Home sellers have a lot to do. They need to have their property listed and marketed. Sellers must come up with an appropriate asking price for their home and figure out where they’re going to live next.
There are certain taxes associated with selling a home. The amount and types of taxes can vary according to the type of property, the amount that it was sold for and where the sellers. Home sellers may be able to deduct certain items related to the home sale from their taxes.
Selling a home in California isn’t always easy. Unexpected delays and problems can occur. There will be different people involved in the process along the way. You should still be able to sell your home with a little patience, persistence and a proper plan of action.
Here are a few items that may be tax deductible after your house has been sold:
- 1. Capital gains tax exclusion.
- 2. Deductions for expenses incurred while selling the home.
- 3. Tax deductions for home improvements.
- 4. Property tax deduction.
- 5. Tax deductions for moving expenses (only for active military personnel)
- 6. Mortgage interest deduction.
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1. Capital gains tax exclusion.
A home sale tax exclusion (also referred to as a capital gains tax exclusion) is available for many homeowners.
Home sellers can claim this exclusion if filing a joint tax return as a married couple for up to $500,000. Sellers filing as a single person can exclude up to $250,000 in capital gains taxes from the sale of their house.
To qualify for this exemption, you must have owned the home for at least two of the last five years and have lived in the house for at least two of those five years.
You don’t necessarily need to have lived in the home for the same two years that you owned it and vice versa.
In addition, you can’t omit any capital gains made from any other homes that you’ve sold within two years from when this particular house was sold.
If you don’t meet these qualifications, you may still be able to claim a partial or reduced exclusion.
Job changes and other special circumstances could reduce the amount of capital gains tax that you’d have to pay after your home has been sold.
This can vary from state to state, so check your local tax laws or consult with your accountant or tax attorney for more information.
2. Deductions for expenses incurred while selling the home.
Some costs that were paid to help sell your home can be deducted on your income taxes.
Title insurance, the home inspection, escrow fees and related advertising, legal and administrative expenses are included. Retain all associated receipts so that these items can be listed on your tax return.
Stamp taxes, transfer taxes and other related fees can be treated as home sale expenses. They can be subtracted from any profit that you made from the sale.
IRS Publication 523 has further details about the kinds of home selling expenses that are deductible.
3. Tax deductions for home improvements.
You can add certain capital improvements that were made to your home before it was sold to your cost basis. Capital improvements are defined by the Internal Revenue Service as anything that “adds market value to the home, prolongs its useful life or adapts it to new uses.”
Some common examples of capital improvements are new roofs and siding, upgrades to the heating and/or cooling system and additions such as a new garage, deck or patio.
A detailed list of capital improvements can be found in IRS Publication 523 on the ninth page. This may make it easier to tell if the change that was made was a necessary repair or a capital improvement.
Such items can be added to your cost basis as long as they don’t exceed the amount that can be excluded from capital gains taxes from the sale of your home.
4. Property tax deduction.
You can also deduct property taxes, to a certain extent. Property taxes can only be deducted up to $10,000. This includes both state taxes and local property or income taxes.
Property taxes can only be deducted if they were paid the prior year and were assessed by the respective government office in your city or town.
Property taxes are the seller’s responsibility up until the sale date. You may need to pay a prorated portion of the home’s property taxes before the home is sold.
Your state or local assessor’s office should be able to provide you with an updated amount. After that time, property taxes on the home will then be the home buyer’s concern.
5. Tax deductions for moving expenses (only for active military personnel)
Active military members can deduct travel from their former home to their new home, as well as storage and transportation costs for personal belongings and household items. Meals purchased while moving aren’t tax-deductible.
To qualify, you must be an active Armed Forces member. The relocation must be a permanent change because of a military order or other similar situation.
You can’t deduct moving expenses just because you’ve sold your current home and bought another house. Form 3093 can be used for any applicable moving expenses.
6. Mortgage interest deduction.
Some mortgage interest can be deducted from your income taxes. The 1098 form that you receive from your mortgage lender will list how much mortgage interest you paid for the year.
The IRS mandates that this information be mailed by borrowers to their lenders. You can deduct up to $750,000 from your loan.
You may also be able to deduct mortgage points. These are fees that some borrowers pay so that they can receive a mortgage loan. Loan origination fees and prepaid interest are some examples of mortgage points. Points can usually only be deducted in the year that they were paid.
These are some of the most common tax deductions when a home is sold. You may want to talk to your accountant or tax preparer if you have questions or concerns about these or any other possible deductions.
Tax codes can be confusing, so don’t be afraid to seek out an expert’s advice. Taxes aren’t always enjoyable, but they’re a necessary part of the home sale process. Once they’re done, you can reflect on the successful sale of your house and concentrate on the next phase of your active life.
📞 Have Questions? Ask The Chris Eckert Real Estate Team
Give The Chris Eckert Real Estate Team a call today at 650.627.3799 to learn more about local areas, discuss selling a house, or tour available homes for sale.