tax deductions when selling a home

It’s a great time to sell a home! With low housing inventory due to the pandemic and amazing mortgage rates available for buyers, there is plenty of demand for single-family homes in the Tampa area. Plus, houses are selling more quickly right now, and housing prices have gone up! Add to that the potential for tax deductions when selling a home, and the incentives just keep on stacking up. 

If you have sold a house this year or are thinking about listing your home, look into whether you may be eligible for these tax deductions. Keep in mind, I am not an accountant so if you would like further clarification, please seek help from a tax professional or dive into the IRS or Florida Department of Revenue websites. They have done a pretty good job helping to make it easy for us to understand what can often be a confusing topic.

Tax Deductions When Selling a Home: Selling Costs

Did you live in your home for 2 out of the last five years before you sold it? If so, you can deduct the costs associated with selling your home. This includes any legal fees you incurred, escrow fees, Realtor commissions, and any advertising costs you incurred. In Florida, you may only have escrow and Realtor fees. If you work with a skilled Tampa Realtor, she will handle the advertising for you so you will not have to worry about that. Also, Florida does not require that sellers have an attorney, so unless you want to hire representation, you will not incur any legal fees.

It is not as simple as just claiming these costs, though. To take advantage of this tax deduction, you will need to subtract your selling costs from the gross price of the home you sold. This will give you a new net total for the sale of your home. Use this figure to calculate your capital gains, which is the profit you receive from the sale of your home. 

I will be talking more about capital gains at the end of this post and how that number is used to determine how much you pay in taxes for your real estate income.

Repairs and Improvements

Sometimes, we need to fix things up a bit before listing a home. This can make it more attractive to buyers and even increase the value and selling price of your home—win, win!

Thankfully, this investment can pay off in more ways than one. In addition to beautifying your home and making it more functional, costs of repairs and improvements can be deducted from your capital gains if they were necessary to sell your home. That means that if you need to install a new roof, you can deduct those costs from your capital gains and pay less in taxes.

Property Taxes

You may remember the change a few years ago when the federal government changed property tax rules. They limited the amount of property taxes that could be deducted, capping it at $10,000.

This may or may not be enough to allow you to deduct your entire tax bill, but it is still better than not being able to deduct it at all!

Remember that you will need to calculate the amount of taxes you paid up to when you sold the property. 

During closing, the buyer may pay towards property taxes so you will need to check how much you actually put towards taxes before claiming them as a deduction.

Mortgage Interest

One of the best tax deductions for homeowners is mortgage interest. If you are selling a home, you will still be able to deduct your mortgage interest for the time you were in the home. Your lender should send you this information for your records once the calendar year ends. If you don’t receive it in a timely fashion, reach out to them or check out their online portal to see if you are able to print this information for yourself. 

Capital Gains Exclusion

During this post, I have primarily discussed deductions. However, there is a major exclusion that you need to know about if you are selling a home in Florida.

What’s the difference?

Well, a deduction is when you subtract an amount from your gross income to determine your taxable income. An exclusion is when you do not have to pay any tax on some of your income because of a certain situation. That is the case with Capital Gains.

The money you make from selling your home is called your capital gains. It’s not the selling price of your home, but the profit you receive from the sale. When you sell a home, you are not taxed on your capital gains until you meet a particular threshold. If you file as single, your exclusion is $250,000. That means that if your profit surpasses $250,000, you will need to pay taxes. If you file jointly, then your capital gains exclusion is $500,000. 

Remember, you can deduct your improvements and repairs and your selling costs before determining what your capital gains are. 

To take this exclusion, the property sold must have been your primary residence. Also, you can only take this exclusion once every two years, so if you have recently sold another home, check your tax records to determine whether you are eligible. It can be useful to plan the sale of your home so that the timing allows you to take this exclusion and reduce your tax bill!

Plan Ahead

We tend to think of April as tax time, however, when selling a home, it is important to consider the tax implications so that you are not surprised come April 15th. You will want to set aside any potential tax payments that will be due after you sell so that you do not accidentally dip into those funds. 

If you are considering selling a property, let’s talk. The Tampa real estate market is continuing to grow with plenty of buyers looking for a new place to call home.