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You may recall that in 2018, the new Tax Cuts and Jobs Act changed some restrictions for homeowners. However, if you sold your house in 2021 or plan to sell in the future, your tax deductions can still save you a lot of money when you file your taxes with the IRS. Here is the complete list of all tax deductions as well as tax exemptions and other write-offs that are available to Sellers.
Selling Costs
These deductions are allowed if they are related to the sale of the home and you lived in the home for at least two of the five years before the sale. Another stipulation is that the home must be used as a primary dwelling rather than an investment property.
You can deduct all expenditures related with selling the home, such as legal fees, escrow fees, advertising charges, and real estate agent commissions. Just keep in mind that these expenses are deducted from the sale price of your house, which lowers your capital gains tax liability (more information on that below).
Home Improvements and Repairs
Yes you read that right! You can deduct all upgrading and repair costs if you renovated the property prior to going on market to make your property more valuable. However, these expenses need to have been completed within 90 days of the closing.
Property Taxes
If you paid your property taxes on time up until you sold your house, you can deduct up to $10,000 in property taxes paid for the previous year. Remember that sellers can only deduct interest on up to $750,000 of mortgage debt under the 2018 tax code. However, homeowners who received their mortgage before December 15, 2017 can continue to deduct up to the original amount of $1 million.
The mortgage interest and property taxes are itemized deductions, therefore to take the most advantage of this all your itemized deductions need to be greater than the new standard tax deduction. To complicate things, in 2021, those amounts increased to $12,550 for individuals, $18,800 for heads of household, and $25,100 for married couples filing jointly.
Mortgage Interest
You can deduct the interest on your mortgage for the portion of the year you owned your home, much like property taxes. Remember that sellers can only deduct interest on up to $750,000 of mortgage debt under the 2018 tax code. However, homeowners who received their mortgage before December 15, 2017, can continue to deduct up to the original $1 million.
The mortgage interest property taxes are itemized deductions. Therefore, to take the most advantage of this all your itemized deductions need to be greater than the new standard tax deduction.
Also note that in 2021, those amounts increased to $12,550 for individuals, $18,800 for heads of household, and $25,100 for married couples filing jointly.
Capital Gains Tax
Even though the capital gains rule is technically an exclusion and not a deduction, it is still something you can appreciate. Capital gains are the proceeds from the sale of your home after paying off your bills and any remaining mortgage debt, therefore these profits are taxed as income. The good news is that if you’re single, you can deduct up to $250,000 in capital gains from the sale, and if you’re married, you can deduct up to $500,000. The sole requirement is that you must have spent at least two of the previous five years in your current residence.
It is also important to keep in mind that capital gains are calculated based on the cost basis of your home and not the purchase price. The cost basis of your home is what you purchased the home for plus any investments on upgrades. For example, if you buy a house for $400,000 and invest $100,000 on upgrades, your cost base will be $500,000. After residing in the home for 2 years, a married couple may sell it for $500,000 and avoid paying capital gains taxes. The greater your cost basis, the lower your tax burden will be when you sell. Just keep a record of every home improvement receipt.
Lastly, be sure to keep an eye out for changes to the rules of this exemption in a future tax law.
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