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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28082
Experience:  Taxes, Immigration, Labor Relations
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We have lived in our primary residence than 2 years and we

Customer Question

We have lived in our primary residence for less than 2 years and we are in the process of a purchase on a new property contingent on the sale of our current residence. We would like to add the big renovation we did to the cost basis of our home to reduce the capital gains hit. Is there a way to do this online? Or do we need to employ an accountant?
Submitted: 5 months ago.
Category: Tax
Expert:  Lev replied 5 months ago.

You will need to report that sale transaction on your tax return - and definitely may prepare your tax return by yourself - you are NOT required to hire a tax preparer.

If you don't meet the eligibility test, you may still qualify for partial exclusion if you moved because of work, health, or an unforeseeable event.

You can qualify either by meeting a set of standard requirements (the “safe harbor” provisions) or by showing enough facts and circumstances to validate your claim.

If you are NOT eligible for exclusion - you will report the sale transaction on form 8949

https://www.irs.gov/pub/irs-pdf/f8949.pdf

You will report your adjusted basis in column (e) Cost or other basis.

Your adjusted basis will be original purchase cost PLUS improvements PLUS selling expenses (Realtor fees, etc)

Do not send any supporting documents with your tax return - just keep for your reference.
Let me know if you need any help with reporting?

Customer: replied 5 months ago.
Lev, this might be a dumb question but I thought the capital gains taxes were paid at the time of the sale closing? It sounds like what I really need to do is get my ducks in a row for next years tax filing
Expert:  Lev replied 5 months ago.

Just to be clear...

Expert:  Lev replied 5 months ago.

- there is no separate capital gains taxes - we are talking about INCOME taxes - and the gain is included into gross income for income tax purposes

- if you held the property more than a year - that gain is taxed at reduced rates which may be zero percent, 15% or 20% - depending on your total income, filing status, etc. These reduced rates are referred as long term capital gain tax rates.

- tax liability is calculated when the tax return is prepared - and based on TOTAL income, deductions, etc - not when income is received.

- what you are referring - is WITHHOLDING - not actual tax liability. The purpose of withholding to cover possible tax liability - that is calculated on your tax return - and may be more or less than withholding.

In most situations - there is NO withholding at closing unless you are a foreign.

Let me know if you need any help with reporting.

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