Selling a home can be a lucrative endeavor, but it’s crucial to be aware of the potential tax implications, particularly capital gains tax. This tax is levied on the profit you make from the sale of an asset, including real estate. However, there are several strategies you can employ to minimize your capital gains tax liability, one of which is deducting eligible expenses from the sale proceeds.
Understanding Capital Gains Tax
Capital gains tax is calculated as the difference between the sale price of an asset and its adjusted cost basis, which includes the original purchase price plus any improvements made to the property. The tax rate for capital gains depends on your income and filing status.
Eligible Expenses for Deduction
The Internal Revenue Service (IRS) allows homeowners to deduct certain expenses from the sale proceeds of their homes to reduce their taxable capital gains. These expenses fall into two main categories:
1. Selling Expenses:
- Advertising costs
- Appraisal fees
- Attorney fees
- Closing fees
- Document preparation fees
- Escrow fees
- Mortgage satisfaction fees
- Notary fees
- Points paid by the seller to obtain financing for the buyer
- Real estate broker’s commission
- Recording fees (if paid by the seller)
- Costs of removing title clouds
- Settlement fees
- Title search fees
- Transfer or stamp taxes charged by city, county, or state governments
2. Home Improvements:
- Adding a new bedroom, bathroom, or garage
- Installing new insulation, pipes, or duct work
- Replacing walls and floors
- Installing a new or upgraded heating and air conditioning system
- Installing extensive new landscaping, such as new lawns
- Installing new fences, retaining walls, porches, patios, or decks
- Replacing driveways and walkways
- Installing a new roof, windows, or doors
- Installing new wall-to-wall carpeting
- Installing new built-in appliances
- Major repairs if they’re necessary to restore your home after a disaster such as a fallen tree or fire
Exclusions from Deductions
It’s important to note that not all expenses related to selling a home are deductible. Expenses that physically affect the property, even if they enhance its saleability, cannot be deducted. These include:
- Cleaning carpets
- Repainting (unless it’s part of a larger remodeling or improvement project)
- Hiring a gardener to improve the lawn’s appearance
Tracking Expenses
To maximize your deductions, it’s essential to keep accurate records of all expenses incurred during the preparation and sale of your home. This includes receipts, invoices, and bank statements. Your real estate agent can also provide an itemized list of expenses they arranged on your behalf.
By understanding the eligible expenses that can be deducted from capital gains tax on home sales, you can significantly reduce your tax liability. Carefully tracking your expenses and consulting with a tax professional can help you optimize your deductions and minimize your tax burden.
What Expenses Can Be Deducted From Capital Gains Tax? – CountyOffice.org
FAQ
Can you deduct home repairs from capital gains?
What deductions offset capital gains?
Can you deduct transaction fees from capital gains?
Are capital gains tax deductible?
The capital gains rule isn’t technically a deduction (it’s an exclusion), but you’re still going to like it. As a reminder, capital gains are your profits from selling your home—whatever cash is left after paying off your expenses, plus any outstanding mortgage debt. And yes, these profits are taxed as income.
Do you pay capital gains tax on a home sale?
Their home’s tax basis (original cost plus improvements) is $200,000. They subtract this from the amount realized to determine their gain from the sale. Thus, their gain is $520,000. This is $20,000 more than the applicable $500,000 home sale tax exclusion. Thus, the couple must pay capital gains tax on $20,000 of their profit.
How are capital gains taxed?
Net capital gains from selling collectibles (such as coins or art) are taxed at a maximum 28% rate. The portion of any unrecaptured section 1250 gain from selling section 1250 real property is taxed at a maximum 25% rate. Note: Net short-term capital gains are subject to taxation as ordinary income at graduated tax rates.
Do home staging costs reduce capital gains taxes?
The basic answer is “yes.” Home staging costs that you, as the homeowner, incur in order to sell your home will reduce any capital gains taxes you’ll have to pay on profit earned from the sale. Such expenses can reduce capital gains taxes in two different ways. First, most home staging costs qualify as advertising expenses.