Are Expenses When Selling a House Tax-Deductible?
Some expenses can add to your cost basis and reduce capital gains
The Internal Revenue Code offers an exclusion from capital gains tax when you sell your primary residence—you’re not taxed on this portion of any gain or profit that you realize—but only if you meet several rules.
That said, your gain might be more than the exclusion or the property you might not qualify. This can leave you wondering what—if any—expenses associated with the sale are tax deductible.
Your Cost Basis and Capital Gains Tax
You can include all sorts of selling expenses in the cost basis of your home. Your cost basis is what's subtracted from the sales price to determine how much of a gain—or in some cases a loss—you've realized.
Adding expenses increases your cost basis, and a higher cost basis decreases your capital gain. If you have less of a gain, you're more likely to fall within the exclusion limit, and if your gain isn't excluded, you'll pay taxes on less. It's a good deal all the way around.
You can deduct any reasonable and customary expenses to get your house sold, including all those fees you pay at closing plus any improvements that prolong the useful life of the property.
Most costs associated with preparing the property for sale and selling it can qualify as a deduction. The Adjusted Basis section of IRS Publication 523 offers a complete list of possible adjustments you can make to your cost basis by adding these costs. Keep all your receipts so you don't overlook anything.
The Home Sales Exclusion From Capital Gains Tax
Most people don’t have to worry about paying capital gains tax when they sell their homes because married couples can exclude up to $500,000 of gain and single taxpayers can exclude up to $250,000. Of course, as with most things tax-related, there are some qualifying rules.
Both spouses—or a single taxpayer if he's not married—must have lived in the home for at least two of the last five years preceding the sale. You must own the property for at least two of those five years as well. The IRS figures this makes it your main residence.
If you’re married and filing a joint return, only one of you must pass the ownership test.
You don’t have to own the home and live in it simultaneously. You might have lived in the home as a tenant for a while before purchasing it. Nor do you have to be living there at the time you sell it. Your two-year residency period can occur at any time as long as it’s within that five-year period.
If you have a co-owner—for example, you bought the property with someone else to whom you're not married—each of you can take his or her exclusion of $250,000.
There’s one last catch: You—or you or your spouse or co-owner—cannot have claimed an exclusion for a gain from the sale of another home within the two years immediately preceding the house sale.
What Is Taxed As a Long-Term Gain?
Any gain you realize over the exclusion amount will be taxed as a long-term capital gain if you owned the house for more than one year. The tax rate on long-term capital gains is either 0 percent, 15 percent, or 20 percent depending on what income tax bracket you fall into.
Most taxpayers pay capital gains tax at the 15-percent rate, so you might want to set aside 15 percent of your taxable gain for the IRS if you don't qualify for the exclusion of if your gain is greater than the exclusion.
The Effect of State Taxes
Check on the capital gains tax rate in your state as well. Any state taxes that you must pay on the sale of the house will not reduce your capital gain, but you can at least include them along with other state income taxes you paid on Schedule A if you itemize your deductions.
Your deduction is limited to $10,000, however, beginning in 2018, and this ceiling applies to income taxes paid to your state and local taxes as well. You can only deduct $10,000 of the total when you add them all together.
If you owned the property for less than a year, it's a short-term capital gain and it won't qualify for the exclusion because you don't meet the residency or ownership rules. This type of gain is taxed at ordinary tax rates along with your other income. In other words, you'll effectively pay the percentage of whatever tax bracket you're in after taking all available tax credits and deductions.
What About Separate Property?
What happens with your home's refrigerator and all those other appliances? These are considered separate from your house. If you sell them separately, it’s very likely that you’ll do so for less than what you paid for them. Unfortunately, if you take a loss—and you probably will—this loss is not tax-deductible.
You can still recoup some money by selling them, however. If the appliances are fairly new, you should be able to dig up a receipt for their purchase prices. If the appliances are older, they might not have much value, but you can get an idea of the fair market values by browsing through local classified advertisements, eBay or craigslist for similar appliances.
Of course, the proceeds represent taxable income, too, so you might just want to save yourself some aggravation by just including them in the house sale.