7 Popular Tax Deductions When Selling Your Home | [2021 Guide]

Posted by Andrew Fortune 8,083 Views

7 Important Tax Deductions When Selling Your Home

Tax Deduction Tips for Home Sellers

Home selling tax deductions are valuable. The average homeowner has more money in their home's equity than they do in their bank account. There's plenty of money to be made from selling a home in 2021. There's even more money if you know what tax deductions you can claim.

In 2020, the median sales price of a home in the United States was $310,800. As home prices increase, so do the dollar amounts of the tax deductions you can claim when selling your house.

If you're looking into tax deductions for home sellers, you might feel confused and frustrated by how complicated they are. There's a lot of information out there, but tax advice websites can be as confusing as the IRS website. It's easy to get lost in all of the tax deduction information online.

We've put together this list of home-selling tax deductions to simplify the process. By giving you all the information you need, you can know what's required by the IRS while also saving some money. Read on to learn more about each of the deductions available when selling your home.

Topics Covered in This Guide

Number OneMortgage Interest Tax Deduction

Mortgage interest deductions are one of the more popular home selling tax deductions. This deduction covers the interest you paid on your mortgage for the tax year you're filing your taxes.

The Tax Cuts and Jobs Act of 2017 changed the mortgage interest tax deduction. The bill lowered the total mortgage debt limit to claim interest from $1,000,000 down to $750,000 for couples filing jointly. This change means that if you have a mortgage for $1,250,000, you can only claim interest up to an equivalent mortgage of $750,000. This change reduced the amount of mortgage interest claims for some homeowners.

The standard tax deduction may be better than mortgage interestThe Tax Cuts and Jobs Act also changed the standard deductions to $24,000 for a married couple filing jointly. It’s $18,000 for a head of household and $12,000 for single people or couples filing separately. This change made it less desirable to itemize the mortgage interest. The standard deduction has better results in reducing taxable amounts. Many homeowners choose to claim the standard deduction rather than itemize their mortgage interest.

It still works well for some folks to deduct mortgage interest, so it’s wise to be familiar with it. To get the most out of your mortgage interest deduction, keep close track of your financial records and mortgage history. You can access information on the date of sale from the same year you sold your home.

It’s important to note that the mortgage interest tax deduction applies to multiple loans on a single property. This includes HELOCs and home equity loans. You can combine the interest from all of the mortgage loans for your tax deduction up to the max limit. Bankrate had a great mortgage tax deduction calculator to determine your total mortgage interest deduction.

Number TwoDeducting Property Taxes

Property tax amounts are different all over the country. According to WalletHub, New Jersey has the highest average property tax rate at 2.47%. Hawaii has the lowest property tax rate of 0.27%. Regardless of which state you live in, you are most likely paying property taxes every year on the basis of your home.

You can deduct up to $10,000 per year in property tax from your overall bill. The property tax deduction is an itemized deduction, like the mortgage interest deduction mentioned above. If you’re filing as an individual, the total of your itemized deductions needs to be over $18,350.

If you’re filing jointly as a married couple, the total needs to be over $24,400. If your total itemized deductions are less than these amounts, it may be wise to skip these deductions and claim the standard deductions.

Number ThreeHome Selling Cost Exemptions

Home selling tax deductions may include any of the costs you’ve had to pay when selling your home. You are only eligible for this deduction if you’ve lived in the house for two or more years out of the five years. The home also needs to be your principal residence.

In other words, if you bought the home as an investment property, you aren’t eligible for the selling costs deduction. These tax deductions help homeowners who would otherwise lose too much money from the selling costs. These costs make them not want to sell their home as a result.

Some selling costs that you can deduct include:

  • Real estate agent commissions
  • Advertising costs
  • Escrow fees
  • Legal fees
  • Abstract of title fees
  • Payments to utility service install
  • Legal fees
  • Recording fees
  • Survey fees
  • Transfer of taxes
  • Owner's title insurance

A few home selling expenses you cannot deduct would be:

  • Fire insurance premiums
  • Rent for occupancy of the house before closing
  • Charges for utilities related to occupancy of the house before closing
  • Moving expenses
  • Certain charges connected with getting a mortgage loan, including:
  • Mortgage insurance premiums
  • Loan assumption fees
  • Cost of a credit report
  • Payment for an appraisal required by a lender
  • Fees for refinancing a mortgage

When using this deduction, remember that it’s deducted in a specific way. You subtract the home selling expenses from the purchase price of the home you sold. Then you’ll get more out of your capital gains tax.

Home staging can be costly. If you’ve spent money on staging, you can also deduct that from your taxes. The same goes for any expenses incurred to create a real estate ad when marketing your home on a cost basis.

How To Claim Selling Cost Tax Deductions

There are different steps you should take to get these tax deductions when selling your home. If you’ve already sold your property, you should gather all invoices and receipts related to your costs when you closed. File these receipts in a safe place so you have them ready for tax season.

If you’re still in the process of selling, create a folder where you place invoices and receipts as you pay for them. When you’ve finally closed the sale of your property, you’ll have all the information where you need it. Save any documents proving your expense of the selling costs listed above.

Number FourDeducting Improvements and Repairs

Often, when selling your home, you have to make improvements so that buyers are interested. For example, you might renovate your kitchen so that it’s modern and sleek. You may also install a deck out back so that your home is more sellable during the COVID-19 pandemic.

