• Are home selling costs deductible?
If you sell your home and realize a taxable gain even after the exclusion, you can reduce your gain with selling costs.
Your gain is defined as your home’s selling price, minus deductible closing costs, minus your basis. The basis is the original purchase price of the home, plus improvements, less any depreciation.
Real estate broker’s commissions, title insurance, legal fees, administrative costs, and inspection fees are all considered to be selling costs.
• Are seller-paid points deductible?
For the buyer, yes, but not the seller – even though the seller pays them. Since January 1, 1991, homebuyers have been able to deduct points paid by the seller whereas, previously, they could only deduct the actual points they paid on the home loans themselves.
• Can I deduct a loss on the sale of my home?
No. A loss from the sale of personal–use property, such as a home or car, is not deductible. They are considered nondeductible personal losses, and you cannot reduce your tax bill by deducting them the way you would deduct stock and investment losses on your tax returns.
• Can I deduct improvements made to my home?
Yes, but only after you have sold it because improvements add to the basis of your home. Remember your gain is defined as your home’s selling price, minus deductible closing costs, minus your basis. The basis is the original purchase price of the home, plus improvements, less any depreciation.
The IRS defines improvements as those items that “add to the value of your home, prolong its useful life, or adapt it to new uses” – such as putting in new plumbing or wiring or adding another bathroom.
• How do capital gains work when you sell your home?
If you sell your primary residence, you may be able to exclude up to $250,000 of gain – $500,000 for married couples – from your federal tax return. To claim the exclusion, the IRS says your home must have been owned by you and used as your main home for a period of at least two out of the five years prior to its sale.
You also must not have excluded gain on another home sold during the two years before the current sale. However, special rules apply for members of the armed, uniformed and foreign services and their families in calculating the 5-year period.
If you do not meet the ownership and use tests, you may use a reduced maximum exclusion amount. But only if you sold your home due to health, a change in place of employment, or unforeseen circumstances.
If you can exclude all the gain from the sale of your home, you do not report it on your federal tax return. If you cannot exclude all the gain, or you choose not to, you must use Schedule D of Form 1040, Capital Gains or Losses, to report the total gain and claim the exclusion you qualify for.
• What about repairs made to get the home ready for sale?
If you realize a taxable gain after you sell your home, even with an exclusion, you can reduce your gain with selling costs. These selling costs may include items that are otherwise considered to be repairs – such as painting, wallpapering, even planting flowers – if you complete them within 90 days of your home sale and provided they were completed to make the home more saleable.
• What if you have more than one home?
For more than one home, you can exclude the gain only from the sale of your main residence. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is usually the one you live in most often.