. “Conversely, repairs or maintenance to the home, like painting a room or replacing broken windows, do not count as improvements unless they are part of an extensive remodel.”

Also, the transactions costs you incur to sell your home such as real estate commissions and attorney fees can be used to increase your cost basis in the property, which will reduce the taxable gain,” Taylor said.

In the year you sell your home, consider selling other capital assets that have losses. This will offset some of the gains you will recognize on the sale of your residence, Taylor said.

“Defer income where possible to a future year in order avoid paying a higher capital gain tax rate and other taxes in the year you sell your residence,” he said.

Then review your 2015 tax return for any carry forward capital losses (see Schedule D of the federal return) which can be used to offset the capital gains from the sale of your residence, Taylor said. Unfortunately, New Jersey does not allow for carry forward losses.

Also be sure you know about the so-called exit tax, which is assessed when people sell their homes and move out of the state. It’s not a real tax exactly, but an estimated payment some sellers must make so New Jersey can be sure that you’re not bailing on your tax liability when you leave the state.
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This story was first posted in March 2016. presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.