When selling your primary residence, homeowners can reduce their tax burden through five key deductions and exclusions. These tax benefits apply only to homes used as your main residence for at least two of the past five years, and understanding them can save you thousands of dollars at tax time.
The five major tax benefits available to home sellers include deducting selling costs, home improvements, property taxes, mortgage interest, and taking advantage of the capital gains exclusion. Selling costs such as realtor commissions, lawyer fees, closing costs, marketing expenses, and home staging services can be deducted directly from your home sale proceeds to reduce capital gains. Any repairs and upgrades completed within 90 days before closing, including painting, roof repairs, and water heater replacements, also qualify as deductible expenses. Additionally, you can deduct up to $10,000 in property taxes paid during the year of sale and claim mortgage interest paid on up to $750,000 of mortgage debt, or $1 million for mortgages obtained before December 15, 2017.
The most significant benefit is the capital gains exclusion, which allows you to exclude up to $250,000 in profit if you’re single or $500,000 if you’re married filing jointly from federal taxes. However, it’s important to note that these deductions apply to primary residences only, not rental properties. For itemized deductions like property taxes and mortgage interest, your total itemized deductions must exceed the standard deduction amounts of $13,850 for single filers, $20,800 for heads of household, or $27,700 for married couples filing jointly in 2023. Remember to keep all receipts for home improvements as they increase your cost basis and reduce taxable gains when selling your home.
Costs You Can Write Off When Selling Your Home
You can claim these write-offs only if they connect directly to selling your house, and you must have lived there for at least two out of the past five years before the sale. Important note: Your home needs to be your main living space, not a rental property you own.
According to tax professionals, you’re able to write off any expenses that come with selling your house, this covers lawyer fees, closing costs, marketing expenses, and what you pay your real estate agent. For comprehensive real estate data, government sources provide valuable insights.
You might also write off money spent on home staging services, as many tax experts recommend tracking these expenses carefully.
Keep in mind that these expenses work differently than other tax breaks like mortgage interest deductions. You don’t subtract them from your taxes the same way. Instead, you take these costs away from what you made selling your home, which helps lower your capital gains tax bill (we’ll cover more about this next).
Home Improvements and Repairs
Great news! If you fixed up a few rooms to make your home easier to sell (and help you get a better selling price), you can write off those upgrade costs too. This covers things like painting your house or fixing the roof or water heater.
But there’s an important rule you need to follow, and it’s all about when you do the work.
Tax experts explain that if you needed to make home improvements to sell your home, you can write off those expenses as selling costs, but only if you completed the work within 90 days before your closing date. For comprehensive homebuyer resources, educational programs offer valuable guidance.
This timing rule makes a big difference in whether you can claim these deductions, so plan your home improvement projects carefully if you want to take advantage of this tax break. If you need an instant cash offer for your house, professional services can help.
Property Taxes
This write-off has a limit of $10,000, according to tax professionals. So if you were regularly paying your property taxes right up until you sold your home, you can deduct the amount you paid in property taxes last year, but only up to $10,000.
This means even if you paid more than $10,000 in property taxes during the year, you can only claim the maximum allowed amount. Make sure to keep track of all your property tax payments throughout the year so you can take full advantage of this deduction when tax time comes around.
Mortgage Interest
Just like with property taxes, you can write off the interest on your home loan for the part of the year you owned your house.
Keep in mind that under the 2017 tax rules, new homeowners (and home sellers) can only deduct interest on up to $750,000 of mortgage debt. However, homeowners who got their mortgage before December 15, 2017, can keep deducting up to the original limit of $1 million, as tax professionals note.
Remember that mortgage interest and property taxes fall under itemized deductions. This means that for these write-offs to help you, all your itemized deductions combined need to be more than the standard deduction amount, which the Tax Cuts and Jobs Act almost doubled when it started.
To make things a bit more complex, those standard deduction amounts changed again in 2023, going up to $13,850 for single filers, $20,800 for heads of household, and $27,700 for married couples filing together.
