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 of, when you make a lot of money, you can expect the IRS to come calling.
Fortunately, there are some different tax deductions you can take when selling your home. Like with all tax deductions, you may not be able to take advantage of all of them. But you should indeed be able to take advantage of a few.
The more deductions you can take the more profit you will make off of 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. Obviously, 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 come to the conclusion there are some really nice tax benefits of owning a house.
1. You can deduct the cost of repairs and improvements related to the sale.
You’ve talked to your Realtor, and the news is precisely what you expected—you have to make some repairs to yield top dollar from the sale. Nobody wants to spend more money than they have to, so the need for repairs 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.
Repairs vs. Improvements for tax purposes
It is essential to understand that the IRS treats repairs vs. improvements differently.
Repairs can be deducted immediately in the tax year of your home sale. Home improvements, one the other hand are a different animal and are deducted over the course of multiple years.
What you first need to understand is 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.
Here are some examples of home improvements:
Adding solar panels – make sure you understand selling a home with solar panels.
Replacing all the windows
Adding a deck.
Installing central air conditioning.
Finishing the basement.
Adding granite counters to the kitchen and baths.
Here are some 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.
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 are going to deduct your mortgage interest for the year you sell, make sure you have records of the date of 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 going over that limit. Unless your mortgage interest was over $1 million, you are in the clear.
One note of importance – tax deduction laws changed for 2018. Sellers can now only deduct the interest on up to only $750,000 of mortgage debt.
3. You can deduct discount points from your mortgage.
The deduction of discount points is one of the most forgotten about home selling tax deductions. The use of this deduction often occurs when you have only stayed in your home a short period of time 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 that 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 active duty and making a move, though, then you should take advantage of this deduction.
5. You can deduct property taxes.
The new tax laws of 2018 put a limit on 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. 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.
Be sure to 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, by the way, 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.
These may include the cost of hiring a real estate agent, the cost of hiring an attorney, any other legal fees, title insurance, advertising costs and escrow fees. You can even include the cost of staging your home for sale or if you paid to have a pre-sale home inspection.
These are some of the key tax deductions when selling your home.
The Biggest Financial Benefit is not a Deduction. It’s an Exclusion.
With most investments that 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, then 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 make 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 make 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, then anything over the $500,000 mark is going to be taxed as capital gains.
The home needs to 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. It’s not necessary to live there for a full two years at a time.
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 have to 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 have to file a joint tax return to take advantage of the capital gains tax exclusion.
There are exceptions.
While the above rules apply in most situations, there are exceptions. If you do not meet all of the rules, it is worth checking to see if you qualify for an exception. It never hurts to look.
Video Explaining Home Buying and Selling Tax Deductions
Turbo Tax has a short and sweet video explaining the deductions to remember when tax time comes.
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.