One of the biggest tax breaks on the books is the federal income tax exclusion for gains from principal residence sales. If you qualify, you can pocket a home sale profit of up to either a quarter or a half a million dollars federal income-tax free—no strings attached.
But the giant home sale exclusion might not be enough if your home has appreciated hugely since you bought it. You still may have a king-size tax to pay when you finally sell your castle.
Strategy: Keep good records of home improvements. These expenses increase your tax basis for home sale calculation purposes (see box below). So, when you finally do sell your home, the higher basis reduces or eliminates the taxable gain.
Here’s the whole story: If you’ve owned and used your home as your principal residence for at least two of the previous five years, you can elect to exclude from tax up to $250,000 of home sale profit if you’re a single filer; $500,000 for jo...(register to read more)