Tax Season Already? Here are the 5 Expenses Home Sellers Can Write Off

By Amanda Hanna | HomeLight

Your house is likely in one of two camps right now: sold or trying to get sold. And every spring, like clockwork, you can be sure that Uncle Sam comes knocking, magnifying glass in hand, to determine whether he can share your gains. As a home seller (and thereby an investor), there are ways you can minimize this capital gains tax — a type of tax on “profits an investor realizes when he sells a capital asset for a price that is higher than the purchase price.”

In this case, your house is considered a capital asset and, depending on how much you sell it for and how long you’ve owned and lived in it, there are 5 tax deductions that could apply to you in order to lower your capital gains tax obligation.

When you sell a house, there’s a fine line between what you can deduct and what you cannot. There’s also a ton of confusing information on the internet and, unless you’re a seasoned tax professional, the mystifying tax lingo doesn’t make it any easier to understand.

Lucky for you, we’re here to help you separate fact from fiction, navigate the pesky tax slog and filter the deductions that best apply to your situation come April.

First, let’s tackle the 2 most common questions homeowners ask about deductions:

Do you even need to report the sale of your home to the IRS?
Well, it comes down to a few key factors:

Are you single or married?

According to Nolo, most people “who sell their personal residences qualify for a home sale tax exclusion” — which means you won’t need to pay taxes on gains of $250,000 for single homeowners and $500,000 for married homeowners filing jointly. However, if your profit exceeds these amounts, you’ll need to pay taxes on the excess.

Is this house your primary residence? How long have you owned and lived in it?

TaxAct explains that to exclude the above gains ($250K and $500K, respectively) from your tax obligation, you need to meet the following 3 qualifications:

  1. You owned the property for at least two of the last five years.

  2. You lived in the property for at least two of the last five years.

  3. You did not exclude the gain from the sale of another house within two years from the sale of this house.

Tip: Did you sell your house for under $250K, if you’re single, or under $500K, if you’re married, — and did you live in it for at least two of the five years before you sold it? If both are true, the IRS doesn’t want to hear about it, according to U.S. Code Section 121.

Are you eligible for a reduced exclusion from your gain?

Let’s say you haven’t had the opportunity to own or live in the house for two of the last five years before the date of sale. According to NerdWallet, you might still be able to take advantage of a reduced or partial exclusion due to special circumstances “such as a change in employment, even if you haven’t met the ownership/residency requirements.”

With that in mind, here are the top deductions — caveats and requirements in tow — that sellers can use to minimize their capital gains tax obligation when tax season rolls around.

Now, let’s go through the various types of real estate tax deductions and debunk some of the most common myths:

Home Improvement Tax Deductions

Myth 1: “I can deduct the costs of all my home improvements.”

Fact: According to Realtor Magazine, improvements need to be made within 90 days of the closing if you want to deduct those expenses.

How to Get This Tax Deduction:

Have you already sold your house?

Determine the closing date and reflect on the last three months. Did you pay for significant changes? If so, collect the receipts for proof when you file your taxes.

Are you currently selling your house?

If you’re working with a top real estate agent to sell your house, they can be a helpful resource for determining both

1) the home improvements that need to take place

2) the ideal timing so that changes are made within 90 days of closing.

Top agents who are experts in their markets tend to have a better grasp on the speed to which your home will sell, which will help you take advantage of as many home improvement deductions as possible.

Myth 2: “I can deduct any home improvement expense.”

Fact: While you may not agree, as even the tiniest improvements can put a dent in your wallet, not all the work you do on your house is tax deductible to the IRS.

For instance, repairs on their own are ineligible to write off because the IRS describes them “as things that are done to maintain a home’s good condition without adding value or prolonging its life” — like replacing a broken window pane.

Instead, go for capital improvements which, according to the IRS, “have to last for more than one year and add value to your home, prolong its life, or adapt it to new uses” — like putting in a whole new window.

The exception?

If your house was damaged in a natural disaster (think California fires or Florida hurricanes), then repairs that “are done as part of an extensive remodeling or restoration of your home” count as deductible-worthy improvements.

How to Get This Tax Deduction:

Have you already sold your house?

It can sometimes be difficult to determine if the improvement you made before closing was a capital improvement or just a repair.

Thankfully, page 9 of IRS Publication 523 provides specific examples of improvements that actually add to the value of the house and, thus, can be deducted from your tax obligation.

Review the list and consider if any of them apply to you.

Are you currently selling your house?

As mentioned earlier, a top real estate agent can help you decide what’s worth your time and money to change or update with the house.

Again, be sure that whatever improvements you make are done within 90 days of closing — granted you want to capitalize on tax benefits.

Home Selling Expense Tax Deductions

Myth: “I can’t deduct my real estate agent’s commission fees.”

Fact: Yet another reason why it’s worth it to hire a top real estate agent!

Not only can they guide you through the daunting process, help sell your house faster and for more money and provide you with advice you can’t get anywhere else, — because your best interest is their best interest — but you can deduct their fees from your capital gains tax obligation, too.

According to Nolo, you can also deduct the following costs when selling your house:

  • administrative costs

  • advertising costs

  • escrow fees

  • inspection fees

  • legal fees

  • title insurance

How to Get This Tax Deduction:

Have you already sold your house?

