Are you thinking of selling your home? Did you know that there may be some deductions available to help offset the costs of your property sale? Understanding how and when taxes apply can make a big difference in helping you save money!
In this blog post, we will provide helpful information about the tax deductions available to those who are selling their homes. We’ll discuss what kind of deductions are applicable, which expenses qualify, and other tips for making sure that the process runs as smoothly as possible.
Keep reading to learn more about tax deductions when it comes to selling your home.
Home Selling Costs
Selling your home may seem like a daunting process, but making sure you keep track of every expense associated with it can be beneficial.
When filing taxes, the IRS will accept deductions for most expenses related to selling, such as listing agent fees, attorney or legal fees, title insurance costs, and advertising charges too; plus, don’t forget about escrow costs at closing time.
Staging services to get your house ready for showings should also qualify- so does any needed inspection work. Each deduction helps reduce what must ultimately come out of pocket from final sale prices – leaving more money in your bank account after all’s said and done.
You must have lived in the house for at least two years out of the last five years. The house must be your primary residence, not a place where you only live sometimes or an investment property. You cannot deduct these costs in the same way as other expenses, like mortgage interest. Instead, you subtract them from the sales price of your home. This will help reduce the amount of taxes you have to pay on your profits from selling the home.
Home Improvements and Repairs
If you made repairs to your house before selling it, you might be able to get money back from the government, but there are some rules. Anything you want to deduct must have been done 90 days before you sold your house. The IRS thinks that three months is enough time to do any repairs related to selling a house. If there are repairs that usually take longer, like replacing a roof, this might be difficult. Talk to the person who is doing the repairs and make sure they are done within the right time frame so you can get the most money back from your taxes.
The IRS is careful about what it decides is a repair and what it decides is an improvement. Some repairs might be things like fixing a roof, removing mold, dealing with wiring problems, replacing rotten decking, or replacing broken smoke detectors. In contrast, improvements might be things like painting the house, upgrading the deck, updating the windows, renovating a bathroom, adding new windows, or adding energy-efficient appliances.
Home improvement deductions can happen even if you do not sell your home. You can take these deductions over time within the year that the improvement happened. Sometimes there is a limit to how much you can deduct. The repairs that you did to your home in order to sell it are the ones that you need to track within the 90-day window.
In the past, you had no limitation when deducting your property taxes on income taxes. But with 2018 legislation, it’s not quite so simple – as a homeowner, there is now an upper limit of $10,000 that can be used to calculate deductions. Any additional amount over this will have to bear itself at tax time and won’t apply against your return. To make sure your tax return accurately reflects what’s required by law for deductions, do double-check all amounts entered and ensure they are within the time frame specified.
Mortgage Interest Tax Deduction
You can deduct the interest on your mortgage from your taxes. This is for the part of the year that you owned your home. But remember, under the 2018 tax code, you can only deduct the interest on up to $750,000 of mortgage debt. If you got your mortgage before December 15, 2017, you can continue deducting up to $1 million.
Itemized deductions are deductions that you list separately. This means that you need to have more deductions than the new standard deduction for it to work in your favor. The Tax Cuts and Jobs Act nearly doubled the standard deduction when it went into effect.
Capital Gains Tax Exclusion
The first step to avoiding capital gains tax when selling your home is understanding the threshold set by the Internal Revenue Service. As an individual, you can make up to $250,000 and still not owe anything in taxes, while married couples filing jointly are allowed to profit up to $500,000. Reaching these amounts usually isn’t too difficult and can provide immense relief when it comes time to distribute any profit you’ve made from your home sale. However, if those amounts are exceeded above and beyond these limits, it’s important that sellers understand their responsibilities so they know exactly what their tax burden will be. With that knowledge in place and proper planning, home sellers can keep as much of their cash as possible.
While the dollar amount of your exclusion must be taken into account, there are two other important rules to follow that will determine whether you qualify. The first is that the home needs to be used as your primary place of residence. If it’s a holiday home, it won’t meet this requirement. Furthermore, for it to be accepted as your main residence, you’ll need to have lived there for at least two out of the previous five years. Luckily, within those five years, these two periods don’t have to be consecutive. The second rule states that you cannot have already used the exclusion in the last two years.
For married couples, filing taxes jointly is a must – not only to benefit from the exclusion but also to ensure you don’t have an unexpected capital gain tax bill come due with the IRS.
You Can Deduct Discount Points From Your Mortgage
If you own a home, one of the best pieces of tax news you might not have heard of is the deduction of discount points. Although it’s an often-forgotten deduction, it can amount to substantial savings on your taxes if you’ve only been staying in your home for a short time before selling. Such deductions may also be available if you’ve been refinancing your loan and used cash to buy down your interest rate. This type of authorized deduction can be pro-rated and taken allowance from year to year until the loan is paid off. Upon sale of the property, all un-deducted points may then be taken all at once – for example, $2,700 if you refinance three years prior and paid $3,000 in points.
Deducting Moving Expenses for Active Duty Military Personnel
Homeowners who are members of the military now have exclusive access to deductions on their moving expenses. Previously, anyone could deduct these costs if they had relocated for work – but as a result of changes in legislation, this is no longer possible. For those actively serving our nation, though, it’s still an important way to save money when relocating homes.
Selling a home can be expensive, but there are some tax deductions that can help offset the costs. Home selling costs, home improvements and repairs, property taxes, mortgage interest tax deductions, and capital gains tax exclusion are all deductions you can take when selling your home. Be sure to talk to your accountant or qualified tax professional to see what other deductions may be available to you.
If you are buying a home in the Nashville area, reach out to our real estate team. We would be happy to help you find the perfect home and take advantage of any tax breaks you may qualify for.