I'm a single person who owns a home with equity well above the applicable $250,000 home sale tax exclusion for single taxpayers. I want to avoid paying as much capital gains tax as possible when I sell my home.
I'm thinking about having extensive landscaping done before I put the house up for sale, including installing a new lawn, new plantings, and resurfacing the long driveway. Will paying for such pre-sale landscaping help reduce my capital gains obligation when I sell my home?
Yes. People like you with substantial equity in their homes do need to be concerned with capital gains taxes when they sell their homes.
If your gain exceeds the applicable home sale tax exclusion ($250,000 for singles, $500,000 for married filing jointly), you’ll have to pay capital gains taxes on the overage. The way to reduce such taxes is to reduce the amount of taxable gain (profit) you receive from the sale.
Your gain is calculated by subtracting your home's adjusted basis from the sales proceeds. The higher your adjusted basis, the lower your profit and less taxes you'll have to pay. Your home's adjusted basis consists of its original cost plus the cost of improvements you make while you own it.
Improvements include any expense that materially adds to the value of your home, significantly prolongs its useful life, or adapts it to new uses.
Home landscaping is one of the most common types of improvements homeowners make. They include, but are not limited to: installing new lawns, trees, and plants; replacing driveways and walkways; installing new fences; and putting in new sprinkler systems.
You can add the cost of all of these items to your home’s basis. For example, if your basis was $200,000, and you spend $50,000 on landscaping, your new adjusted basis will be $250,000. If you receive $550,000 when you sell the home, your profit will be $300,000. Subtracting your $250,000 home sale tax exclusion, you’ll be left with $50,000 to pay capital gains tax on. But, had you not done the landscaping, your taxable profit would have been $350,000, aving you with $100,000 to pay tax on after applying your exclusion.