Four Critical Tax Considerations for Homeowners

Anthony Sandomierski |
Categories
Tax

Your Home May Be Worth More Than You Think – And the Tax Bill Could Surprise You!

With home values reaching historic highs in many markets, your residence may represent a larger portion of your wealth than ever before. While this appreciation is certainly welcome news, it also creates a tax planning opportunity that many high-net-worth families overlook.

If you've owned your home for several years, you could be sitting on substantial capital gains that require careful planning. Here are four critical tax considerations every homeowner should understand:

1. Document Your Original Purchase Price and Acquisition Costs

  • Your tax basis in your primary residence includes closing costs, title insurance, legal fees, and other acquisition expenses – NOT JUST THE PURCHASE PRICE!
  • Many homeowners underestimate their basis by failing to include these costs, resulting in higher taxable gains than necessary
  • Dig out those old settlement statements; they could potentially save you thousands!

2. Track Every Improvement Over the Years

  • Capital improvements like kitchen renovations, new roofs, or pool additions increase your tax basis and reduce your eventual gain
  • We regularly see clients who've made $100,000+ in improvements over the years but lack proper documentation
  • Keep detailed records of all substantial improvements – NOT just repairs, but additions and upgrades that add lasting value

3. Understand the $500,000 Gain Exclusion (and Its Limitations)

  • Married couples could potentially exclude up to $500,000 in capital gains on their primary residence if they've lived there for two of the past five years ($250,000 for single filers)
  • High-income earners may face additional net investment income tax, and the exclusion can only be used once every two years
  • Strategic timing of your sale can make a significant difference in your overall tax liability

4. Don't Assume You'll Never Sell

  • Life circumstances change – whether relocating to be closer to children and grandchildren, downsizing, or health considerations
  • Many clients who were certain they'd never leave their longtime home eventually find themselves contemplating a move
  • Having a tax-efficient exit strategy in place years before you need it provides valuable flexibility and peace of mind

The combination of appreciated home values and complex tax regulations creates both opportunities and pitfalls for high-net-worth families. A proactive tax strategy today can potentially save tens of thousands of dollars down the road.

If you'd like to discuss how these considerations apply to your specific situation, or explore other tax planning strategies for your overall wealth management plan, we'd welcome the opportunity to speak with you!