Three Mistakes That Can Cost You Thousands When You Sell Your Home
Your home; for most people it's the largest asset they have. It's also the largest single contributor to their net worth and their largest single debt, especially early in their mortgage. The majority of people use the equity in their existing home as the down payment for their next. You want the ability to extract the maximum amount of that equity when you sell your home. These three mistakes can prevent you from achieving your goal.
1- Not maximizing the tax basis in your existing home when you sell. It's not just how much profit you make when you sell your home, It's how much of that profit you keep. Failing to maximize your tax basis can cause you to owe federal, and in some cases, state and local taxes when you sell your property. If you will owe taxes, it can inflate the amount you owe. No one likes to be in a position to owe The Man more money, do they. What is meant by maximizing the tax basis of your home?
When you sell your home, if you've lived in it full time for two of the past five years (five years: date of purchase to date of sale) , it's known as your “principal residence”. As such, you can exclude $250,000 of the profit from your federal capital gains taxes if you file singly, or $500,000 if you file jointly. This applies on homes sold after May 7th, 1997.
To minimize the tax you owe, or make sure you'll owe none, you want to increase the tax basis, that is, the amount that Uncle Sam uses to calculate that profit. Profit is the difference between the amount you purchased the property for and the amount you sell it for, minus any capital improvement costs. It is defined as your total investment in the property. The tax basis is basically the amount you can subtract from the selling price to calculate your profit. Note that regular maintenance cannot be used as an expense in these calculations. If you remodeled the bathroom or added an addition, you should use the cost of those in the calculations. If you replaced the water heater or fixed the window when Johnny threw a baseball through it, no dice.
There are two things many people forget to include when calculating their tax basis. The first is any fees they paid when they purchased the property. Obviously the greater the expenses at the time of the sale, the greater the actual cost of the property, and the lower the realized profit. The second is the aforementioned costs associated with any improvements to the property. To maximize your tax basis, and thus lower the profit used to calculate your taxes, you must maximize the expense side of the equation.
2- Mistake number two is related to mistake number one. If you use a competent tax accountant, you'll probably not have to worry about this one. This tax increasing mistake is incorrect calculation of your taxes if you only lived in your home for a portion of the 2 years. You can claim a deduction proportional to the time you actually lived in the home in the five year period. If, for example, you file singly, and only lived in your home for 18 months in that five years, and sold your home for a $100,000 profit, you might think your deduction would be 75% of the $100,000. If you thought that way, you'd have cost yourself a chunk of money. You actually may deduct 75% of the maximum allowed amount of $250,000, or $187,500. So, your entire $100,000 gain would be exempt from taxes, not just $75,000. See IRS tax topic 701 for more information.
3- This mistake is common, and so avoidable. It is the failure to make your home look like one someone would want to buy. All too often people fail to do what's known as staging their homes. Staging involves cleaning up everything around your home and ridding the property of anything that might be detrimental to the selling price. You want to maximize curb appeal, and make the interior of your home have the maximum amount of appeal to the greatest number of people. The cleaning you give your property should include far more than the average little scrub down. First get rid of anything that might be defined as garbage; not by you, but by the prospective buyer. Many people have tons of crap lying around their home they fail to recognize as such. Sorry, it really is, and you should get rid of it. If you can't bear to throw it away, at least get it away from your home while you're trying to sell it.
You're trying to de-clutter your home. Get rid pictures and family photos covering the walls, and shelves full of nick-nacks. If you've got storage tubs visible, except in the garage or store room, hide them. Many rooms tend to have too much furniture. Get rid of some of it, especially if it's worn or shabby.
After taking out the trash, really clean your home. Not just spring clean, but much deeper. If you can't get stains off the walls, repaint them. While you're repainting, be sure you use a color that will make your home sell. Stay away from colors with limited appeal, even if you think they look just great. If you have what the majority of people would consider strange colors, like purple and gold, walls, repaint them into something neutral, even if they're spotless.
It may be a good investment to hire a staging firm. As the value this type of pre-sale preparation becomes more apparent, an industry has sprung up to provide these services. They are experts in maximizing your home's value for a minimum of expenditure. As an added bonus, staged homes usually sell faster too.
One last tip from those that sell multi-million dollar homes. Have some soft jazz or classical music playing throughout your home. Don't use the radio, use commercial free music from your cable company, satellite radio, or put your CD player on random. Having this type background music playing when showing your home is a technique used in model homes and higher end properties that you can incorporate for nothing, even if your home is far less expensive.
Avoiding these mistakes should help you make, and keep, more money when you sell your home.