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Tax Advice if You Sold Your Home

Tax Implications of Selling a Home

Did You Sell Your Home After Making Improvements?

Keeping track of the cost of capital improvements to your home can really pay off on your tax return when it comes time to sell.

Tax Implications of Selling a Home

It’s no secret that finishing your basement will increase your home’s value. What you may not know is the money you spend on this type of so-called capital improvement could also help lower your tax bill when you sell your house.

Tax rules let you add capital improvement expenses to the cost basis of your home. Why is that a big deal? Because a higher cost basis lowers the total profit—capital gain, in IRS-speak—you’re required to pay taxes on.

The tax break doesn’t come into play for everyone. Most homeowners are exempted from paying taxes on the first $250,000 of profit for single filers ($500,000 for joint filers). If you move frequently, maybe it’s not worth the effort to track capital improvement expenses. But if you plan to live in your house a long time or make lots of upgrades, saving receipts is a smart move.

What Counts As a Capital Improvement?

Although you may consider all the work you do to your home an improvement, the IRS looks at things differently. A rule of thumb: A capital improvement increases your home’s value, while a non-eligible repair just returns something to its original condition. According to the IRS, capital improvements have to last for more than one year and add value to your home, prolong its life, or adapt it to new uses.

Capital improvements can include everything from a new bathroom or deck to a new water heater or furnace. Page 9 of IRS Publication 523 has a list of eligible improvements.

There are limitations. The improvements must still be evident when you sell. So if you put in wall-to-wall carpeting 10 years ago and then replaced it with hardwood floors five years ago, you can’t count the carpeting as a capital improvement. Repairs, like painting your house or fixing sagging gutters, don’t count. The IRS describes repairs as things that are done to maintain a home’s good condition without adding value or prolonging its life.

There can be a fine line between a capital improvement and a repair, says Erik Lammert, former tax research specialist at the National Association of Tax Professionals. For instance, if you replace a few shingles on your roof, it’s a repair. If you replace the entire roof, it’s a capital improvement. Same goes for windows. If you replace a broken window pane, repair. Put in a new window, capital improvement.

One exception: If your home is damaged in a fire or natural disaster, everything you do to restore your home to its pre-loss condition counts as a capital improvement.

How Capital Improvements Affect Your Gain

To figure out how improvements affect your tax bill, you first have to know your cost basis. The cost basis is the amount of money you spent to buy or build your home including all the costs you paid at the closing: fees to lawyers, survey charges, transfer taxes, and home inspection, to name a few. You should be able to find all those costs on the settlement statement you received at your closing.

Next, you’ll need to account for any subsequent capital improvements you made to your home. Let’s say you bought your home for $200,000 including all closing costs. That’s the initial cost basis. You then spent $25,000 to remodel your kitchen. Add those together and you get an adjusted cost basis of $225,000.

Now, suppose you’ve lived in your home as your main residence for at least two out of the last five years. Any profit you make on the sale will be taxed as a long-term capital gain. You sell your home for $475,000. That means you have a capital gain of $250,000 (the $475,000 sale price minus the $225,000 cost basis). You’re single, so you get an automatic exemption for the $250,000 profit. End of story.

Here’s where it gets interesting. Had you not factored in the money you spent on the kitchen remodel, you’d be facing a tax bill for that $25,000 gain that exceeded the automatic exemption. By keeping receipts and adjusting your basis, you’ve saved about $5,000 in taxes based on the  15% tax rate on capital gains. Well worth taking an hour a month to organize your home improvement receipts, don’t you think?

The top rate for most homesellers remains 15%. For sellers in the 39.6% income tax bracket, the cap gains rate is 20%.

Watch Out for These Basis-Busters

Some situations (below) can lower your basis, thus increasing your risk of facing a tax bill when you sell. Consult a tax adviser.

  • If you use the actual cost method and take depreciation on a home office, you have to subtract those deductions from your basis.
  • Any depreciation available to you because you rented your house works the same way.
  • You also have to subtract subsidies from utility companies for making energy-related home improvements or energy-efficiency tax credits you’ve received.
  • If you bought your home using the federal tax credit for first-time homebuyers, you’ll have to deduct that from your basis too, says Mark Steber, chief tax officer at Jackson Hewitt Tax Services.

16789 River Road, Bon Secour, AL

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Met a client early this morning and walked this magnificent property. 3 acres with 247 front feet on Magnolia River. The main house was built in 1850 with tons of Southern charm. The guest house is 1/1 with a wide glassed in porch. As we walked the property, birds were chirping and shrimp boats engines were humming. Serenity were the views of Bon Secour River.

A Beautiful Time of the Year..

