How the “fiscal cliff” might impact you as a home seller.

How the “fiscal cliff” might impact you as a home seller.

One of the “Bush tax cuts” that might be falling off the cliff could hurt you as a home seller.  Until Dec 31, 2012  the formula for paying tax on the sale of your principal residence is very favorable.

You take the ‘basis’ which is what you paid for the home initially plus major improvements you have made. (my very simplified explanation)   Then subtract that ‘basis’ from today’s sale price.  We think of that as profit on the sale.  The existing tax break lets you take $250k off that profit if you are single and $500k if you are married (again simplified).  The overage remaining is taxed as a capital gain, the rate depending  on your tax bracket.

If that tax cut falls off the cliff, you will be paying capital gains tax on the entire proceeds over your ‘basis’.  There will be no more $250k or $500k reduction.  There is to be a raise in the capital gains tax from 15% to 25% (% is variable per your tax bracket).   Plus there is a new medicare tax of 3.8% on capital gains.

PLEASE understand that my explanation is super simplified !

There are so many ins and outs and dozens of pages in the IRS books defining this formula that only your tax person will understand it fully.   I am in no way qualified to explain more than the simplified basics to you.  My purpose is to give you a heads up for your future home buying plans if they depend upon the proceeds from the sale of your existing home and to make the strong suggestion that you have a meeting with your tax person at your soonest.