Additionally, you might need to do some repairs to your home before the sale goes through. This scenario often happens with home-selling contracts when the buyer asks you to fix a shoddy window or leak in the roof.

Once you’ve done these improvements and repairs, your home improvement costs will increase. Fortunately, there’s a tax deduction for that. You can get this tax deduction if by demonstrating that the changes required were necessary to sell your home.

However, keep in mind that you need to file for this deduction within 90 days of the day you close the sale. Be clear with the construction company you hire about the tight schedule of these repairs. They need to be completed within 90 days.

The Difference Between Improvements and Repairs

Know the difference between improvements and repairsDo keep in mind that improvements and repairs work differently in the eyes of the IRS. Improvements are not deducted immediately but instead over a several-year period. Repairs are deducted directly within the same tax year as you sold your home.

Home improvement examples include:

  • Adding a deck
  • Adding counters
  • Installing central air conditioning or heating
  • Adding solar panels
  • Replacing windows

These are larger projects that aren’t necessary for selling a home, even though they would add value to potential homebuyers.

Repairs, on the other hand, are necessary for the sale of the home to go through. Many buyers would refuse to buy a home without these repairs being completed.

Home repair examples include:

  • Repairing leaks in your roof
  • Mold removal
  • Replacing smoke detectors
  • Repairing electricity or plumbing

Number FiveDeducting Moving Expenses for Active Duty Military Personnel

Until changes in 2018, moving expenses could be covered as a deduction for home sellers. Now, however, this deduction only counts for those who are active-duty military personnel. Additionally, you can get this tax deduction if you’ve had to relocate permanently before selling your home because of a military order.

Using Form 3903, you can get deductions for the travel you paid to get from your old home to your new home. This deduction includes what you pay for lodging, as well as the cost to transport your household items.

Number SixCapital Gains Tax Exemption

Okay, this isn’t technically a deduction, but the capital gains tax is an exclusion that’s beneficial to home sellers. So, what are capital gains?

When you sell your home, the profit you make counts as capital gains. This includes the cash that’s left after you’ve paid all your expenses and outstanding mortgage debts. The money left over is taxed as income.

Fortunately, if you’re married, you can exclude $500,000 from the sale from being taxed as income. If you’re single, the amount you can exclude is $250,000. If you’re filing and you’re married, then you have to file jointly to take advantage of the capital gains tax exclusion.

Details on the Capital Gains Tax Exclusion

You need to have lived in your home for at least two years out of the past five years you owned your home. If you own more than one residence, you can only use the capital gains tax exclusion on one residence (your primary one).

Additionally, your home needs to have been your primary residence. You also can’t use this exclusion regularly. You can only use the capital gains tax exclusion two years after you’ve last used it.

Keep in mind that these rules might change in the future. Stay up-to-date for any future tax bill related to capital gains tax.

Exceptions on Regulations

You may think that the IRS’s regulations will keep you from getting the exclusion and deduction you need. There are some exceptions put in place for particular situations.

You might be exempt from having to meet the IRS’s regulations if:

  • You served in the US Military while owning the home. You couldn’t be there for a significant enough period of time to call it your main residence.
  • You’ve sold a remainder interest on your property.
  • You experienced a divorce or separation, which might impact how much time was spent residing in your home.
  • You, your co-owner, or your spouse died.
  • You, your co-owner, or your spouse became eligible for unemployment.
  • You, your co-owner, or spouse gave birth in the same pregnancy to two or more children.
  • You, your co-owner, or your spouse became unable to pay for living expenses.

Note that, even though these are the most common exceptions, there are others.

If you find that you’re in a complicated financial situation, you might be able to get an exemption from the IRS’s regulations. If so, speak with a tax professional or accountant to better understand your options.

Number SevenDeducting State Taxes

You might be able to get a tax deduction of the capital gains tax paid in your state. Even though the capital gains will not be smaller, you can include the taxes you paid into your state taxes as itemized deductions.

The rules for this vary from State to State. You’ll need to do some research to determine the process for the State in which you live.

Need More Tips on Tax Deductions When Selling Your Home?

You might be curious about how to file for the deductions mentioned above. Maybe you want to learn more about what resources are out there for you when selling your home.

Home selling tax deductions can get complicated. Take your time when preparing your tax returns this year. If it’s too hard to file alone, find a great tax professional to help you.

Here are a few more guides to help you through the process of selling your home.

  • The Ultimate Home Sellers To-Do Checklist

    How To Prepare Your Home for a Home Inspection

  • What does a Realtor Do?

    10 Critical Steps to Take Before Listing Your Home

  • How To Sell Your House in 3 Basic Steps

    How To Sell Your Real Estate in 3 Basic Steps

  • 20 Step Checklist to Prepare Your Home for Real Estate Photos

    20 Step Checklist to Prepare Your Home for Photos

Andrew Fortune

Hi! I'm Andrew Fortune, the founder of Great Colorado Homes and the creator of this website. I'm also a Realtor in Colorado Springs. Thank you for taking the time to read my blog post. I am always open to suggestions and ideas from our readers. You can find all my contact info here. Let me know if you need a Realtor in Colorado Springs.

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