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Selling Your Home? Avoid These Costly Mistakes and Pay Less Tax

Spring is an often-busy time for home buyers and sellers who want to make deals and moves when it’s warm outside and the school year is coming to a close. But selling a primary home or an investment property comes loaded with tax consequences.

I interviewed Collier Swecker about key tax considerations home sellers should know to pay less. He’s a founding partner of the Mega Agent real estate team at RE/MAX Advantage, recognized as RE/MAX's #1 selling team in the Birmingham, Alabama market.

Collier is a distinguished HomeLight agent, awarded for ranking in the top 1% of all agents in his area. He leads one of the most technologically advanced and forward-thinking real estate teams in Alabama.

But on top of all those accolades, Collier graduated from Auburn University with a law degree and Washington University School of Law in St. Louis with a Master of Law in Taxation. He was the principal partner in Swecker and Sparks, a law practice in Auburn, Alabama, for three years. He left the practice in 2006 to pursue a new career in real estate development and sales.

Click on the audio player above to listen to the interview. Here are some of the real estate and tax topics we cover:

  • Common costly mistakes first-time home sellers make.
  • How to avoid up to $500,000 in capital gains tax on a home sale.
  • What to consider when selling an investment or rental property.
  • Home records you should keep in order to pay less tax.
  • Why paying for title insurance on a home sale is critical.
  • Tips for choosing the best real estate pro to sell your property.
  • Differences between selling a single-family home vs. a condo or townhouse.

[Listen to the interview using the embedded audio player or on Apple Podcasts, Stitcher, and Spotify]

Use these tips from HomeLight’s Corinne Rivera to avoid expensive tax mistakes when selling a home:

Sold a Home? 5 Tax Questions You Should Ask

Give yourself a pat on the back—you sold your home! Your sale profit is sitting pretty in your bank account, but with Tax Day quickly approaching, will the IRS take a chunk of your proceeds?

“The majority of America does not need to worry about that,” says Collier Swecker, a Jefferson County, Alabama real estate agent who ranks in the top 1% of agents in his area.

That’s good news, but to make sure you’re in the clear and that you file a tidy tax return, ask yourself these questions relevant to home sellers during tax season:

Question #1: Which home sale documents do I need to file my tax return?

If you sold your home in 2018, these are the documents you’ll need when you file your taxes.

  • Form 1099-S – tells the IRS that you sold your home. If you don’t have to pay capital gains tax, you may not receive this form. See if you qualify for a capital gains exemption below. 
  • Form 1098 – shows how much mortgage interest you paid over the past year. You can add the interest paid on your home to your cost basis, which will lower your taxes. 
  • Closing statement – is a receipt for your home sale listing the costs, which may cut your taxes. 
  • Home improvement receipts – that show dates and amounts spent can be added to your cost basis and reduce your taxes. 
  • Moving expenses – from a job relocation may qualify for a reduced tax deduction. 
  • Documents proving residency – are important to qualify for the capital gains tax exclusion, which requires you to live in the home for at least two of the past five years. These might include utility bills, bank statements, or voter registrations.
  • Home sale documents – including records and receipts to back up any tax benefits you received in the event of an audit.

Question #2: Do I owe taxes on the income from my home sale?

If you’re a single tax filer and your adjusted capital gain on your home sale is $250,000 or less, you qualify for the capital gains tax exclusion. Married filers can exclude gains up to $500,000. The IRS considers profits in excess of these amounts to be taxable income.

“The biggest thing is to make sure that the homeowner has lived in the house two out of the last five years to qualify for that exemption,” says Swecker.

For example, if you’re a single taxpayer who’s lived in your home for five years, and your capital gains from the sale were $300,000, you must pay taxes on $50,000 of that profit. But, if your capital gains were $100,000, you’re in the clear!

Question #3: What’s my adjusted cost basis and capital gain?

To calculate the capital gain from your home sale, you’ll need to calculate your adjusted cost basis for the house. Here’s how to break down the numbers:

  • Take the amount you originally paid for the home.
  • Add the cost of improvements you’ve made that increased the home’s value, such as a new water heater or new floors. (This is where all of those saved receipts come in!)
  • Add expenses from repairs needed due to a casualty, such as a natural disaster.
  • Add special tax assessment for improvements levied by your local government, such as installing streetlights.
  • Subtract any insurance proceeds you received to cover repair costs after a casualty.
  • Subtract anything you already deducted elsewhere.

The number left over is your adjusted cost basis, or how much your home actually cost you. Next, here’s how to figure your capital gain.

  • Take the sale price of your house.
  • Subtract your adjusted cost basis.
  • Subtract any closing costs or fees accrued in the home sale process.

