Skip to content

Capital Pains

Capital Pains

How to save from capital pains

Today’s housing market is ripe for profit. If you’ve owned your home for a while, chances are the value has increased significantly. Good news if you are planning to sell, right? Maybe not. Join Matt Robison and I this week as we talk about capital gains, and how you can save yourself a chunk of change in taxes with the right strategies and planning. 

We will discuss real clients who successfully navigated the tax savings strategies we will give you today and saved thousands of dollars in the process.

Ode to Joy, and Dave

Let’s start with my client story: Dave and Joy (not their real names) bought their home 20 years ago for $1.1 million. In that time, their home appreciated significantly, and they recently sold it for $2.3 million. That’s a gain of $1.2 million; they profited more than they actually spent on the property. 

The downside was that Uncle Sam came calling for 15% of Dave and Joy’s profit. They were looking at forking over $105k to the government (the first $500k in capital gains is non-taxable for couples, courtesy of the primary residence exclusion which we discuss later, so they would be taxed on their $700k profit). However, Dave and Joy managed to save a lot of that money by keeping meticulous records of their home improvements.

Save your home improvement receipts!

Here’s the key: Dave and Joy had invested over $500k in improvements to their home over the years. These improvements increased their home’s value and, just as beneficially, could be used to reduce their taxable gain. By providing receipts for these improvements, they were able to lower their capital gain tax, thus saving a significant amount on what they owed to the government.

The Internal Revenue Service (IRS) is strict about documentation. If you make large-scale improvements to your home, you must keep receipts as proof. This documentation can include anything from contractor invoices for kitchen or bathroom renovations to home improvement store receipts for lumber. When you sell your home, these documented expenses can be added to your home’s cost basis, reducing your capital gain and the associated taxes.

Primary Residence Exclusion

One major tax advantage for homeowners is the primary residence exclusion. If you’ve lived in your home for at least two out of the last five years before selling, you can exclude up to $500,000 of your gain from your tax liability if you’re a married couple, or $250,000 if you’re single. This exclusion applies whether you’ve done work to your home or not.

In Dave and Joy’s case, this exclusion allowed them to shield $500,000 of their gain from taxes outright. For the remaining $700,000, they used their home improvement receipts to further reduce their taxable amount. By using the $500k in receipts for work done to the home, Dave and Joy’s “gain” on their $1.2 million profit was reduced to $200k, thereby reducing the amount owed in taxes from $105k to $30k. That is a reduction of almost three-quarters of the original bill!

Here’s how to save on capital gains

  1. Keep All Improvement Receipts – Save receipts for any significant improvements you make to your home. This can include renovations, additions, or major repairs.
  2. Use Before and After Photos –  Who doesn’t love a good reveal? Photos can serve as additional evidence of improvements made to your property so channel your inner HGTV and document the changes.
  3. Consider the Timing of Your Sale – If you’ve moved out of your primary residence but still own it, selling it within three years can still qualify you for the exclusion.
  4. Move Strategically – If you have a second home or a vacation home, consider living in it for at least two years before selling to take advantage of the primary residence exclusion.

If you’d like to keep as much of the profit from the sale of your home in your bank account and out of the hands of the government, be sure to save receipts and document the improvements you make to your residence. By keeping detailed records and leveraging the primary residence exclusion, you can reduce your taxable gain and keep more money in your pocket.


Never miss a post!

Related Podcasts

Capital Pains

Episode 145 •

03rd June 2024