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This is the time of the year that most areas experience coloring of the leaves, but in our area we experience vivid sunsets. Have you noticed?  Some nights, the colors in the sky after the sunsets are as vivid as the actual sun setting.  We live in a beautiful area and I know you will agree.

The market has been very interesting this year. Prices have not increased much but we are seeing some bright spots out there.  Presently there are 772 active listings in the Spanish Fort to Point Clear area.  The average price is $393,911.  Average time on the market for the active listings is 155 days.  Since January 1, 2015, our area has experienced 1540 homes to close with an average list price of $282,974.  The average sold price was $273,611. Presently,  there are 212 homes under contract. As you can see, these stats are showing great improvement in our market.

The upper price point is still struggling.   We have had great sales but we would like more.   I do expect this to change as we go into 2016.  Eventually buyers will get less opinionated on their expectations.  When this day arrives, all of us will celebrate.

The great news is people are eagerly shopping on the internet. One of our listings just sold via internet without the buyer visiting.  Photos are so important in marketing.  As you know Allison Ashurst, my daughter –in-law is our photographer and she is excellent.

Before you know it, we will be celebrating Thanksgiving dinner. Sellers sometimes think this is the worst time of the year to sell a home.  I disagree because this is the time of the year that we think home, good cooking and great family gatherings.  Just remember if you are going to be out of town, please let us know.

Any questions about the market, give us a ring and we will try to answer.

Happy Holidays

Judy Niemeyer & Lucy Sundbeck

 

 

 

Finest Day –

Is closing a Special Listing on Mobile Bay in Fairhope, Alabama.

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Brilliant Sunset Sky

This is why I love living and selling Fairhope, Alabama.  Night before last, our sky was brilliant from the setting sun. The above pictures shows the beginning to the end. Each night is different, but this night was special. Our little town of Fairhope is getting ready for downtown trick and treat. This will be Saturday from 10-2. Please stop by our downtown Ashurst and Niemeyer office.

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Henry Ford once said “Coming together is a beginning. Keeping together is progress. Working together is success.”

How this saying fits with real estate but also in all walks of life. This past Friday was of course the first Friday of the month but in FAIRHOPE it is “Art Walk”. Ashurst and Niemeyer’s downtown office on Section was open to our many clients as well as public. Music was provided by Jeff Farrow, who was incredible. Thank you for all that dropped by. This night was a tremendous success.

If you have not attended Art Walk, please put it on your calendar. You can start at the Art Center and stroll throughout the town. Be sure to make reservations for dinner to top off your evening. Fairhope is a truly wonderful place to live.

Cotton Fields back home….

“When I was a little bitty baby
My mama would rock me in the cradle
In them old cotton fields back home”….

What a beautiful site to see, as I drove around Baldwin County yesterday.

I thought I would share a few of the pictures I took
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Thinking of Selling your home? Here’s 7 Reasons to use a REALTOR

I am sharing this article to you. Definitely buying or selling a home is very stressful, but this article points out strategic information
that you need to consider in choosing an agent. The strengths of an agent is professionalism, marketing abilities, education and
understanding the industry. Read on for the 7 steps.

It may seem cheaper to sell your home yourself, however, there are a lot
of details to work through and a lot of advantages to working with a REALTOR®.
blog.rismedia.com

 

<a href='http://openx.rismedia.com/www/delivery/ck.php?n=a727cfcb&cb=’ target=’_blank’><img src='http://openx.rismedia.com/www/delivery/avw.php?zoneid=63&cb=&n=a727cfcb’ border=’0′ alt=” />

WE ARE LIVING IN THE RIGHT PLACE

Movoto, a real estate blog, managed by Randy Nelson, has ventured to rank THE 10 SMARTEST PLACES IN ALABAMA based on a series of criteria including number of colleges and universities per capita; library per capita; museums per capita; percent of residents with bachelor’s degree or higher; high school graduation rate; and average K-12 class size.
So which cities landed on the “A” honor roll as Alabama’s smartest? Here you go:
1. Mountain Brook
2. Fairhope
3. Chelsea
4. Helena
5. Homewood
6. Calera
7. Vestavia Hills
8. Huntsville
9. Irondale
10. Muscle Shoals, Montgomery (tie)

WE ARE LIVING IN THE RIGHT PLACE—FAIRHOPE RATES AS #2.

It’s a job keeping Fairhope beautiful

I have always wondered how plants are planted in Fairhope, AL. This photo shows the story. One of the employees using this wonderful tool that is called an auger digging the holes for all the beautiful plants and another follows along dropping them in.  These plants are all grown in the city nursery, and changed 4-6 times per year to keep up with the seasonal changes.  They do such a fantastic job keeping our city beautiful.

Planting Fairhope