Learn which tax benefits you can take advantage of when selling your home!
It’s that time of year again, when Americans start gathering up all their various financial documents in preparation for Tax Day. Hopefully, you will have some money coming to you instead of the other way around! If you sold your home in the last calendar year, you’ll definitely want to take note of this article.
Most home sellers know about the standard tax exclusion on capital gains for their primary residence. If the profit on the sale of your home is less than $250,000 (for individuals) or $500,000 (for married couples filing jointly) over the purchase price, and if you have lived in that home for two of the five years before you sell, whatever you make is excluded from taxation under U.S. Code Section 121.
What you may not know, however, is that the IRS grants additional income tax deductions for home sellers. If you don’t qualify for the 121 exclusion, or if your profit exceeds the threshold, you will owe taxes on what you made, so definitely be sure you deduct what you can. This requires that you itemize your taxes instead of taking the standard deduction, admittedly a tedious job, but one that is probably worth the effort.
Here are five tax deductions you should take this year:
According to Nolo.com, you can deduct the following settlement expenses from your income:
Your real estate agent’s commission
Additionally, if you sell your home due to circumstances involving divorce, change in employment, change in health, or other unforeseen circumstances, you might qualify for additional exclusions.
If you have to sell your house because you’re relocating for work, you might be able to deduct some of your moving expenses. Possible deductions include transportation costs, travel expenses, storage costs, and lodging costs.
Property Tax Deduction
According to the IRS, you can deduct a portion of your annual property taxes from the last year that you owned the home, prorated up to, but not including, the date of the sale (since the buyer pays beginning from the sale date).
Sometimes, home improvements must be made in order to increase the market appeal of the property, or to satisfy repair requirements made in the sales contract. If you make home improvements for the specific purpose of selling your home (like replacing a leaky roof or defunct HVAC system), and if they are made within 90 days of closing, they can be considered selling costs, which are tax-deductible.
Typically, any other home improvements you’ve made are not tax-deductible, unless they qualify for energy-efficiency programs. If you installed certain energy-efficient appliances or fixtures in the last calendar year, such as tankless water heaters or low-flush toilets, you may be entitled to federal and state tax credits and/or deductions on those.
If you ever paid mortgage points to lower your interest rate, you might qualify for an additional deduction when you sell. Because you can deduct a proportional share of the points until the loan is paid, when you pay off the loan through the sale, you can take the remaining value of those points as a deduction.
Itemized tax deductions are obviously very tricky and can vary year to year between federal and state levels. You should consult a tax expert to confirm the deductions that are still available at the time of your sale.