5 Tax Deductions to Take When Selling Your Home

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I’m sure the idea of doing your taxes doesn’t excite you, but the idea of saving money might. There are numerous tax deductions you can take if you are selling your home. The expenses you pay from owning and selling a home can be subtracted from your taxable income, reducing the overall amount you end up having to pay at the end of the year on taxes. To ensure you save the most money on your taxes this year, we will go over 5 tax deductions and exemptions you can take when you’re selling a home!

Selling Costs

If your home is a primary residence, and not an investment property, you may be able to deduct the costs associated with selling your home. In addition, you must have lived in the home for at least 2 of the 5 years leading up to the sale. In order to receive the deduction, these selling costs must be directly related to the sale of your home. Expenses such as: legal fees, escrow expenses, advertising costs, agent commission fees, and staging costs can potentially get you a hefty tax deduction. You won’t deduct these Selling Costs from your taxable income. Instead you deduct these expenses from the total sale price of your home. On paper, this decreases the sales price of the home which will lower your capital gains.

Capital Gains

While this is technically an exclusion and not a deduction, it still works in your favor. Capital gains are the profits which you make from selling your home, once you’ve paid any other expenses, closing costs and mortgage debt. These profits are taxed just as income is. If you’re single you have the potential to exclude up to $250,000 of your capital gains. If your married, that exclusion goes up to $500,000. However, to get this exclusion you must have lived in the home for at least 2 of 5 years preceding the sale. Remember to keep track of any home improvements you do because your capital gains are determined by the cost basis of the home. The cost basis includes the purchase price as well as home improvements made. To make things clear — if you bought a home for $500,000 and spent $100,000 on home improvements, your cost basis would amount to $600,000. If you lived there for at least 2 years and then decided to sell the home for $600,000, you wouldn’t have to pay any capital gains taxes. In other words, the higher the cost basis you have the less you pay in taxes. So make sure to keep track of all your home improvements.

Home Improvements and Repairs

If you’ve made some upgrades or repairs to your home to increase its resale value and make it more attractive to buyers, you can deduct those expenses as part of your selling costs! However, it’s important to note that the IRS looks at repairs and improvements differently. Repairs, which are necessary to sell your home, (mold removal, leaky roof) can be deducted in the same tax year you sell your home. Home improvements, which aren’t necessary to fulfill the sale, but add value (installing central air, granite countertops) can’t be deducted immediately instead over a period of time. The only catch to get these deductions is that these home improvements and repairs must have been made within 90 days of closing the sale.

Property Tax

The Tax Cuts and Jobs Act (TCJA) capped the property tax deduction starting with 2018 tax year. If you paid property taxes on your home up until you sold it, you can deduct what you paid last year up to $10,000. For married couples they can deduct $5,000 if they are filing separately. The property must be used for personal use and the owner must itemize their deductions on their federal tax return.

Mortgage Interest

If you sell your home, you can also deduct any mortgage interest you’ve paid. This is an itemized deduction that allows homeowners to deduct loan interest they’ve paid on their home up until they sell. It can even be taken on a second home if the deduction stays within the capped limit of $750,000. Married couples filing separately can deduct $375,000 each. The loans that qualify for this deduction are those to buy, build, or carry out home improvements.

Bottom Line

If you are selling a home and want to save on your taxes this year, check if you are eligible for these tax deductions and exemptions. Keep in mind, these tax breaks were modified in 2018 with the Tax Cuts and Jobs Act, which changed a lot of rules and regulations for homeowners. However, the tax deductions are still a substantial amount and could benefit you greatly. It’s important to stay up to date on the latest tax laws and updates as they could change again in the future.

Note: We are not tax advisors and urge you to discuss your specific scenario with a CPA.

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