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Home Sale: Failure to Plan may Raise Your Tax Bill


As the saying goes, there’s nothing certain in life except for death and taxes. But when it comes to selling your home, proactive tax planning can help you reduce your federal income tax bill.

A Costly Mistake to Avoid

Let’s say Tom is a soon-to-be married homeowner who’s looking to sell his principal residence. If certain tests are met, an unmarried individual may be able to exclude up to $250,000 of taxable gain.

Just before the wedding, Tom sells the home he’d purchased 20 years earlier. The home had appreciated by $500,000. He and his future wife, Stacy, plan to move into her much smaller fixer-upper home after the wedding.

As an unmarried taxpayer, Tom can exclude $250,000 of the gain from the sale of his home, leaving a taxable gain of $250,000 ($500,000 minus the $250,000 federal home sale gain exclusion). He owes 15% federal income tax on the gain, plus the 3.8% net investment income tax and state income tax.

Instead, suppose that Tom and Stacy had taken the time to seek tax planning advice. Their tax advisor would have let them know that the home sale gain exclusion for married couples is $500,000 if various tests are met, including that both spouses have resided in the home as their principal residence for at least two years.

Rather than sell Tom’s house before the wedding, they might have kept it and lived in it as a married couple for two years. That would have allowed them to avoid the full $500,000 in taxable gain and the resulting taxes when they later sold it. Even if Stacy had sold her fixer-upper home before the wedding, the gain would likely have been much smaller and may have been fully sheltered with her $250,000 home sale gain exclusion.

Tax Deduction vs. Tax Credit

Many taxpayers are unclear on the difference between deductions and credits. Both can be powerful tax-saving tools. Here’s how they each work:

Deductions lower a taxpayer’s taxable income before the tax is calculated.

For instance, on an individual return, you can either claim the standard deduction or itemize deductions, depending on which option reduces your taxable income more.

Credits directly reduce the tax due, dollar-for-dollar.

As a result, credits are more valuable than deductions of the same dollar amount. Some credits, such as the Child Tax Credit, are partially or fully refundable, meaning that if the credit exceeds the tax owed, the taxpayer may receive some or all of the difference as a refund.

At Hilton CPA, we’re committed to providing you with the tools and knowledge needed to manage your taxes efficiently and stay compliant. Explore our resources and take control of your tax situation with confidence. For personalized tax planning and advisory services, contact us today!

Phone : (978) 420-9000

Address : 76 Merrimack Street Suite 15 Haverhill, MA

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