Collect all receipts and invoices that pertain to your individual selling costs — including services you’ve hired for — when you closed on the house, and then file them under separate sections so you’re organized come tax season.

Are you currently selling your house?

While you may not necessarily incur costs from all of the above as you sell your home — with or without the help of a top agent — keep tabs on your spending so you’re not scrambling for numbers in the spring.

Tip: According to the IRS Publication 523, if you, as the seller, paid for “transfer taxes, stamp taxes, or other taxes, fees, and charges when you sold your home” you can treat these as selling expenses and deduct them.

Tax Deductions for Moving Expenses

Myth: “I can’t deduct moving expenses.”

Fact: Turns out you can — but only if you’re relocating for work.

There’s another stipulation: Home Guides by SFGate explains that to “qualify to write off your moving expenses, your new home must be at least 50 miles closer to your new job than your old home was.”

If that sounds like you, you can deduct the mileage you drive (if applicable), moving company expenses, moving supplies and other travel expenses.

How to Get This Tax Deduction:

Have you already sold your house?

Whether you’re transitioning out of your old house or already settled in your new one, try to make a list of the moving expenses applicable to you — before you start at that new job!

Are you currently selling your house?

If you’re selling your house for work-related reasons — and that’s a big if — it’s never too early to consider how you’ll move yourself, your family and your belongings.

  • Are you close enough to the new job that you can drive?

  • Do you need to travel by plane?

  • Do you need to hire a moving company?

  • Do you need moving supplies?

If you answer yes to any of those questions, collect all the receipts.

Tip: Keep the offer letter from your new job on hand when tax season comes around, too. Just in case.

Property Tax Deductions

Myth: “I can deduct all the taxes I paid to local and state governments, including income, property and sales taxes.”

Fact: This used to be true — before Congress passed, and President Donald Trump signed into law, the Republican tax bill in December of 2017.

According to Business Insider, there is now a limit to how much you can deduct: “…the new law caps the deduction at $10,000, either for property taxes, state and local income taxes or sales tax” — and you can only deduct property taxes if they were assessed by your local government and paid the previous year.

As for when you can officially pass the property tax bill baton? The date the buyer purchases the property — which, TurboTax explains, “is typically listed on the settlement statement you get at closing.”

In other words, the buyer is responsible for taxes on and after the sale date.

How to Get This Tax Deduction:

Have you already sold your house?

To make sure you can write off your property taxes, you need to itemize your deductions. While it’s best to work with a tax professional who can crunch the numbers accurately and assess your situation better than we can, it might also be a good idea to review Schedule A (Form 1040) from the IRS to get acquainted with the details of how itemizing real estate taxes work.

Now that you’ve sold the property, make sure to bring your settlement statement to your tax appointment so you have official documentation for the date the buyer took over the house and property taxes.

Are you currently selling your house?

If you have the time, determine an estimate for how much you paid in property taxes last year and how much you’ve paid this year — wherever you’re at in the process of selling your house.

This way, you clearly understand your property tax responsibility and the buyer’s liability come closing time.

So, how do you figure out how much you’ve paid?

You can try these 3 options:

  1. Use SmartAsset’s property tax calculator for an overview of your state taxes and home value.

  2. Access your current year payments online from the county assessor to which you pay property taxes

  3. Retrieve Form 1098 from your mortgage lender — which “…lists any real estate taxes your lender paid on your behalf through an escrow account,” according to Zacks Investment Research.

Home Mortgage Points Tax Deduction

Myth: “If I have a home mortgage, I can’t deduct mortgage interest.”

Fact: According to the IRS, mortgage points are technically “prepaid interest and may be deductible as home mortgage interest, if you itemize deductions on Form 1040, Schedule A.”

However, keep in mind there are 9 requirements you must fall under to “deduct the points in full in the year you pay them,” which you can find on this page.

Still, as a homeowner looking to sell your house, it’s in your best interest to work with a tax professional who can both guide you through the itemizations form and confirm if you can write off mortgage points, given the requirements.

How to Get This Tax Deduction:

Have you already sold your house?

Whether you sold you house at the beginning, middle or end of the year, we suggest you get your documents in order sooner rather than later so that you’re not forgetting about charges you incurred that could be written off.

For the mortgage points deduction, consider printing itemization Form 1040 ahead of time and reviewing it. Then, once tax season rolls around, you’ll know what’s expected.

Are you currently selling your house?

No matter how long your house has been on the market, if you have a mortgage on the house you’re selling — and it’s your main house — there’s a good chance you can deduct your mortgage points from your taxes.

At this point, while your full attention should be on selling your home quickly and for as much money as possible — preferably with the help of an experienced agent — it doesn’t hurt to start reviewing the mortgage interest charges you’ve incurred since the last time you filed.

Here's the Bottom Line on Tax Deductions When Selling Your House

There’s a lot of information here. We know. But as you walk away, we want to leave you with a few parting points — whether you’re currently selling your house or you’ve already sold it and passed the baton to its new rightful owner:

When in doubt, we encourage sellers — and potential sellers — to consult with a tax advisor as deduction rules can vary from state-to-state, year-to-year and even administration-to-administration.

This way, you’ll feel more confident about maximizing the deductions available to you — given your marital status, your ownership and living situation and the dollar amount for which you sell your house.