Q: I've recently settled on a house. Are there things that I need to do now in order to minimize my capital gains taxes when I eventually sell my home?
Wanda Fowler, Northwood
A: Any profit from the sale of a home can add to your tax burden. You may reduce taxes by being aware of several guidelines.
Be sure to keep a good record of improvements to both the inside and outside of your home. By saving receipts for all home and landscaping improvements, you will ensure that your home's tax basis is not understated nor your gain overstated. Don't forget to include closing costs you paid at the time you purchased your home.
In order to defer the entire gain on the sale of your principal residence, an amount at least equal to the adjusted sale price of the old residence must be spent on the purchase, construction or improvement of a replacement residence. This should take place within two years before or after the date of sale. (Exceptions are made for certain military personnel and individuals living outside the United States.)
If a home seller buys a replacement home that costs less than the adjusted selling price of the old home, but also makes capital improvements to the new home that is expected to increase its value to at least the selling price of the old home, then the entire gain can be deferred. Remember, improvements must be made within two years.
Many replacement homes are not in move-in condition and will require renovation to satisfy personal tastes, or market conditions may delay the sale of the old home. To take advantage of the capital gains deferral, the new home must be occupied and used as a principal residence, and the old home must be sold within the two-year replacement period.
Should you decide at a later date to maintain your principal residence as a second home, the deferral would not apply to the sale of the second home because it would not qualify as your principal residence.
If you have sold one principal residence within the last two years and now anticipate selling another primary home, note that only one deferral may be used. An exception may be permitted if the sale of your residence was necessitated by a job-related move.