Are Expenses When Selling a House Tax-Deductible?
Some expenses can add to your cost basis
Selling a home can complicated enough even before you consider all the tax implications. One of the greatest concerns is that you might find yourself liable for a capital gains tax depending on the nature of the property you’re selling. The Internal Revenue Code does offer an exclusion—you’re not taxed on this portion of your gain—but only if the property is your primary residence and it meets several rules.
That said, your gain might be more than the exclusion available to you, or the property you’re selling may not qualify. This can leave you wondering if any expenses associated with the sale are tax deductible so you can lessen your tax burden. You might have questions like:
- Does any touchup work you did just prior to listing the house come into play?
- Does painting count?
- Is there a state tax that has to be paid on the sale?
- What can be subtracted from the capital gain?
- What about selling the appliances?
Here's what you need to know before you plant that For Sale sign on your lawn.
Selling Your Main Home
You can include all sorts of selling expenses in the cost basis of your house. Increasing your adjusted cost basis decreases your capital gain because this is what's subtracted from the sales price to determine how much of a gain—or loss in some cases—you've realized. If you have less of a gain, you're more likely to fall within the exclusion limit, and if you're 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, and yes, this includes painting. It also includes all those fees you pay at closing, plus any improvements that prolong the useful life of the house. The IRS says that the following improvements will increase your cost basis in the house:
- Additions and other improvements that have a useful life of more than one year
- Special assessments for local improvements
- Amounts you spent after a casualty to restore damaged property.
The Adjusted Basis section of IRS Publication 523 offers a complete list of possible adjustments you can make to your cost basis.
About That Exclusion
Most people don’t have to worry about paying capital gains tax when selling 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. Your circumstances must pass the ownership test and the use test.
Both spouses—or a single taxpayer if he's not married—must have lived in the house for at least two of the last five years ending with the date of 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 home. If you’re married and filing a joint return, only one of you need pass the ownership test.
Now here's where it gets tricky and where the IRS is actually pretty generous: You don’t have to own the home and live in it simultaneously during the same two-year period, such as if you lived in the home as a tenant for a while before purchasing it.
Both ownership and use must occur during the five years immediately preceding your sale of the home, however. 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 co-owners—for example, you bought the property with someone else to whom you're not married—each owner 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 Capital 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 a year. The tax rate on long-term capital gains is either 0 percent or 15 percent, depending on what income tax bracket you fall into.
The zero rate may apply if your regular income falls within the 10 or 15 percent tax brackets. These taxpayers had to pay a 5-percent long-term capital gains tax rate prior to 2008, but that’s changed.
Most taxpayers pay capital gains tax at the 15-percent rate, however, so set aside 15 percent of your taxable gain for the IRS. Check on capital gains tax rates 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.
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. This type of gain is taxed at ordinary tax rates along with your other income. In other words, you'll effectively pay whatever tax bracket you're in after taking all available tax credits and deductions.
What About Separate Property?
So what happens with your home's refrigerator and other appliances? These are considered separate property 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 may 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 including them in the house sale.