Are you too wondering, if there are tax deductions that you can take when selling a house? It’s every home seller’s worry. Fortunately, the answer is: Yes! You can avail of preparing your house for a sale tax deduction if you know how.

While the Internal Revenue Service will receive some of the shares if you’re profiting off the sale of an investment, or the sale of a home (in the form of a real estate capital gains tax), it’s up to you to use your financial knowledge to your advantage. 

Because the IRS does have some exclusions from the capital gains tax — that can reduce your taxes significantly. These real estate tax deductions make selling a home worthwhile.

If you’re new to the home selling market, know that this capital gains tax is a type of tax on your profits that you realize when you sell a capital asset for a price that’s higher than its purchase price. You need to pay taxes that are suitable for your capital gain on a cost basis.

Do I have to report the sale of my home to the IRS?

tax deduction

Yes. When you sell any real estate investment for a capital gain, you’ll receive IRS form 1099-S. The IRS requires that all the settlement agents and professionals involved in the real estate transaction send the 1099-S form to the agency and you.

This 1099-S form will have the record of your capital gains, whether you qualify for any capital gains tax exclusions, and your itemized deductions. You’ll receive this form in the mail and it’s an important document to have, especially at the time of filing your taxes.

Know that when you sell a house, there’s a difference between what you can deduct and what you cannot. Unfortunately, there’s a lot of confusing information on the internet regarding it. Unless you’re a seasoned tax professional, tax deductions can be a bit difficult to understand.

Fortunately, we’ve done most of the legwork for you. We will list out some of the tax deductions you can take when selling your home. The knowledge will empower you to be able to take advantage of some of them.

Needless to say, the more tax deductions you can take, the more profit you will make off of your house sale price. So, if you were wondering, “What expenses can I deduct when selling my home?”, well, we have a rundown of all the tax deductions as well as tax exemptions. Read on.

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Possible tax deductions while selling a home

1. Cost of repairs and improvements related to the house sale

A realtor will suggest you make some repairs to your house to yield top dollar from the sale. The good news is that if you can relate the repairs to the sale, you should be able to get a tax deduction.

However, do keep in mind that there’s a time frame for this deduction. All the repairs and home improvements you make should be within 90 days of the closing date. 

After all, three months is good enough time for any significant home renovation. Make sure you clarify the time frame with your contractor and plan accordingly.

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Another important point to keep in mind is that the IRS treats repairs vs home improvements differently when it comes to preparing the house for a sale tax deduction.

While repairs costs can be deducted immediately in the tax year of your home sale, home improvement costs are deducted over the course of multiple years — over a depreciation schedule. The IRS does this since the improvement adds value to your property for years to come.

Understand that a home improvement makes your property more valuable while a home repair is important for its maintenance — to keep the property functioning normally. These repair works could include repairing a leaky roof, fixing an electrical issue, or replacing a smoke detector in the house.

repairs and home improvements

Some important home improvements, that warrant preparing the house for sale tax deduction, include:

2. Mortgage interest

Mortgage interest may get you a good tax deduction for the time period that you owned the home. That’s why it’s very important that you keep detailed financial records, especially if you’re planning to deduct your mortgage interest for the year you sell. Ensure that the records mention the date of sale and other details that you can access in the event you are audited.

Of course, there’s a limit on how much you can deduct. Since tax deduction laws and tax bills have changed over the past few years, in most state taxes, home sellers can deduct the interest on up to only $750,000 of mortgage debt. You can consult a tax expert for more clarity.

3. Discount points from your mortgage

Your mortgage discount points are an important (although most forgotten) home selling tax deductions. You can usually get this deduction when you’ve stayed in your home for only a short period of time before selling it.

Moreover, if you had refinanced your loan, while owning your home, and paid points in cash to buy down the interest rate, you can avail of the tax deduction. The IRS lets you deduct a proportional share of the points every year until your home mortgage is paid off.

For example, if you have been refinancing your loan for three years before selling your house, and had paid an amount of $3,000 in points, you’ll be able to take a tax deduction for the remaining $2,700 in un-deducted points in the year you sell your property.

mortgage discount points

4. Moving expenses if you’re active duty military

Interestingly, before the tax law changed in 2018, anyone who had to sell their home to move for employment opportunities could deduct their moving expenses. But, now, only those in active duty military service can avail of this tax deduction. If you’re military personnel, selling your home, and making a move, you should take advantage of this deduction in taxes.

5. Property taxes

The IRS has put a limit on the amount of property taxes you can deduct. Unfortunately, you can deduct only up to $10,000 in property taxes. That said, this too is not a small amount. Just make sure that you include any property taxes you paid — for the year that you owned your home — on your tax return.

Also, consult a financial expert to check how to lower your property taxes or save taxes if you’re paying more than your fair share.

6. Costs related to selling your home

Selling a home also costs good money. Thankfully, the IRS accepts all your costs for the sale of your home as deductions. At the cost of repetition, you must keep a record of all your expenses related to a house sale.

These costs include hiring a real estate agent, the cost of hiring an attorney, legal fees and other, title insurance, advertising costs, pre-sale home inspection fees, escrow fees, and even the cost of staging your home for sale.

When it comes to home staging costs, the IRS considers it a legitimate selling expense — for both primary as well as secondary homes. And is, therefore, tax-deductible. However, if you stage your house and then take it off the market before it sells, the staging expenses will not be tax-deductible.

Last words

These are some of the most important tax deductions that you must consider when selling your home. You won’t be taxed on some if not all of the profit you realize, provided you meet certain rules and regulations laid down by the IRS.

Needless to say, such preparing house for sale tax deductions can help you save money. And, you can reinvest that capital in a more suitable, more profitable space if so desired.

Read more: Top Tips on the Best Way to Avoid Taxes When Selling Your House

A Complete Guide on Preparing Your House for Sale Tax Deduction was last modified: September 8th, 2021 by Ramona Sinha
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