If you’re trying to sell your house or have recently sold and were fortunate enough to have gained a profit from the sale, you can be sure the government is going to want a piece of the pie.
As a home seller, you are technically an investor in real estate which might make you liable to pay capital gains taxes – a type of tax that happens when someone sells a property for higher than the original purchase price – on the sale of your home.
Fortunately, there are ways you can minimize the tax burden owed, if the home was sold for a profit. Your house is considered a capital asset and might qualify for several tax deductions when selling that can eliminate capital gains taxes owed or at least significantly reduce them.
Reporting the sale of your home to the IRS
Determining if you even owe taxes on the sale of your home comes down to a couple of factors explained below.
Being single or married makes a difference
According to the IRS, filing jointly or single makes a difference when determining if you even owe money on your tax bill. If filing single, you don’t need to pay taxes on gains realized up to $250,000. Likewise, married couples filing jointly, don’t need to pay taxes on gains realized up to $500,000. If there is excess profits over these amounts, taxes will need to be paid.
Is this house your primary residence?
According to U.S. Code Section 121, to be excluded from owing taxes on profits up to250k/500k, 3 qualifications need to be met.
- You owned the property for at least 2 of the last 5 years
- You lived in the property for at least 2 of the last 5 years
- You did not exclude the gain from another property sale in the last 2 years
Basically, if you sold the property and filed single with a realized profit of under 250k or filed jointly with a realized profit of under 500k and lived there for 2 years, the IRS doesn’t want to know about it. If unforeseen circumstances have come up causing you to not meet these requirements, there is the possibility that you can receive a reduced or partial exclusion. For example, this can be due to a change in employment.
Home improvement tax deductions
According to the current tax code, repairs like painting, enhanced curb appeal, fixing broken doors, or just general selling cost items to get the home ready for selling are not allowed to be deducted from a tax return. However, increasing the cost basis by tacking on costs for capital improvements are allowed.
The IRS defines a capital improvement as anything that “adds market value to the home, prolongs its useful life or adapts it to new uses.”
According to IRS Publication 523, below are examples of specific improvements that add value to a home and can be deducted from a tax bill.
- Additions – Additions are things such as bedrooms, bathroom, decks/patios/porches, and garages.
- Lawn and Grounds: Lawn and grounds items can include landscaping, driveway, walkway, fences, retaining walls, or swimming pools.
- Exterior: Exterior items can include storm windows and doors, new roof, new siding, satellite dish.
- Insulation: Adding insulation to places like the attic, walls, floors, pipes and ductwork
- Systems: Systems can include, heating systems, central air conditioning, furnace, duct work, central humidifier, central vacuum, air/water filtration system, wiring, security system, lawn sprinkler systems
- Plumbing: Plumbing are things like septic systems, water heater, soft water system, filtration system
- Interior: Interior items are things like built-in appliances, kitchen modernization, flooring, wall-to-wall carpeting, fireplaces.
Expenses incurred from selling your home
The biggest expense when selling a home is usually real estate agent’s commission (unless you hire a flat-fee real estate company) which can also be deducted from your capital gains tax obligations. In addition this deduction, the following can also be deducted:
- Administrative costs: These are fees that go to the agent’s broker and cover things like document storage or office assistant.
- Advertising costs: This includes advertising channels that are necessary to selling the home such as flyers, brochures, signs, open houses, etc.
- Escrow fees: Fees that go into escrow such as taxes, loan fees, etc. go into escrow.
- Inspection fees: Inspection fees are incurred from having an inspector create a report on what is wrong and not wrong with the property. Depending on the contract, a seller might have to pay for these.
- Legal fees: Some states require that a buyer and seller close with a real estate attorney.
- Title insurance: This protects lenders and buyers in the event that there is an issue with the properties title.
Again, this applies only if you have made over 250k in profits as a person filing single or you made over 500k in profits filing jointly.
Active duty military moving expenses
You used to be able to deduct moving expenses depending on the location of your new home and a new job. However, this has been eliminated mostly with the exception of active military members. According to IRS publication 3, you must the following criteria:
- A member of the armed forces on active duty
- Military order forced you to change where you are stationed
If you meet these criteria then the following expenses can be deducted:
- Transportation of belongings via moving truck or moving company
- Storage of belongings in a storage unit
- Travel from old home to new home
- Lodging while traveling at hotels
Property tax deductions
You used to be able to deduct all taxes paid to local and state governments before president Trump signed into law the Republican Tax Bill, which caps the deduction of taxes a homeowner can take advantage of up to $10,000. This includes property taxes, sales taxes, and state/local income taxes.
If you have already sold your house and want to deduct your share of property taxes, it’s important to bring your settlement statement to your tax professional to clearly understand what it is that you owe. You can deduct taxes up to the day before the sale took place. The buyer can deduct on the day of sale and after.
Mortgage interest deduction
One of the major benefits of owning a home is the standard mortgage interest deduction that American’s get to take. As of now, the IRS allows you to deduct up to $750,000 in annual interest payments.
In addition to the mortgage interest deduction, it’s advised to ask your tax professional if you can deduct mortgage points. However, according to the IRS, there are several requirements needed to deduct points.
If you have sold your house already within the last year, you can deduct mortgage interest for the time period that you owned the home. If you are currently selling your home, then you can deduct the mortgage that you paid until the final day that you owned the property. Your lender will send you a 1098 form that shows you exactly how much you paid in interest for the year.