One of the more popular provisions in the tax code is the $250,000 capital gain exclusion ($500,000 for a married couple) of any profit from selling your home. As long as you follow the rules according to the tax code, most home sale transactions are not at risk of being taxable.

• But what if the tax law changes?
• What if you rent out your home?
• What if you have a home office?
• What if you cannot prove the cost of your home?

Your best defense against a potentially expensive tax surprise in the future is proper record retention.

The home sale tax risk

The gain exclusion is so high that many of us are no longer keeping track of the true cost of our home. This mistake can be costly. Remember, this gain exclusion still requires documentation to support the tax benefit.

To calculate your home sale gain, take the sales price received for your home and subtract your basis. The basis is an IRS tax term that equals the original cost of your home, including closing costs, adjusted by the cost of any improvements you have made to your home. You might also have a reduction in home value due to prior damage or casualty losses. As long as the home sold is owned by you as your principal residence in at least two of the last five years, you can usually take advantage of the capital gain exclusion on your tax return.

Keep the tax surprise away

Always keep documents that support calculating the true cost of your home. These documents should include:

• Closing documents from the original home purchase
• All legal documents
• Canceled checks and invoices from any home improvements
• Closing documents supporting the value when the home is sold

There are some cases when you should pay special attention to tracking your home’s value:

1. You have a home office. When a home office is involved, it can impact the calculation of the capital gain exclusion. This is especially true if you depreciate part of your home for business use.
2. You have lived in your home for a long time. Most homes will rise in value. The longer you stay in your home, the more likely its value will rise over time. For example, a sizable gain can occur when an elderly single parent sells their home after living in it for over 40 years.
3. You live in a major metropolitan area. Certain areas of the country typically have rapidly increasing property values.
4. You rent your home. Any time part of your home is depreciated, it can impact the calculation for the available gain exclusion. Home rental can also impact the residency requirement calculation to receive the home gain tax exclusion.
5. You recently sold another home. You can only use the home sale gain exclusion once every two years. If you recently sold a home for a gain, keeping all documents related to your new home will be critical.

The best way to protect this tax code benefit is to keep all home-related documents that support calculating the cost of your property. Contact our RRBB advisors if you wish to discuss your situation.