What Expenses Are Tax Deductible When Selling A House

The Internal Revenue Service always wants some of your money. This is true whether you're profiting off the sale of an investment, or the sale of a home, in which you will be subject to a real estate capital gains tax. 

There are, however, some exclusions from the capital gains tax that can reduce or eliminate the requirement to pay the IRS entirely. Even if you are making a substantial profit on the property, there are still several real estate tax deductions that could come in handy. In fact, these tax deductions are one of the arguments for why owning a home can be better than renting.

Working Out the Cost Basis

The first thing you need to do is work out if you have made money on the sale of your home. To do this, you simply take the purchase price and add on the closing costs. For example, if you purchased the house for $200,000 with closing expenses of $5,000; this means your cost basis is $205,000. If you were to sell this house for $300,000, you will have made a profit of $95,000.

Closing fees which you can deduct include:

• Title fees
• Installing utility services
• Survey fees
• Stamp taxes
• Legal fees

There are some closing costs which aren't allowed to be included in your cost basis:

• Fire insurance
• Rent or utilities related to occupancy before closing
• Charges related to getting a mortgage - there are, however, tax deductions when buying a home pertaining to the mortgage that can be taken for the tax year of your purchase.

Tax Deductions From Selling a House

However, any costs associated with adding value to the home can be added to the cost basis to reduce the profit. If you spent $10,000 on home improvements, these count as tax deductions when selling a house. In the example above, your profit, which could be subject to capital gains, would be reduced to $85,000 ($95,000-$10,000).

Improvements are considered anything that increases the value of the house, extends its life, or adds new uses. This will include things like:

• Adding rooms
• Constructing decking
• Landscaping
• Fencing
• New heating system
• Adding water filtration
• Increasing insulation
• Adding solar panels

If you have had to spend money to repair damage to the house, this can be included as well. What you can't include is maintenance costs, however. Any repairs or maintenance which are necessary to keep the home in good condition, which doesn't add to the value or extend the life of the property, can't be counted as a tax deduction. Things like painting the house would be considered maintenance rather than an improvement.

You also can't include any improvements which aren't still part of the house at the time of sale. Improvements that have a life expectancy of less than a year shouldn't be added to the deductions, either.

Many expenses linked directly to the sale can also count as tax deductions. These include:

• Real Estate sales commissions
• Legal fees
• Advertising costs
• Loan charges which should be the buyer's responsibility

Home Sale Exclusions

The IRS allows for exclusions that could remove your capital gains taxation completely. Single taxpayers are allowed to make gains of up to $250,000 and a married couple $500,000. If you don't make a profit above those figures after real estate tax deductions, you will avoid paying capital gains tax. The home sale exclusion is a significant homeownership advantage.

Qualifying for the Exclusion

In order to qualify for the exclusion, you need to have been resident in the house for at least two years out of the last five. They don't need to be continuous periods, and you don't need to live there at the time of sale, but you must be able to pass their ownership test. This test includes things like having your address registered on your driver's license, on tax returns, and voter registration card.

If you pass the ownership test, you should be able to benefit from an exclusion as long as you haven't made a previous claim in the last two years.

The Cost of Capital Gains

If you do find that you need to pay capital gains tax, it is linked to your earnings. There are three long-term capital gains brackets; 0%, 15%, and 20%. Based on 2019 tax guidelines, you will qualify for the 15% rate on income above $39,375 for single payers and $78,750 for a married couple.

Deducting State Taxes

There is up to $10,000 worth of state and local tax deductions available. This won't affect your capital gains, but you can add it to your Schedule A itemized deductions.

Final Thoughts

When selling or buying a home, it is essential to have a solid grasp of the current tax laws. By not having at least a basic understanding of the tax code, you could be leaving money on the table, potentially costing yourself thousands of dollars.

It is vital that whenever you have a tax question to speak to a qualified tax professional or accountant. It is better to be safe than sorry when it comes to tax deductions.

Other Benzinga Real Estate Articles Worth a Look

• What is escrow - get a detailed overview of what an escrow account is in a real estate transaction. Learn how a buyer's earnest money deposit keeps them accountable to a home seller.
• Why mortgage preapproval is critical - understand that there is a difference between mortgage pre-approval vs. prequalification. They are not the same.