The remaining amount is your adjusted capital gain, which is the profit you made on the sale.

Question #4: Are there any tax write-offs I can use?

You can use capital improvement costs to increase your cost basis, which in turn reduces your capital gain. A lower capital gain means less tax liability.

But the cost of “improvements” doesn’t include routine repairs and maintenance costs. The only improvement costs you can include are those that increased your home’s market value.

“In my own house recently, I had a problem with a window, but I decided that all of them should get replaced,” Swecker says. “Now, that would be an improvement to the house because I went from single pane wood windows to double pane energy-efficient windows.”

But Swecker reiterates that the specific improvements added to your cost basis really only matter if you have to pay capital gains tax.

Question #5: What’s my capital gains tax rate?

To qualify for the capital gains exclusion, you’ll need to meet the criteria of a three-pronged test:

  • You must have lived in the home as your primary residence for at least two of the five years leading up to the date of the sale.
  • You must have owned the home for at least two years.
  • You have not excluded your home sale profit within the past two years. You can only claim the exclusion once every two years.

If any don’t apply or if your capital gains exceed the amount you can exclude, you must pay the capital gains tax.

How Much is the Capital Gains Tax?

Short-term capital gains apply if you’ve owned your house for less than a year before selling it. If your home sale gives you a short-term capital gain, it’ll be taxed at your federal income tax rate.

If you’ve owned your home for longer than a year when selling, you’d be subject to long-term capital gains, which is generally lower than ordinary income tax rates.

Review HomeLight’s comprehensive capital gains tax bracket breakdown to see where you land and find your rate.

See? Taxes on your home sale aren’t that scary. When in doubt, talk to a tax advisor to save the most money this tax season.

Corinne Rivera is a content writer at HomeLight. She writes about every step of the real estate process, from paint colors that add value, to the terms of closing documents, and everything in between. When she’s not creating real estate content, you can find her exploring open houses, watching HGTV, or redesigning her apartment…again.

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How Many Credit Cards Should You Have for Good Credit?

Have you ever wondered, "How many credit cards should I have? Is it wise to have a wallet full of them? Does having multiple credit cards hurt my credit score?"

If you’ve been following this blog or the Money Girl podcast, you know the fantastic benefits of having excellent credit. The higher your credit scores, the more money you save on various products and services such as credit cards, lines of credit, car loans, mortgages, and insurance (in most states).

Even if you never borrow money, your credit affects other areas of your financial life.

But even if you never borrow money, your credit affects other areas of your financial life. For instance, having poor credit may cause you to get turned down by a prospective employer or a landlord. It could also increase the security deposits you must pay on utilities such as power, cable, and mobile plans.

Credit cards are one of the best financial tools available to build or maintain excellent credit scores. Today, I'll help you understand how cards boost your credit and the how many credit cards you should have to improve your finances.

Before we answer the question of how many credit cards you should have in your wallet, it's important to talk about using them responsibly so you're increasing instead of tanking your credit score.

5 tips for using credit cards to build credit

  1. Make payments on time (even just the minimum)
  2. Don’t rely on being an authorized user
  3. Never max out cards
  4. Use multiple cards
  5. Keep credit cards active

A common misconception about credit is that if you have no debt you must have good credit. That’s utterly false because having no credit is the same as having bad credit. To have good credit, you must have credit accounts and use them responsibly.

Having no credit is the same as having bad credit.

Here are five tips for using credit cards to build and maintain excellent credit scores.

1. Make payments on time (even just the minimum)

Making timely payments on credit accounts is the most critical factor for your credit scores. Your payment history carries the most weight because it’s an excellent indicator of your financial responsibility and ability to pay what you owe.

Having a credit card allows you to demonstrate your creditworthiness by merely making payments on time, even if you can only pay the minimum. If the card company receives your payment by the statement due date, that builds a history of positive data on your credit reports. 

I recommend paying more than your card’s minimum. Ideally, you should pay off your entire balance every month so you don’t accrue interest charges. If you tend to carry a balance from month-to-month, it’s wise to use a low-interest credit card to reduce the financing charge.

2. Don’t rely on being an authorized user

Many people start using a credit card by becoming an authorized user on someone else’s account, such as a parent’s card. That allows you to use a card without being legally responsible for the debt.

Some credit scoring models ignore data that doesn’t belong to a primary card owner.

Some card companies report a card owner’s transactions to an authorized user’s credit report. That could be an excellent first step for establishing credit … if the card owner makes payments on time. Even so, some credit scoring models ignore data that doesn’t belong to a primary card owner.

Therefore, don’t assume that being an authorized user is a rock-solid approach to building credit. I recommend that you get your own credit cards as soon as you earn income and get approved.

