What Expenses Are Deductible When Selling a House
Do you know what expenses can be deducted from capital gains tax?
One of the questions I am asked now and then by homeowners is, “what are the home-selling tax deductions I can take.”
Selling your home is a big step, perhaps the most significant financial decision you have made thus far.
You are going into a transaction that could yield a substantial return.
In simpler terms, selling your home will hopefully make you a lot of money. And, as every adult is sure to be aware, you can expect the IRS to come calling when you make significant money.
Fortunately, you can take some different tax deductions when selling your home. Like with all tax deductions, you may be unable to take advantage of them all. But you should indeed be able to take advantage of a few.
The more deductions you can take, the more profit you will make from your sale.
The more profit you make, the better off you are—and the better home you can buy with the proceeds. There are tax deductions when buying a home and also when selling. It is important to know what they are so you can take advantage of them!
When you finally get done reading, you’ll no doubt conclude there are some nice tax benefits of owning a house.
What Are Capital Gains?
Gains realized from the sale of an investment such as stocks, bonds, and real estate are commonly referred to as capital gains. For our discussion, we will refer to real estate capital gains.
So, in simplest terms, if you profit from selling real estate, you have a capital gain.
What Are Capital Gains Deductions?
A deduction is an amount that can be deducted from your taxable income, thus reducing the overall tax liability. It is essential to know what expenses are deductible when selling a house.
By knowing what is deductible with the sale of a home, you can reduce your taxes paid to the Internal Revenue Service (IRS).
We will be examining in-depth the home sale deductions for taxes. Let’s dig in.
1. You Can Deduct Improvements Related to The Sale.
You’ve talked to your Realtor, and the news is precisely what you expected—you must make some improvements to yield top dollar from the sale.
Nobody wants to spend more money than they have to, so the need for improvements can be frustrating. But don’t let it get you too down. As long as you can relate the repairs to the sale, you should be able to deduct them.
There is a time frame for this deduction. All the repairs and improvements you make need to be made within 90 days of the closing date.
Three months is enough time to get things done, but it could be tight for significant renovations. If you plan on making improvements before a sale, make sure you plan accordingly.
Clarify the time frame with your contractor and make sure it fits within your window.
What Home Improvements are Tax Deductible When Selling?
It is essential to understand that the IRS treats repairs vs. improvements differently. Understanding how the IRS treats these differences will be essential to properly deducting expenses when selling your house.
Repairs vs. Improvements For Tax Purposes
Repairs can be deducted immediately in the tax year of your home sale. On the other hand, home improvements are a different animal and are deducted over multiple years.
You first need to understand the difference between a repair and an improvement. An improvement is something that makes a property more valuable to own. A repair is required maintenance to keep the property functioning normally.
Examples of Home Improvements
- Adding solar panels – ensure you understand selling a home with solar panels.
- Replacing all the windows
- Adding a deck.
- Replacing your siding
- Installing central air conditioning.
- Finishing the basement.
- Adding granite counters to the kitchen and baths.
- Replacing the roof.
- Replacing your heating system
Examples of Home Repairs
- Repairing a leaky roof.
- Removing mold from the attic.
- Fixing an electrical issue.
- Replacing a smoke detector.
- Replacing rotted trim around the home.
Tax Deductible Home Improvements Must Have a Depreciation Schedule
Home improvements made on your property can be deducted. However, you can’t deduct the full value of the improvement in the year the improvement took place.
You must take the deduction over a depreciation schedule. The IRS does this because an improvement adds value to your property for years to come, not just in the current year.
The improvements must be capitalized and depreciated based on a depreciation schedule (it will vary for each improvement). It’s calculated by dividing the cost of the improvement over the life of the improvement and then taking an annual deduction.
For example, you install a new heating system that costs 10,000. Using a 20-year straight-line depreciation schedule, you can claim $500 per year. 10,000 divided by 20 years equals 500. If you were in a 28 percent tax bracket, you could write off $140 in taxes in that calendar year.
A repair, however, can be deducted right away. Using the same $10,000 repair as an example, you can deduct the entire repair in that year. So the calculation would be 10,000 x 28 percent or $2800.
2. You Can Deduct Mortgage Interest.
Mortgage interest is a possible tax deduction for the time period that you owned the home. You probably know how important it is to keep detailed financial records, but it bears repeating.
If you will deduct your mortgage interest for the year you sell, make sure you have records of the date of the sale that you can access in the event you are audited.
There is a limit on how much you can deduct, but most people will not have to worry about exceeding that limit.
Home sellers can deduct the interest on up to only $750,000 of mortgage debt. Tax laws were adjusted in 2018 to cap the deductible home selling expense at $750,000.
What expenses are deductible when selling a home is in constant flux, so it is essential to check yearly with a tax professional.
3. You Can Deduct Discount Points From Your Mortgage.
The deduction of discount points is one of the most forgotten home-selling tax deductions. This deduction often occurs when you have only stayed in your home for a short period before selling.
Additionally, if you refinanced your loan while you owned your home and paid points in cash to buy down your interest rate, the IRS will let you deduct a proportional share of the points every year until the mortgage is paid off.
When you pay off your loan by selling your house, you can deduct everything you haven’t deducted all at once.
For example, if you refinanced three years prior and paid $3,000 in points, you’ll be able to take the remaining $2,700 in un-deducted points as a deduction in the year you sell your house.
