Home Seller Tax Deductions: What You Need to Know

Selling your home is a big deal. Between packing boxes, juggling paperwork, and negotiating offers, taxes might be the last thing on your mind. But here’s a little secret: you could save some serious money thanks to home seller tax deductions. Yep, the IRS might give you a break, and who doesn’t love that?

If you’re preparing to sell your home—or recently did—dive into how to save money on your annual taxes. Because hey, who doesn’t love keeping a little extra cash?

What Are Home Seller Tax Deductions?

Let’s start with the basics. Home seller tax deductions are the expenses you can subtract from your taxable income when filing your annual taxes. These deductions work to lower the amount of tax you owe Uncle Sam. It makes the process of selling your home a little less painful on the financial front.

Perhaps you’re thinking of capital gains tax exclusions? Don’t get twisted. Home seller tax deductions are not the same as capital gains tax exclusions. The latter allows you to avoid taxes on a certain amount of capital gain, or profit, from the sale of your primary residence–but more on that later.

Instead, these tax deductions apply to the costs of selling your home. Typically, they are for those who sell their primary residence or an investment property. Understanding the nuances is key to maximizing your tax benefits.

Key Tax Deductions for Selling a House

Now, onto the good stuff. Some items you can deduct from the sales price to reduce your taxable profit, and you can also deduct as expenses when you pay taxes. Here are the big-ticket tax deductions to track when selling your home:

Home Selling Costs 

You’ve heard the saying, “It takes money to make money,” right? Selling a house is no exception.

Did you pay a real estate agent? Spend money on legal fees or escrow services, including those closing costs? Good news—these costs are deductible. Commissions, advertising expenses, and even the flyers you printed can count. 

Just remember, these deductions only apply if they’re directly tied to the sale of your home. No home sale, no deductions. Additionally, deducting these costs can reduce your profits, subsequently influencing capital gains tax calculations.

Home Improvements and Repairs 

Made some upgrades to boost your home’s value before listing? You might see those costs come back in the form of tax savings.

• Qualifying home improvements include things like new roofing, modernized kitchens, or energy-efficient windows. 
• Repairs like fixing a leaky faucet or patching up drywall don’t typically count unless necessary to close the sale. The key is that improvements must be made to sell the house, not just general maintenance.

Pro tip? Keep those receipts—they’re your ticket to claiming these deductions.

Mortgage Interest Deduction 

Still paying on your mortgage while selling? You can deduct the mortgage interest paid until you hand over the keys. Don’t miss out on this one, especially if you’re in the early years of a loan when interest payments are higher. Mortgage debt also affects mortgage interest tax deductions and matters when calculating capital gains from home sales.

Property Taxes 

Property taxes you’ve paid through the sale date are usually deductible. However, keep in mind there’s an annual limit ($10,000 as of 2023) on state and local taxes, including property tax deductions.

​​Capital Gains Tax Exclusion

Okay, this isn’t a deduction, but it’s worth mentioning. The capital gains tax exclusion is a golden ticket for home sellers looking to keep more of their hard-earned money. This tax benefit allows you to exclude up to $250,000 of capital gains from the sale of your primary residence or a whopping $500,000 if you’re married and filing jointly. If the profit exceeds that amount, you’ll start owing some long-term capital gains, but still much less than you would have.

To qualify, you must have lived in the home as your primary residence for at least two of the five years leading up to the sale. Plus, you can’t have excluded gain from selling another home in the two years before this sale. This exclusion can significantly reduce your taxable gain, making it a crucial factor in your home sale strategy. That’s a huge tax break when selling your home.

And here’s the real kicker—this exclusion doesn’t cancel out selling expenses. It works alongside deductions, making it a potential game-changer for your finances and tax bill.

Special Considerations for Tax Deductions

It’s not always as simple as selling and deducting. Special circumstances require a closer look:

• Inherited Homes: Selling a house you inherited? The rules are a bit different, especially regarding the stepped-up basis. But this calculation still helps home sellers avoid a big capital gains tax bill.
• Rental Properties or Second Homes: Tax deductions for selling a rental property don’t work the same as for your principal residence or a second vacation home. Depreciation recapture and other factors come into play. It gets more complicated if you rent the home and live there (as in a duplex property). Keep all documentation and see professional tax advice.
• Length of Ownership: How long you’ve owned and lived in the home affects what deductions and exclusions you qualify for.

Additionally, mortgage interest and closing costs can be deducted only if you opt for itemized deductions. Itemized deductions are specific deductions listed separately on tax returns and are beneficial only if they exceed the standard deduction, which the Tax Cuts and Jobs Act significantly increased.

