Q. How do you prove the tax base when you finally sell your home? Everyone I know uses the value of their old home to propel themselves into a newer, more expensive home. They defer the capital gain until their final sale when they move and do not defer the capital gain. Does that mean I have to have proof of the cost of my original home that I bought in 1969 and carried over to four other homes?
— Salesman, one day
A. We think you misunderstand how taxes are calculated on the sale of a home.
Let’s start with section 121 of the IRS code.
This code allows an exemption from $250,000 for singles or $500,000 for married people filing jointly on the gain on the sale of a personal residence as long as you’ve lived in the home for two of the last five years, said Kenneth Bagner, chartered accountant at Sobel and Co. in Livingstone.
“You can use this exclusion more than once in your lifetime. As long as you’ve lived in the house for last two out of five years, gain is ruled out,” Bagner said.
Your new cost base would be the purchase price of the most recent home — assuming you’re not talking about a 1031 exchange, he said.
“You would need to pull out the closing statement of your most recent home purchase and any improvements to that home, and then compare it to the sale price minus selling costs,” he said.
If the gain is under $250,000 for singles or $500,000 for married couples filing jointly, there should be no tax as long as you meet the two in five year rule and you have never rented out your home or depreciated your home as an office at home, which could result in a loss of the exemption or some recapture of taxable income on a sale, he said.
Remember that you can use home improvement accumulated over the years to offset any capital gains.
“If your winnings exceed that amount and you can’t find the records, our advice would be to do your best with the records and only record what you think you can reasonably prove,” Bagner said. “If you don’t have receipts, you may be able to list the year the items were improved and estimate the cost, but be reasonable in your methodology.”
Send your questions to [email protected].
Karin Price Mueller writes the Bamboos column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. To find NJMoneyHelp on Facebook. Register for NJMoneyHelp.comit is weekly e-newsletter.