Curious about tax deductions as a homeowner when selling your home? You’re not alone! You can indeed get deductions, including tax deductions when selling.
So, what exactly can you deduct when selling a house? This guide will explore what expenses are deductible when selling your home, helping you maximize your financial benefits.
How to Find What Expenses Are Deductible When Selling a Home
When you sell your home, you might be able to lower the taxes you pay by deducting some expenses. Here’s how to figure out which expenses you can deduct:
Know What Counts
Not all expenses can be deducted. Generally, expenses related to selling or improving your home might be deductible. These include real estate agent fees, advertising, legal, and home improvement expenses.
Keep Records
It’s important to keep records of all the expenses related to selling your home. It includes receipts, contracts, and other documents showing what you spent money on.
Know the Rules
Tax laws can be complex, so it’s a good idea to familiarize yourself with the rules. For example, there might be limits on how much you can deduct or certain conditions you must meet.
Claiming Deductions
You can claim these deductions on the appropriate forms when you file your taxes. Make sure to report your expenses accurately and keep all supporting documents in case the tax authorities audit you.
The Cost of Acquisition Expense
One of the primary deductible expenses when selling a home is the cost of acquisition, which includes tax deductions when selling. Cost of Acquisition is when a business acquires a new customer or buys something like equipment, and it spends money.
In accounting, it’s all about the money spent on getting an item. Like legal fees, surveyor fees, transfer taxes, title insurance, and other fees.
What Expenses Are Deductible When Selling a Home?
In addition to the acquisition cost, several other expenses are deductible when selling a home. These may include:
Real Estate Agent Commissions
If you use a real estate agent to help sell your home, their commission fees are deductible. Usually, this amounts to around 5-6% of the sale price. Keep records of the commission paid to your agent.
Advertising and Marketing Expenses
You can deduct costs related to advertising your home for sale. It includes expenses for online listings, brochures, and other promotional materials. Remember to keep receipts and documentation.
Home Staging Costs
If you hire a professional home stager to enhance the appeal of your property, those costs are deductible. Home staging expenses can include furniture rental, decor, and other improvements.
Inspection Fees
Fees paid for home inspections (such as pest inspections, structural assessments, or radon testing) are deductible. These inspections are often necessary before selling a home, potentially qualifying for a home inspection tax deduction.
Attorney Fees
Legal fees associated with the sale, including hiring an attorney to handle the closing process. These fees ensure a smooth transaction and protect your interests.
Closing Costs
You can deduct certain closing costs, which will impact your expenses around the closing date. These may include title fees, title insurance, recording fees, and transfer taxes. Usually, the closing disclosure outlines these details.
Home Improvement Expenses
These major repairs must be necessary and directly related to the sale. Home improvements such as a new roof or upgraded kitchen are not immediately deductible but can impact your capital gains tax.
Property Taxes
You can deduct property taxes paid while you own the home. Ensure you have accurate records of property tax payments and adhere to the property tax laws in Texas. These property tax deductions can significantly impact your overall tax liability when selling your home.
Mortgage Interest
While the tax laws have changed, mortgage interest is still deductible. However, the limit is now $750,000 of mortgage debt for new loans taken out after December 15, 2017.
The Incidental Costs of Acquisition Expense
When it comes to capital gains taxes (CGT) and the acquisition of property, it’s essential to consider not only the direct cost of purchasing the property but also the incidental costs that are directly related to the acquisition. These incidental costs are deductible under specific conditions.
According to the Taxation of Chargeable Gains Act 1992 (TCGA92), the definition explicitly outlines the incidental acquisition and disposal costs. You can only deduct any other spending if TCGA92 says you can.
Permissible incidental expenses consist of:
- Paying for professional services (e.g., surveyors, valuers, auctioneers, accountants, agents, or legal counsel) in the form of fees, commissions, or other compensation.
- Fees associated with transferring or transferring ownership (such as stamp duty or stamp duty land tax).
- Advertisement expenses incurred to locate buyers or sellers of real estate.
