Buying and selling a home are both exciting milestones, but the tax implications can make them tricky. While you’ll likely claim a tax break when you first purchase your house, you may need to pay taxes on a portion of the profits if you decide to sell it. The tax planning professionals at Daren Katayama CPA LLC in Kailua, HI, want to help area residents understand the impact of capital gains on tax liability after buying and selling a home.
Here, they elaborate on this correlation.
How Homeownership Impacts Tax Planning
When you buy a home, you’re entitled to use the interest from your mortgage and any property tax payments to reduce your tax liability. This can result in significant savings each year. However, when selling a home, the tax implications are slightly different.
If you’ve owned a home for at least a year before you sell it, the IRS considers it a long-term capital gain. When you sell your property, the federal government will tax you on the overall profit. To calculate the capital gains from the home sale, subtract the price you paid for the home from the price you sold it for. This number counts as additional income for the year and allows the government to tax your earnings from 0–20%, depending on your overall tax bracket.
What You Can Do to Reduce the Tax
Luckily, you may be able to reduce the taxable portion of your capital gains. If you made improvements to the home, upgraded appliances, replaced the roof, or remodeled the master bedroom, you may be able to deduct those costs from the profits of your sale. Keep track of those expenses for tax planning purposes so you can take full advantage of the reduction.
If you’re trying to get the most out of your home sale, work with the tax planning experts at Darren Katayama CPA LLC to prepare for upcoming tax returns. By trusting your tax return preparation to an experienced accountant, you’ll get the maximum number of deductions and the highest possible refund. Visit them online for more information about their services and call (808) 329-6635 to schedule a consultation.