Don't Pay Your Drunk Uncle

Quite a few Financial Zen members have sold their homes lately. And since Uncle Sam only writes tax code after a few whiskeys, it's not easy to figure out what you'll owe him.

So here's the whiskey-less version of how it works:

Each spouse gets $250,000 in gains tax-free. If you bought your house for $1,000,000 and you sell it for $1,500,000, you will not pay capital gains tax, if:

1. You've lived there for at least 2 out of the last 5 years and

2. It's your primary residence, not an investment property

What happens if you sell it for $1,600,000? Then you'll pay a 15% capital gains tax on the $100,000. $15,000 goes to Uncle Sam. Ouch.

But if you keep good records, you can reduce your gains by increasing your cost basis.

Maybe the price tag was $1,000,000. But you also paid closing costs, title insurance and settlement fees.

When you sold, you paid agent commissions, attorney fees and transfer taxes.

And maybe you renovated your bathroom and kitchen, built a deck and replaced the roof.

All told you spent $100,000 buying, selling and renovating. That gets added to your $1,000,000 purchase price.

So your cost basis is now $1,100,000 and if you sell for $1,600,000 you'll still be under the $500,000 exemption limit.

And you won't owe your drunk Uncle a single dime.

I've simplified the details for illustration purposes. Talk to your financial planner or tax advisor for specifics regarding your specific situation. Don't have one? Then contact us!