4. If You Are Active Duty Military, You Can Deduct Moving Expenses.
Before the tax law changes that went into effect in 2018, anyone could deduct moving expenses if they had to sell their home to move for employment.
But with the changes in 2018, lawmakers removed this deduction for everyone but active duty military personnel.
If you are on active duty and making a move, you should take advantage of this deduction. Make sure you track these expenses to take as a home sale deduction.
5. You Can Deduct Property Taxes.
The new tax laws of 2018 limit the amount of property taxes you can deduct. You can only deduct up to $10,000 in property taxes, so if you paid more, you are out of luck. Your property taxes are based on your tax assessment.
Ten grand is nothing to scoff at, however. Be sure to include any property taxes you paid for the portion of the year that you owned your home on your tax return.
Check out how to lower your property taxes if you feel you’re paying more than your fair share.
6. You Can Deduct The Costs Related to Selling Your Home.
Selling a home costs money, even if you go the For Sale By Owner Route (not recommended if you want to maximize your sales price). The IRS is happy to accept all your costs for the sale of your home as deductions, so be sure to keep a record of all of your expenses.
- The commission you pay a real estate agent
- The cost of hiring a real estate attorney
- Any other miscellaneous legal fees
- Appraisal fees
- Title insurance
- Costs for removing title problems
- Advertising expenses
- Any escrow fees
- The cost of staging a home
- The cost of a pre-sale home inspection
- Transfer taxes or tax stamps
- Settlement fees
- Notary fees
These are some of the key tax deductions when selling your home. It is essential to keep track of all these deductible home-selling expenses.
Home Selling Expenses That Cannot Be Deducted From Your Capital Gains
There are some expenses that the IRS does not let you deduct to reduce your capital gains. For example, you cannot deduct the cost of mowing your lawn, cleaning the carpets, or hiring someone to clean your house each week.
Even though these items help sell your home, they are not considered deductible expenses.
Before an investment can qualify as a capital improvement, it must be ascertained whether it is part of a remodeling project or if the enhancement yields a substantial value for more than a year.
This is known as the “one-year rule.” Improvements must add to the value of a property, prolong its lifespan or adapt it for new purposes.
The Biggest Financial Benefit is not a Deduction. It’s an Exclusion.
With most investments you sell, your profits are considered capital gains—which means they are taxed at a specific rate.
But with a home sale, it is possible to avoid real estate capital gains tax.
As long as you meet specific requirements, which are easy for most sellers to achieve, you can avoid paying taxes on the profits from your home sale.
The preceding reference gives an incredibly detailed overview of the tax law.
Some things you should know about the home selling tax exclusion include:
You Can Deduct a Profit of up to $250,000 if You Are Single.
The IRS allows individuals to make up to $250,000 in profit without taking a penny. Anything over that number is going to face capital gains tax.
If You Are Married, You Can Deduct up to $500,000 From The Sale.
The tax laws are fairly generous to married couples who sell a home.
When you are married, you get to make double the profit from the sale. Again, if you make more than the cap, anything over the $500,000 mark will be taxed as capital gains.
The Home Must Be Your Primary Residence.
The tax exclusion is designed to help homeowners. Because of this, the exclusion is only available to those who have lived two out of the last five years in the home. The time frame is quite flexible. Living there for a full two years at a time is unnecessary.
You could live at the home for a year, live somewhere else for three years, and then live in the home for the final year before the sale.
You Cannot Have Used The Exclusion in The Past Two Years.
The exclusion is available repeatedly throughout your life, but you must wait two years between each use.
If you sold a home and used the exclusion a year and a half ago, you will need to wait six more months before you sell if you want to use it again.
Married Sellers Must File Jointly.
If you are married and selling, you must file a joint tax return to take advantage of the capital gains tax exclusion.
There Are Exceptions to Tax Deductions When Selling a House
While the above rules apply in most situations, there are exceptions. If you do not meet all the rules, it is worth checking to see if you qualify for an exception. It never hurts to look.
Speak to a tax advisor to ensure you get all the qualified capital gains tax deductions.
Video Explaining Home Buying and Selling Tax Deductions
Turbo Tax has a short video explaining what expenses can be deducted from capital gains tax.
What Expenses Are Deductible When Selling a Second Home?
The tax laws on what expenses you can deduct on a primary residence vs. a second home or investment property are different.
See what to know about paying taxes on second homes to help determine what expenses can be deducted from capital gains.
Final Recap on Tax Deductions Selling a House
When it comes to taxes, everyone’s circumstances differ. When trying to understand what you can deduct when selling your home, it is always wise to speak to a qualified tax professional.
While most folks can take the outlined deductions, your situation may limit what you can do.
Additional Helpful House Tax Tip Articles
- Real Estate tax tips – get general tax advice via Maximum Real Estate Exposure.
- Taking an office deduction without getting audited -see some exceptional advice on home office tax deductions via C-Net.
Use these additional resources to make sound decisions when selling your house.
About the Author: The above Real Estate information on tax deductions when selling your home was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. Bill has helped people move in and out of many Metrowest towns for the last 37+ Years.
Are you thinking of selling your home? I am passionate about real estate and love sharing my marketing expertise!
I service Real Estate sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge MA.
