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Tax guidelines let homeowner hold onto more of sale profit


Dear Mr. Gisriel: I've recently settled on a house. Are there some things that I need to do or be aware of now in order to minimize or eliminate my paying capital gains taxes when I eventually sell my home -- whether I purchase another or not?

Thomas Buhl


Dear Mr. Buhl: Any profit from the sale of a home can create a potential 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 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 eight years after for certain military personnel and four years for certain individuals residing outside the United States.) If a home seller purchases a replacement home that costs less than the adjusted selling price of the old home, but also makes capital improvements to the new residence that are expected to increase its cost to at least the amount of the adjusted selling price of the old residence, then the entire gain can be deferred, or "rolled over." 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 and standards of living. Also, market conditions may delay the sale of the old residence. In order to take advantage of the capital gains deferral, the new home must be occupied, 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 sell your home and maintain it as a second home, the gains deferral advantage would not apply to the sale of the second home.

If you have sold one principal residence within the last two years and now anticipate selling another primary home, it is important to note that only one capital gains deferral may be realized within the allowable two-year period. An exception may be permitted if the sale of your residence was necessitated by your job. The capital gains deferral would then apply to each sale of a principal residence.

Perhaps you are a home seller who has reached age 55, and has occupied your home for at least three of the five years immediately preceding the date of the sale. You may take advantage of a $125,000 exclusion of taxable gain from the sale of your principal residence. Most important to note is the fact that this exclusion may be taken only once in a lifetime.

Dear Mr. Gisriel: Are home warranties available to someone trying to do a "For Sale by Homeowner" transaction himself? If so, could you give some company names and phone numbers?

Ed Schaeffer


Dear Mr. Schaeffer: Home warranties are available to homeowners interested in purchasing a warranty contract. These warranty contracts typically cost between $350 and $695. Two national companies that do business in Maryland are HMS (Homeowners Marketing Service) 1-800-327-9787, and AHS (American Home Shield) 1-800-735-4663.

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