We recently sold our home in Washington and moved to Texas. We made more than the $500,000 profit on the sale so will owe capital gains tax on the amount over $500,000. Over the course of the years we made some improvements to the house so our cost basis would be more than the original sale price. What sort of things can be included in the adjustment to the cost basis?
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Thank you for your excellent question!
I'll first address items that can increase your basis in the home for tax purposes and then go over the home gain exclusion just to make sure you have clarity as well.
Your liability will be determined by the amount you sold the home for, minus any fees and expenses related to the sale, minus your basis in the home (what you originally paid for the home and any improvements).
When you make a home improvement, such as installing central air conditioning or replacing the roof, you can't deduct the cost in the year you spend the money. But, if you keep track of those expenses, they may help you reduce your taxes in the year you sell your house.
It depends on how long you owned and lived in the home before the sale and how much profit you made.
The law lets you "exclude" this profit from your taxable income. (If you sold for a loss, though, you can't take a deduction for that loss.)
There are three tests you must meet in order to treat the gain from the sale of your main home as tax-free:
If you're married and want to use the $500,000 exclusion:
you should read IRS PUB 523 it lists items that you can include in your basis
https://www.irs.gov/pub/irs-pdf/p523.pdf
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