As a homeowner, understanding the concept of “adjusted basis” and keeping track of it is crucial for when it comes to reducing or even eliminating taxes related to the sale or disposition of your property.
What is Adjusted Basis?
The adjusted basis of your home is the original cost of the property adjusted for various factors. It serves as a reference point for calculating capital gains or losses when you sell or dispose of your home. The adjusted basis is not a static value; it changes over time based on certain events and adjustments.
Importance of Keeping Track of Adjusted Basis:
Capital Gains Tax: When you sell your home, the difference between the sale price and the adjusted basis is considered a capital gain (or loss). A higher adjusted basis will result in a lower capital gain, reducing your potential tax liability. On the other hand, a lower adjusted basis can lead to a higher taxable gain.
Tax Exclusion on Home Sale: The U.S. tax code allows for a tax exclusion on the capital gains from the sale of your primary residence, up to a certain limit. As of the knowledge cutoff date in September 2021, if you meet the ownership and use requirements, you may exclude up to $250,000 of capital gains ($500,000 for married couples filing jointly) from your taxable income. However, to determine the actual gain eligible for exclusion, you need to know your adjusted basis accurately.
How to Keep Track of Adjusted Basis:
Original Cost: Start by keeping records of the original cost of your home, including the purchase price, closing costs, and any legal fees associated with the acquisition.
Improvement Expenses: Keep track of any home improvements or renovations you make over the years. These expenses can be added to the adjusted basis and may include additions, remodeling, landscaping, and upgrades that add value to your property.
Maintain Organized Records: Create a dedicated folder or digital repository to store all documents related to the purchase, improvements, and any relevant transactions involving your home.
In conclusion, keeping track of the adjusted basis of your home is vital for calculating capital gains taxes accurately and maximizing tax benefits, such as the home sale exclusion. By maintaining organized records and understanding the factors that affect the adjusted basis, you can avoid potential tax pitfalls when selling or disposing of your home.
Wright Ford Young & Co. is headquartered in Irvine, CA and is the largest single office CPA firm in Orange County. WFY is a full service corporate accounting firm offering audit, tax, estate and trust, and business consulting services to closely held company and family business owners. More information about our Firm can be found at www.cpa-wfy.com.