If you’ve sold a home this year, then you can expect that come springtime, you’ll be facing a capital gains tax. As Homelight describes, “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,” you may qualify for a number of tax deductions that will “lower your capital gains tax obligation.”
At the start, Homelight covers two very common deduction-related questions many home sellers ask:
1. Do I have to report my home sale to the IRS?
There are a few things that impact this. You can qualify for a home sale tax exclusion of up to $250,000 if you’re single and double that if you’re married. “However, if your profit exceeds these amounts, you’ll need to pay taxes on the excess.”
In order to avoid these gains, you have to meet three requirements: 1) you were the property owner for two of the last five years; 2) the property was your primary residence for two of the last five years; and 3) you haven’t excluded gains from another property sale in the last two years.
2. Am I eligible for reduced gains exclusions?
As Homelight outlines, there are a few special circumstances that might qualify you for reduced or partial exclusion, such as “a change in employment,” so it’s worth looking into these opportunities before immediately kissing the exclusion gains goodbye.
In addition to the above, Homelight outlines some common tax deductions:
1. Home Improvement
It’s easy to think that any home improvement qualifies for a deduction, however Homelight says “improvements need to be made within 90 days of the closing if you want to deduct on those expenses.” If you’ve already sold the home, tabulate any major improvement expenses incurred in the 3 months before the closing date. If you’re in the process of selling, it’s a good time to consider making tax-deductible improvements and time them to occur within that 90-day window.
You should also consider that only capital improvements qualify, which the IRS states, “have to last for more than one year and add value to your home, prolong its life, or adapt it to new uses.”
2. Home Selling Expense
A seasoned real estate agent can give you advice and help you deduct their fees from your capital gains tax. As Nolo outlines, “administrative costs, advertising costs, escrow fees, inspection fees, legal fees and title insurance” are all qualified for deduction. In order to take advantage of this opportunity, you’ll want to gather all relevant invoices and receipts.
3. Moving Expenses
Many assume that moving expenses can’t be deducted, however you are eligible for a write-off if you’ve relocated for your job. If your new home is 50 miles closer to your workplace than your previous one, you can “deduct the mileage you drive (if applicable), moving company expenses, moving supplies and other travel expenses.”
4. Property Taxes
Before President Trump signed the Republican tax bill into law late last year, it was true that you could deduct all local and state taxes, however “according to Business Insider, there is now a limit to how much you can deduct.” This is capped at $10,000—for property taxes, state and local income tax, or sales tax—and “you can only deduct property taxes if they were assessed by your local government and paid the previous year.”
If you have already sold your home, you will want to itemize your deductions. If you’re in the process of selling, you’ll want to estimate what you paid in property taxes the previous year and try the following:
· Use a property tax calculator for an overview of your home’s value and state taxes.
· Pull payments made to the county assessor for the current year.
· Request Form 1098 from your mortgage lender, which will outline taxes paid through escrow.
Finally, Homelight shares a few quick tips to make tax season easier:
· Be organized! It’s easiest to keep all invoices, receipts and relevant documents in one place from year-to-year so you aren’t scrambling come April.
· Don’t forget you can deduct $250K if you’re single and $500K if you’re married.
· Keep in mind the 90-day window of home improvements.
· Be sure to work with an agent that can advise you through the process.
As always, you should consult directly with a tax advisor to be sure you understand all state and federal rules and regulations.