Selling your home is a big decision, but when timed right it can bring a big return. But as with any large windfall of cash, you can be sure the IRS wants to know about it. Fortunately, there are tax deductions you can claim on a home sale. Like all deductions, you may or may not be able to take advantage of all of them. This filing season though there’s a bit of confusion as there’s a new tax code in force, the Tax Cuts, and Jobs Act. Rest assured that those deductions still exist, but if you don’t claim them you don’t get them. If you sold your home recently, or are planning to, here are five tax deductions you won’t want to miss.
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It costs money to sell a home, even if you go the FSBO route (which is not recommended, by the way, if you want to maximize your profits). There are legal fees, advertising costs, real estate agent commissions, staging costs, and so on. Fortunately, all these expenses can still be deducted under the new law. However, these deductions do come with a few caveats. The home must have been your principal residence, and you must have lived there for at least two out of the five years preceding the sale. Also, keep in mind that these deductions are not made the same as others. You only have to subtract the sales expenses from the sales price of your home.
Home Improvements and Repairs
You can breathe a sigh of relief; the new code left this one intact. If you made any renovations or repairs to raise the market value of your home, then you can deduct those expenses. So you needn’t worry about the extra costs of making some repairs if anything comes up in the home inspection. Just remember, there is a slight catch to this tax deduction. Any repairs or improvements must have been made within 90 days of closing to be tax deductible. That’s cutting it close for any major renovations, so you’ll want to plan for this accordingly.
The new tax code has retained this, but there’s now a limit on how much you can deduct. You can now only deduct up to $10,000 so if you paid more then too bad. If doing your taxes has opened your eyes to how much you’re paying in property taxes, then look for ways to reduce then.
Your mortgage interest is another tax deduction you can make. However, the rules have changed slightly under the new tax code. You can now only deduct the interest on up to $750,000 of mortgage debt. However, homeowners who got their mortgage before Dec. 15, 2017 can continue deducting up to the original $1,000,000 amount. If you’re going to deduct your mortgage interest and property taxes, then keep in mind that these are itemized deductions. That means that the only way to take advantage of it is if your itemized deductions are greater than the new standard deduction. The Tax Cuts and Jobs Act almost doubled that to $12,200 for individuals, $18,350 of heads of household, and $24,400 for married couples that are filing jointly.
Capital Gains Tax
The biggest financial gain is not a deduction but an exclusion. As with every investment that you sell, any profits are considered capital gains which means they can be taxed at a certain rate. The good news is that with a home sale you can exclude up to $250,000 of the capital gains if you are single and $500,000 if married. However, to take advantage of this, you need to meet a few requirements. You must have lived in the home for two out of five years, and you cannot have used exclusion in the past two years. Also, married couples must file jointly. These rules might change in the future so take advantage of them while you can.