Reporting the Home Sale on Your Tax Return

Reporting the sale on your tax return is a must when selling a home. You must fill out Form 8949, Sales and Other Dispositions of Capital Assets, and Schedule D, Capital Gains and Losses. These forms help you calculate your capital gains and report them accurately. 

Additionally, you’ll need to include this information on your Form 1040, U.S. Individual Income Tax Return. If you received a Form 1099-S, Proceeds From Real Estate Transactions, you’re required to report the sale, even if you don’t owe any taxes. Proper reporting ensures you stay on the IRS’s right side and avoid potential penalties.

Filing Requirements

To ensure you cover all your bases, file Form 1040 and attach Schedule D and Form 8949 when reporting your home sale. If you claim depreciation on the home, don’t forget to complete Form 4562, Depreciation and Amortization. And if you’re taking advantage of the capital gains tax exclusion, you’ll need to fill out Form 8828, Recapture of Federal Mortgage Subsidy. Accurate and thorough filing is key to maximizing your tax benefits and avoiding any hiccups with the IRS. As always, seek professional tax advice that can tailor the deductions to your specific circumstances.

Adjusted Basis of a Home

Have you lived in the home for a long time? Understanding the adjusted cost basis of your home is essential for calculating your capital gains. The adjusted basis is essentially the original cost of your home, plus any improvements you’ve made, minus any deductions you’ve taken. 

To calculate it, start with the original purchase price and add the cost of any significant improvements like a new roof, windows, or deck. Subtract deductions such as mortgage interest, property taxes, and home office expenses. This adjusted basis will help you determine your taxable gain when you sell your home.

Determining the Basis

Determining the cost basis of your home requires gathering all relevant documentation. This includes the original purchase agreement, settlement statements, and records of any improvements you’ve made. You’ll need to know the home’s fair market value at the time of purchase or inheritance. 

If you inherited the home, your basis is generally the fair market value at the time of the previous owner’s death. A home appraisal will set this amount. If you received the home through a divorce, your basis will typically be the same as it was for you and your ex-spouse at the time of the divorce. 

Accurate records ensure you can correctly calculate your adjusted basis and, ultimately, your capital gains.

Common Mistakes to Avoid

Claiming tax deductions can save you a pretty penny—if done correctly. Keep an eye out for these common mistakes:

• Not Keeping Receipts: Documentation is everything. If you can’t prove an expense, you can’t deduct it.
• Overestimating Deductions: You can’t deduct personal expenses like moving costs (unfortunately). Only expenses directly related to the sale qualify. Review all claims carefully to avoid penalties.
• Ignoring Professional Advice: First, taxes are complicated. Second, tax laws change. Consulting a tax professional is worth the investment if you’re unsure about a deduction or have a unique situation, like owning multiple properties. Every sale is unique.

Understanding various tax deductions when selling a home can help you retain more of your profits and avoid common mistakes.

How to Maximize Tax Deductions for Selling a Home

Want to squeeze every dollar out of your tax benefits? Here’s how to keep more money in your wallet:

Keep Records from Day 1 

Start tracking any home-related financial records long before you list your property. This includes improvements, repairs, and selling costs. Additionally, keep records of your outstanding mortgage debt, as it significantly impacts financial calculations during the sale of a home.

Plan Ahead 

Review your finances and potential tax liabilities if a sale is on the horizon. Some improvements might be worth tackling before listing your home, both for increasing value and potential deductions. A little prep goes a long way and could boost th selling price. 

Consult a Tax Expert

It’s always wise to get advice tailored to your specific situation. A tax advisor can pinpoint deductions you might not even know about—and verify you’re claiming them legally and correctly.

Saving on Your Taxes From Your Home Sale

Selling your home isn’t just about closing the deal—it’s also about not leaving money on the table when tax season rolls around. With a bit of planning and the proper deductions, you could save more than you expect on your federal return. Selling a house can be profitable in more ways than one—especially if the IRS owes you a little sweetener. When in doubt, a quick chat with a tax professional can make all the difference.

FAQs

• Can I deduct staging costs? Yes, the IRS guidelines have clarified that home staging is considered part of marketing your home to sell and, therefore, can be deductible. However, it has to be done by a professional home stager, and their cost is deducted from your home sale profit. Additionally, if the home is taken off the market before it sells or it does not sell, then the expense is not deductible.
• What if I sold at a loss? Unfortunately, losses on personal residences aren’t deductible. There are exceptions for rental or investment properties.
• Do I need to report the sale if I qualify for the exclusion? Sometimes, yes. Even if no tax is due or capital gains are excluded, the IRS may still require you to report the sale.
• Can I write off closing costs? Some closing costs, like real estate commissions, title fees, and legal fees, can reduce your capital gains, as they’re subtracted from the sale proceeds. That includes the buyer’s and seller’s real estate agent commission, transfer taxes, and document preparation fees.