- Expenses that are justifiably incurred for valuation or allocation for calculating capital gains taxes.
- Spending money on anything other than purchasing or selling must be avoided.
For more detailed information, you can refer to the HMRC internal manual.
Enhancement Expenditure – What Is It?
Enhancement expenditure refers to the costs incurred by an individual or entity to increase the value of an asset, including expenses related to rental property. The nature of the asset at the time of its disposal directly reflects these expenses.
For instance, you can consider renovating a rental property, adding extensions, or upgrading facilities as enhancement expenditures. When calculating capital gains tax (CGT), they consider these costs as part of the gain or loss on the asset.
Expenditure That is Allowed for Income Tax Purposes
For income tax purposes, they allow specific expenditures related to property selling. Let’s break it down:
Repairs and Maintenance
You can usually deduct expenses for repairs and regular maintenance. It covers things like fixing small problems, replacing broken things, and keeping the property in good shape.
They deduct these expenses as part of keeping the property well-maintained.
Renovations and Improvements
Renovations and improvements aren’t just about fixing things. They make the property better and last longer. People usually spend a lot on them and consider them investments. }
For instance, adding an extension to the house, upgrading the kitchen or bathroom, or installing central heating. These improvements can impact your capital gains tax and are important to consider in the context of Texas living costs.
Unlike repairs, which simply fix things, improvements can increase the property’s overall value. It means they affect how much you gain or lose when you sell the property and calculate capital gains tax.
Abortive Costs
Abortive costs are expenses that pop up while trying to sell a property but don’t result in a successful sale. These costs can frustrate sellers, especially when the deal falls through. But here’s the bright side: You can often deduct abortive costs as business expenses.
Abortive costs include various expenses incurred during the selling process, like legal, marketing, and surveyor fees. Even if the sale doesn’t go through, these costs are still part of the overall transaction.
The good news is that sellers can offset these abortive costs against other taxable income, reducing their financial losses.
How to Calculate Deductible Costs from Selling a House
When you sell a house, knowing which deductible costs can affect how much money you make.
The cost basis is the starting point for calculating your profit. It includes the purchase price of the house and any closing costs you incurred when buying the property.
Selling Expenses
These are costs directly related to selling the house, which can impact your overall selling expenses. They can include:
- Transfer taxes
- Stamp taxes
- Sales commissions to a real estate agent for selling your property
- Fees for services that helped you sell the home without a broker
- Advertising costs
- Legal fees
- Mortgage points or other loan charges that would normally be the buyer’s responsibility
Capital Gains Tax
The capital gains rule might not seem like a deduction, but it’s still good news for you and can greatly affect your tax bill.
Capital gains are the money you make from home sales after covering expenses and any remaining mortgage. Tax authorities usually tax these profits as income.
But here’s the silver lining: if you’re single, you can exclude up to $250,000 of your gains from tax; if you’re married, it’s $500,000. The only catch is you must have lived in your home for at least two of the past five years.
If your profit exceeds the threshold set by the IRS, you may owe capital gains tax on the amount exceeding the limit.
Also, remember that your home’s sales price, not just its original price, determines capital gains. What’s the cost basis? Well, if you buy a home for $400,000 and spend $100,000 on improvements, your cost basis is $500,000, including any outstanding mortgage debt.
So, a married couple could sell the home for $500,000 (after living there for two years) without owing any capital gains tax.
Essentially, the higher your cost basis, the less tax you will pay when you sell, as it reduces your taxable gain.
Conclusion
Understanding the key expenses you can deduct when selling a house, such as repairs, improvements, abortive costs, and capital gains tax exclusion, can significantly affect your overall profit.
As you prepare to sell your home, be sure to keep track of all relevant expenses and consult with a tax professional to ensure you take full advantage of available deductions.
If you’re looking to sell your house in Haltom City, worry not, Four 19 Properties has you covered. We buy houses in Dallas and the adjacent area, including Haltom City. Contact us today to learn more about maximizing your profits.