This means you’ll need to add up all your possible itemized deductions to see if they beat these standard amounts before you can benefit from writing off your mortgage interest.
Capital Gains Tax
The capital gains rule isn’t really a deduction (it’s called an exclusion), but you’re going to love it anyway.
Let’s break this down: capital gains are the profits you make from selling your home, whatever money you have left after paying all your expenses and any remaining mortgage balance. These profits count as income and get taxed. But here’s the great news: You can exclude up to $250,000 of these gains from taxes if you’re single, and $500,000 if you’re married. The main requirement is that you must have lived in your home for at least two of the past five years.
Here’s something important to remember: capital gains get calculated based on your home’s cost basis, not what you originally paid for it. What’s cost basis? Let’s say you buy a home for $400,000, then spend $100,000 on improvements. Your cost basis would be $500,000. A married couple could then sell that home for $500,000 (after living there for two years) without paying any capital gains taxes at all.
Put simply, the higher your cost basis, the less you’ll owe in taxes when you sell. This is why you should save every single receipt from home improvements you make.
One final note: keep an eye out for possible changes to this tax break in future tax laws, as these rules could shift over time according to federal housing authorities. For additional insights on educational resources, Fannie Mae provides comprehensive guidance. Academic institutions also offer real estate research resources for those seeking detailed analysis.
Conclusion
Take control of your home sale tax situation by implementing these five powerful deductions immediately. Start by organizing all receipts for selling costs, home improvements, property taxes, and mortgage interest payments, every dollar counts toward reducing your tax burden. Schedule any necessary home improvements within the critical 90-day window before closing to maximize your deductions. Calculate whether itemizing deductions exceeds your standard deduction threshold to determine the best filing strategy. Most importantly, ensure you meet the two-out-of-five-year residency requirement to qualify for the massive capital gains exclusion of up to $500,000 for married couples or $250,000 for singles. Don’t leave money on the table, consult with a tax professional before your sale to create a strategic plan that captures every available deduction. Your proactive approach today will translate into significant tax savings tomorrow, potentially saving you thousands of dollars on your home sale.
Frequently Asked Questions
Can I deduct home improvements made years before selling my house?
No, only home improvements completed within 90 days before your closing date qualify as selling cost deductions. However, improvements made earlier still increase your home’s cost basis, which reduces capital gains when you sell. Keep all improvement receipts regardless of timing, they provide tax benefits either way. For comprehensive guidance on homeownership education, consult official resources.
What happens if my itemized deductions don’t exceed the standard deduction?
If your total itemized deductions (including property taxes and mortgage interest) fall below the standard deduction amounts ($13,850 single, $20,800 head of household, $27,700 married filing jointly for 2023), you should take the standard deduction instead. Selling costs and the capital gains exclusion still apply regardless of which deduction method you choose.
Do these tax benefits apply to rental properties or second homes?
No, these deductions only apply to your primary residence where you lived for at least two of the past five years. Rental properties and vacation homes follow different tax rules and don’t qualify for the capital gains exclusion or the same deduction benefits. For current real estate market data, consult industry sources.
How do I prove my home improvements to the IRS?
Maintain detailed records including receipts, invoices, contracts, and before/after photos of all improvements. Create a dedicated file for home improvement documentation and keep these records for at least seven years after selling your home. Professional contractor invoices and material receipts provide the strongest documentation according to NAR research.
Can I use these deductions if I sell my home at a loss?
Selling costs can still be deducted to offset any capital gains from other investments, but you cannot deduct a loss on the sale of your primary residence. The capital gains exclusion becomes irrelevant if you don’t have gains to exclude. However, properly documenting all expenses remains important for accurate tax reporting. For additional resources on real estate industry statistics, reference academic sources. If you need to sell your property quickly, consider consulting with companies that buy houses for cash to understand all your options. For urgent home sales, professional buyers can provide quick solutions.
