What a Home's Tax Basis Is and Why It's Important
Since it is tax season currently and time is winding down on filing those 2022 tax returns, we thought it might be a good time to talk about what Tax Basis is and how it is important to Granbury homeowners that plan to sell their home or have just recently sold their home.
What is Tax Basis
The tax basis of a home is the value it holds for tax purposes. If you sell your Granbury home the profit from the sale will need to be recorded on your tax return forms if it is above $250,000 in profit gain or $500,000 for married couple filing jointly you will be responsible for taxes from the profit. In order to accurately report your tax responsibilities from the sale of your home, you will need to calculate the home's tax basis. A home sold at a higher tax basis may not seem beneficial but it will lower the amount of taxable profit in the home sale. If the tax basis of a property is larger than the amount of the sale price the homeowner will incur a loss. (this is not a deductible loss) A home's tax basis can change over time, it is possible for it to increase or decrease.
Calculating the Tax Basis of Your Granbury Home
If you have recently sold your home and need to calculate the tax basis you want to start with the starting tax basis for the home. For most properties, this is the cost basis or purchase price of the home when you purchased it. This can include an amount that is owed on a pre-existing mortgage taken out by the previous owner of the home. The next owner takes on the responsibility for paying the value of the home it can also include real estate taxes, title insurance, and other fees related to closing on the purchase of the home. All of these numbers can be found in the closing statement paperwork of your home purchase.
If a homeowner custom-built a home or received it as a gift the cost basis does not apply in calculating a tax basis on a property. For custom-built homes the tax basis will start with construction costs including the cost of materials, equipment, and labor as well as any interest paid on loans at the time of construction. For anyone that has received property as a gift the tax basis for the home at the time the gift was given will be taken into calculation. If you simply inherit a home the starting basis is the fair market value at the time of the previous owner's death.
Once this original basis is found it is then subtracted from the price of the sale of the home accounting for any cost related to the sale.
Factors that can adjust tax basis
There are some factors that can increase the tax basis of a home. The most common include any improvements made to the home or additions added to the home unless the improvement has later been removed or replaced with other improvements. What classifies as an improvement? An improvement is any project that adds value to the property or a new use or makes it more durable.
A tax basis can increase with any tax credits that have been received for home energy improvements that were made after the year 2005 as well. It can increase if a home needs repairs after damage or loss from crime or a natural disaster. Any legal fees that you may have paid as the homeowner to protect your rights could also increase your tax basis. Another cost that can increase tax basis includes spending money to extend any utility services or paying any assessments for the purpose of making improvements to your property that have increased the property value.
A tax basis might decrease if the home has incurred damage or any loss and you receive payments from an insurance policy. Any deductible casualty losses at the property that we're not covered under insurance policy might also result in a decrease in tax basis. If a home is used for business purposes or partially rented out to a tenant this could've also decreased a tax basis. There are also other items that could result in a decrease and it is good to talk about any decreases or increases in basis if you are unsure with a tax professional.
When you sell your home in Granbury it is important to know your tax responsibilities on the profit of the sale of your home. It can be smart to know this responsibility before you sell your home so that you are well prepared for all of the associated costs of your home sale.
For more information on selling your Granbury home please contact us anytime.