What Expenses Can You Deduct When Selling a Home?

September 27, 2020

Getting a house ready for sale can be costly, but there are several tax benefits for homeowners that can save you money when it comes time to file. Here’s what you need to know.

Your home may be your largest investment, and selling it can be incredibly lucrative, but it also comes with costs. Homeowners typically earn a 36.3% return when selling their homes, according to nationwide data from ATTOM Data Solutions. But before you see a cent of those profits, you have to prepare your home for sale, hire a real estate agent, and pay closing costs.

The good news is there are several tax deductions sellers can take when filing. While the Tax Cuts and Jobs Act tightened some restrictions around what can be deducted, you’ll find that you can still save a wad of cash. Here are the tax tips you need to know so that you don’t miss out on any of the tax benefits of being a homeowner.

Capital gains exclusion

If you gain less than $250,000 (or $500,000 for married couples filing jointly) from the sale of your home and meet certain requirements that show it is your primary residence, you won’t need to report your earnings to the IRS. Long-term capital gains are typically taxed at a rate of up to 20%, which means you could save up to $100,000.

In order to exclude capital gains from your taxable income, you need to have owned and lived in your home for two out of the last five years. It doesn’t need to be consecutive time, and you might qualify for an exclusion if you’re in the military or have a health condition or a change of employment. If you’ve already claimed the exclusion on the sale of another home in the past two years, you won’t be able to claim it again.

Related: How Much Does It Cost to Sell a House?

Capital improvements

If you gained more than the maximum exclusion from the sale of your home, you may be able to increase your cost basis by adding capital improvements. These renovations have to meaningfully increase the value of your home; regular maintenance, repairs, and decorating don’t count.

However, if you added a bedroom, upgraded your HVAC system, or bought new built-in appliances, you can subtract those costs from your capital gains to reduce your tax liability.

Read More: The Effect of Landscaping on Property Value

Real estate commissions and other selling costs

Real estate commissions can be costly for sellers, since you’ll need to cover fees for both the buyer’s agent and the listing agent. These can run about 6% of the sale price of your home. However, you’ll be able to deduct these fees from your capital gains. Other seller closing costs you can deduct include:

Mortgage interest and property taxes

You can reduce your taxable income by deducting the interest on your mortgage loan and your paid property taxes, provided that your itemized deductions exceed the standard deduction of $12,400 ($18,650 for head of households) for 2020.

If you bought your home before December 15, 2017, you’ll be able to deduct the interest on up to $1 million in mortgage debt. New homeowners who bought after that date can deduct the interest on up to $750,000 in mortgage debt. You can also deduct up to $10,000 per year in property taxes when filing, assuming you paid them in full for the part of the year you owned your home.

Learn more: Selling a House? Here’s What to Know About Taxes

How to avoid selling costs

Though the capital gains exclusion will help you keep more of your money in the sale of your home, those profits won’t help you make repairs prior to selling. In some situations, selling your home off market might be your best option. But that doesn’t mean that you have to accept anything less than a fair offer price for your home.

At Sundae, we’re committed to getting you the highest possible offer for your home. You won’t encounter any hidden fees, and you may be eligible to receive a $10,000 cash advance after your inspection. Plus, you can close in as little as 10 days without any hassle. There’s no need to work with a real estate agent or get your home photo-ready.

And if you earn less than the limit for the capital gains exclusion on the sale of your home, you still won’t have to pay taxes on the profits. That’s a win for homeowners who want to sell for profit without investing any time or cash in the sale.

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Composed by a team of experienced content, marketing, and real estate professionals, the Sundae Blog is a go-to authority for tips, instructions, and data-driven insights aimed at helping homeowners maintain, renovate, sell, and buy homes, while navigating a complex real estate market.

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