Save Money on Taxes When Buying or Selling Your Home
Save on Taxes When Buying or Selling Your Home
Owning a home in Massachusetts can be a rewarding experience, both emotionally and financially. One aspect of homeownership that can greatly affect your finances is understanding how to save on taxes. In this post, I'll share valuable insights on how to optimize your tax situation when buying or selling a house.
Closing Expenses: Your Tax-Deductible Friend
When you close on a property, you'll be presented with a list of expenses in your real estate closing documents. It's crucial to keep a record of these expenses, as they are tax-deductible. Consider saving a digital copy as a PDF to ensure you have the necessary documentation at tax time.
Upgrades and Renovations: Claiming your Expenses
You can claim expenses for upgrades to rental properties on your taxes, except for routine maintenance like painting, fence repairs, or replacing an old hot water tank. Upgrades and renovations should be substantial changes, such as an addition, garage construction, new flooring, windows, and more. To claim these expenses, they must be tangible and contribute to the improvement of the property.
Capital Gains: Know Your Exclusions
Capital gains are the extra money you make when you sell something, like a house or stocks, for more money than you paid for it. It's the profit you earn from selling something valuable.
Now, in Massachusetts, if you're single and sell your home, you don't have to pay taxes on the first $250,000 of extra money you make. That's a lot! But if you're married, you get to keep up to $500,000 of that extra money without paying taxes. So, if you sell your house and make $300,000, you only have to pay taxes on $50,000 if you're single or nothing if you're married!
But here's the cool part: Even if you make more than $250,000 or $500,000, the tax you have to pay might still be less than what you pay on money you get from work. So it's a good thing!
Now, if you sell your house for less money than you bought it for, it's called a loss. But don't worry. You can use that loss to help you pay fewer taxes on other things you make money from, like stocks or investments.
But here's the thing: if you lose money on your house and owe money to the IRS, you can only take away $3,000 from what you owe each year until you've taken away all the loss. Sometimes it takes a few years to do that.
However, if you haven't lived in the house for at least two years before selling it, you are not eligible for certain tax benefits related to capital gains. To qualify for this exclusion, you need to have lived in the house for at least two of the last five years before selling it.
If you haven't met this requirement and you sell your house, you might not be able to exclude some or all of the profit from your taxable income. This means you could owe more in taxes when you sell the house. It's essential to understand these rules and how they might affect your taxes if you're thinking about selling a home you haven't lived in for two years.
Rental and Investment Properties: A Different Tax Landscape
Rental and investment properties have their own tax rules and regulations, which are beyond the scope of this article. I recommend exploring this topic separately to understand better how rental income can impact your tax situation.
Key Takeaways
Keep meticulous records of your expenses, whether in paper or digital form
Keep track of your renovations and upgrade expenses for tax purposes.
Be aware of capital gains and losses and their impact on your taxes.
I understand the significance of real estate transactions and am here to advise you every step of the way. If you have any questions or need further guidance on tax matters related to real estate in Massachusetts, please don't hesitate to reach out.