If you sell your home the right way, you can expect to make a good profit from it. However, as in most types of income, the profit you get from selling your home also comes with equivalent taxes.
Fortunately, home sellers can ease their tax burden through a number of tax benefits.
- Capital gains tax exclusion
Capital gains refer to the profit you make from selling your home, which you need to declare as income in your tax returns. It’s calculated by taking the sale price of the home and deducting the cost basis, that is, what you paid to buy the home plus allowable costs related to selling and maintaining the property. A higher cost basis results in lower capital gains, and ultimately, lower taxes.
If you’re single, or married but filing separately, you don’t need to pay capital gains taxes for a profit of up to $250,000. If you’re married and filing jointly, your joint exception is up to $500,000.
To enjoy this benefit, however, you must pass the following qualifying tests:
- The Residence Test – A married couple or a single person must have lived in the property for at least two of the last five years before the sale.
- The Ownership Test – A single or married person must have owned the property for at least two of the last five years before the sale. For married couples filing jointly, at least one partner must pass the test.
You must pass both the Residence Test and the Ownership Test to qualify for a capital gains tax exclusion, but you can pass each test exclusive of the other – that is, you don’t need to own and live in the home at the same time. For example, you might have moved house before selling it, or you might have lived in it as a tenant before owning it. In these cases, you can pass the Ownership Test and Residence Test respectively.
- You did not apply the exclusion on another home that you sold in the last two years
- If you own two or more properties, you can only apply the exclusion on your primary home, which is the property you lived in the most in the tax year of the sale
Even if you don’t meet the Residence and Ownership Tests, you may still be eligible for a partial capital gains tax exclusion under certain circumstances, including:
- Death of an owner, co-owner, or spouse
- Separation or divorce
- Sudden unemployment
- Casualty loss from a natural or manmade disaster or terrorist act
- Birth of two or more children in the same pregnancy
- Service in the US Military
- Moving for work-related or health-related reasons
For more information, see this page.
Expenses are often unavoidable when selling a home. The good news is, you can add these expenses to your cost basis and reduce your taxable capital gains. Deductible expenses include:
- Realtor’s fees
- Advertising expenses
- Escrow fees
- Home inspection fees
- Legal fees
- Title insurance expenses
- Administrative costs
If you made capital improvements on the home to prepare it for sale, you can add these expenses to your cost basis to reduce your capital gains. According to the IRS, a capital improvement is any home improvement that adds market value to the property, enhances the property’s useful life, or makes it suitable for new uses.
Note that regular home repairs, such as painting the walls or replacing leaking faucets, do not count as capital improvements and cannot be included in your deductible expenses. Check the IRS guidelines for information on what improvements may be deducted.
In your tax declaration, you can deduct up to $10,000 of what you pay in property taxes, state and local income taxes, or sales tax. Only property taxes assessed by your local government and paid the year before may be included in the deduction.
Under the 2018 tax law, you can deduct the interest you paid for up to $750,000 of your home loan. When you sell your home, the mortgage interest you pay for the part of the year you still own the house may be deducted.
If you want to take advantage of mortgage interest and property tax benefits, you need to itemize these in your tax declaration instead of applying the new standard deduction under the Tax Cuts and Jobs Act of 2017. Review your options carefully to find out where you can get the most savings.
This benefit applies only to active members of the US Military. If you need to relocate permanently due to a military order, you can deduct your moving costs, including transportation, storage, and travel expenses.
Selling a home in the South Bay? If you’re asking, “how can I sell my home fast in California?”, we can provide the answers. Make your property stand out from other California real estate listings. Get in touch with The Stephen Haw Group at 310.503.9886 or leave a note here.