When home sales prices increase, a tax bill may follow

However, there are steps you can take to reduce the amount of your taxable profit.

First, you can deduct the costs associated with selling the home, such as real estate commissions and transfer and appraisal fees.

You can also increase your “base” — the dollar amount on which profit is based — by adding to your purchase price the cost of any improvements made to your home over the years. The improvements must be projects that add value to the home and extend its useful life. Replacing the plumbing in your home would be an option, but swapping out a showerhead wouldn’t, said Michael Durant, a senior accountant at Manhattan’s Prager Metis.

If you’ve added a room, remodeled your kitchen, or replaced a roof, all of these costs can add to your base, helping to reduce your bottom line and associated taxes, said Isabel Barrow, director of financial planning at Edelman Financial Engines , a financial advisory planning and asset management firm.

Ms. Barrow suggested homeowners keep a spreadsheet detailing the date and cost of all improvements. Homeowners should keep receipts, bills, and layout plans to justify an increase in the base of their property.

Here’s how it could work, moving on to the hypothetical individual seller exceeding the $250,000 cap by $50,000. Let’s say you paid a 6 percent ($36,000) real estate commission. They would subtract that from the retail price, bringing it down to $564,000. Maybe you’ve spent $15,000 updating a bathroom; You would add that to the price you paid for your home, bringing your base to $315,000. The profit would then be $249,000 ($564,000 minus $315,000) which would be under the exclusion for a single claimant – so you would not owe any taxes.

Most people who’ve lived in a home for a long time have made significant improvements, whether it’s building a swimming pool, installing blinds or adding a generator, said Melanie Lauridsen, senior manager of IRS Advocacy and Relations with the American Institute of Certified Public Accountants. The improvements count, she said, “even if you’ve paid for them a long time ago.”

If you do not qualify for full exclusion, there are exceptions that you may be able to claim at least partially. Suppose you bought a home but have to sell it within two years due to a job change, illness or disability, or some other unforeseen event that forces you to move. You may be able to claim a partial exclusion. The IRS provides a worksheet, but it’s best to seek professional advice to make sure you’re getting the details right, Ms. Barrow said. When home sales prices increase, a tax bill may follow

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