3. Never max out cards

A critical factor that affects your credit scores is how much debt you owe on revolving accounts (such as credit cards and lines of credit) compared to your total available credit limits. It's known as your credit utilization ratio, which gets calculated per account and on your accounts' aggregate total.

A good rule of thumb to improve your credit scores is to keep your utilization ratio below 20%.

Having a low utilization ratio shows that you use credit responsibly by not maxing out your account. A high ratio indicates that you use a lot of credit and could even be in danger of missing a payment soon. A good rule of thumb to improve your credit scores is to keep your utilization ratio below 20%. 

For example, if you have a $1,000 card balance and a $5,000 credit limit, you have a 20% credit utilization ratio. The formula is $1,000 balance / $5,000 credit limit = 0.2 = 20%.

There's a common misconception that it's okay to max out a credit card if you pay it off each month. While paying off your card in full is smart to avoid interest charges, it doesn't guarantee a low utilization ratio. The date your credit card account balance is reported to the nationwide credit agencies typically isn't the same as your statement due date. If your outstanding balance happens to be high on the date it's reported, you'll have a high utilization ratio that will drag down your credit scores.

4. Use multiple cards

If you need more available credit to cut your utilization ratio, there are some easy solutions. One is to apply for an additional credit card, so you spread out charges on multiple cards instead of consistently maxing out one card. That reduces your credit utilization and boosts your credit.

Having the same amount of debt compared to more available credit instantly reduces your utilization and improves your credit.

For example, if you have two credit cards with $500 balances and $5,000 credit limits, you have a 10% credit utilization ratio. The formula is $1,000 balance / $10,000 credit limit = 0.1 = 10%. That’s half the ratio of my previous example for one card.

Another strategy to cut your utilization ratio is to request credit limit increases on one or more of your cards. Having the same amount of debt compared to more available credit instantly reduces your utilization and improves your credit.

5. Keep credit cards active

Credit card companies are in business to make a profit. If you don't use a card for an extended period, they can close your account or cut your credit limit. You may not mind having a card canceled if you haven't been using it, but as I mentioned, a reduction in your credit limit means danger for your credit scores.

A reduction in your credit limit means danger for your credit scores.

No matter if you or a card company cancels one of your revolving credit accounts, it causes your total amount of available credit to shrink, which spikes your utilization ratio. When your utilization goes up, your credit scores can plummet.

Anytime your credit card balances become a higher percentage of your total credit limits, you appear riskier to creditors, even if you aren't. So, keep your cards open and active, especially if you're considering a big purchase, such as a home or car, in the next six months.

In general, I recommend that you charge something small and pay it off in full several times a year, such as once a quarter, to stay active and keep your available credit limit in place.

If you have a card that you don't like because it charges an annual fee or a high APR, don't be afraid to cancel it. Just replace it with another card, ideally before you cancel the first one. That allows you to swap out one credit limit for another and avoid a significant increase in your credit utilization ratio.

If you're determined to have fewer cards, space out your cancellations over time, such as six months or more. 

How many credit cards should you have to build good credit?

Now that you understand how credit cards help you build credit, let's consider how many you need. The optimal number for you depends on various factions, such as how much you charge each month, whether you use rewards, and how responsible you are with credit.

There's no limit to the number of cards you can or should have if you manage all of them responsibly.

According to Experian, 61% of Americans have at least one credit card, and the average person owns four. Having more open revolving credit accounts makes you more likely to have higher credit scores, but only when you manage them responsibly. 

As I mentioned, having more available credit compared to your balances on revolving accounts is a crucial factor in your credit scores. If you continually bump up against a 20% utilization ratio, you likely need an additional card.

You can keep an eye on your credit utilization and other important credit factors with free credit reporting tools such as Credit Karma or Experian.

Also, consider how different credit cards can help you achieve financial goals, such as saving money on everyday purchases you're already making. Many retailers, big box stores, and brands have cards that reward your loyalty with discounts, promotions, and additional services.

If you continually bump up against a 20% utilization ratio, you likely need an additional card.

I use multiple cards based on their benefits and rewards. For instance, I only use my Amazon card to get 5% cashback on Amazon purchases. I have a card with no foreign transaction fees that I use when traveling overseas. And I have a low-interest card that I only use if I plan to carry a balance on a large purchase for a short period.

There's no limit to the number of cards you can or should have. Theoretically, you could have 50 credit cards and still have excellent credit if you manage all of them responsibly.

My recommendation is to have a minimum of two cards so you have a backup if something goes wrong with one of them. Beyond that, have as many as you're comfortable managing and that you believe will benefit your financial life.