With any luck, you might be able to walk away from the sale of your principal residence without paying any capital gains tax. The current law allows qualified married couples filing jointly to pull down a tax-free profit of up to $500,000 ($250,000 for single filers).
But you could still owe tax on a home sale. That’s because your “gain” for tax purposes is the difference between the sale price (less certain selling expenses) and your “basis” in the home.
If your gain exceeds the home sale exemption limit, or if you owe capital gains tax due to the business use of your home, you could wind up with a tax bill.
Tip: Scour your records and files for home improvements and other outlays that can be used to increase your basis. It doesn’t matter if the costs were incurred years ago. The more you can add to your basis, the less your taxable gain. (more…)