Ask the expert: We're wondering how much profit on the sale of our present home will be tax deductible. Will we have to provide a lot of expense records?
Ask the expert: We're wondering how much profit on the sale of our present home will be tax deductible. Will we have to provide a lot of expense records? At first glance, it appears that very few sellers will have to worry about paying taxes from home sale profits, but the American Institute of CPAs says the law is quirky. * Since 1997, sellers of a principle residence can skip tax on a profit of up to $500,000 for a couple or $250,000 for an individual. Above that, profits are taxed as capital gain at 25 percent. * A principle residence: It could be a house, a duplex, a condominium, a boat or a mobile home, as long as it has eating, sleeping and toilet facilities. It can even be outside the United States. * Tax break calculation: If you bought a house for $200,000 and spent $100,000 on room additions, your cost basis would be $300,000. Including the $500,000 tax break, you could sell the house for $800,000 without owing federal taxes. * Renovations and additions: Tax experts say to keep track of those that will count as improvements. Improvements can include items such as a new roof, a satellite dish or a new central air-conditioning system. For a more complete list, see IRS Publication 523. * The home sale tax break can be claimed every two years if you lived in the house for at least two years out of the previous five. * Rental unit: If you have a rental unit in your home, such as a garage apartment, the rules require you to divide the property into the percentage that is your residence and another that is the rental unit and treat them separately. Only the residence portion qualifies for the $250,000 or $500,000 tax break. * Home office: If you took a depreciation deduction for a home office, you will have to adjust the cost basis of the house downward to reflect them. Yes, the calculation can be quirky, but in most cases, it's a simple matter of taking advantage of the basic tax break.