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Archive for Friday, October 13, 2006

Protecting your home’s value

October 13, 2006

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Q: We are selling the home we purchased several years ago. The problem is that the home has nearly tripled in value, which means our profit will exceed the $500,000 limit that the IRS allows married sellers to keep tax-free. How will our excess profit be taxed?

A: I wouldn't exactly say that making more than half a million dollars from the sale of a home is a "problem," but I understand the gist of your question. Many home sellers, especially those in pricey coastal markets where values have zoomed in recent years, are facing the same sort of tax dilemma.

The Internal Revenue Service allows married sellers who file their taxes jointly to keep up to $500,000 of their net profit tax-free, provided that the home has been their primary residence for at least two of the past five years. Single filers can keep up to $250,000 tax-free.

Any net profit above those limits is subject to federal taxes and, in some cases, state taxes, too.

The trick to keeping as much money as you can tax-free is to pump up your property's tax basis as far as you are legally able, and then make sure to include every possible penny in deductible resale expenses.

To figure your tax basis, you need to start with the original purchase price of your home. This not only includes the price you actually paid, but many of your related closing costs - including transfer taxes, title-insurance premiums and property-inspection fees. Your original settlement sheet should include all those important figures.

Next, to lower the potential resale-profit taxes even further, you can add to your basis the cost of any "capital improvements" that you have made to the property - like building a new bedroom or bathroom, remodeling a kitchen or installing a pool or spa. The cost of maintenance and repairs cannot be included in the basis, which means you won't get any extra tax help for hiring a gardener to cut the lawn each week or paying a plumber to clear a drain that clogged.

After you total up all of your allowable costs, you'll arrive at what the IRS calls your "adjusted tax basis." Your taxable resale profit will basically reflect the proceeds of the sale, minus your adjusted tax basis, sales commission you pay and other marketing expenses.

If you still have a taxable profit after all these costs are taken into account, report it on Schedule D of IRS Form 1040. Make sure to complete the government's special worksheet to figure your tax bill so you won't owe more than the 15 percent tax that the IRS levies on long-term profits from home-sale profits and other investments.

You should get more information by calling the IRS at (800) 829-3676 and ordering a free copy of Publication No. 523, "Selling Your Home." The document also can be downloaded at no charge from the agency's Web site, www.irs .gov.

It's also important to consult with an accountant or similar tax expert. A good tax pro might find other ways to help keep more of the home's resale profit in your pocket and away from the grasp of Uncle Sam.

Q: I am shopping for a home, and a few of the for-sale advertisements I have seen state that the homes have a "BZ." What does this abbreviation mean?

A: "BZ" is shorthand for "breezeway." It's a covered passage that's usually open on both sides and connects one part of the house to the garage or, in some cases, to another part of the home itself.

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