Tax season is upon us, and if you sold your house in 2020 (or are planning to sell it in the future), you're in luck! Thanks to the 2018 Tax Cuts and Jobs Act, there are some tax deductions you can take that may result in serious savings! Here are a few of the most important.
1. Capital Improvements
If you've made certain upgrades to your home before selling, the IRS allows you to add the costs of these "capital improvements" to your home's cost basis. This can reduce the amount of capital gains tax you may owe after you sell your home.
It's important to note that not all repairs and upgrades meet the government's definition of a capital improvement. Some of the things that meet the guidelines include upgrading your HVAC system, adding a lawn sprinkler system, adding an additional bedroom, bathroom, deck, garage, porch, or patio, updating your water heater, adding built-in appliances, and more. If you make any improvements or upgrades to your home, be sure to hold onto all your receipts. When it's time for you and your tax preparer to complete your return, they can review your expenses and determine what may qualify.
2. Selling Costs
Costs tied directly to the sale of your home are deductible as long as the home is your primary residence and you lived there at least two of the five years prior to the sale. As long as you meet these requirements, you can write off expenses, including real estate commissions, legal fees, escrow fees, advertising costs, and even home staging fees.
Note that this isn't a direct deduction. Instead, it's subtracted from the sales price of your home, which positively impacts the amount of capital gains tax you might owe.
3. Mortgage Interest
Current tax rules allow you to deduct the interest you pay on your home mortgage debt of up to $750,000. Just remember that mortgage interest and property taxes are itemized deductions, and it only makes sense to itemize if the total is higher than your standard deduction.
4. Property Taxes
The new 2018 rules capped the amount of property taxes you can write off, but they still allow you to take a deduction of up to $10,000. Make sure you include the amount of any property taxes you paid on your tax return.
5. Discount Points
When you pay points in cash to buy down the interest rate on your mortgage or refinance, the IRS allows you to deduct a portion of the points each year until your mortgage is paid in full. When you sell your house and pay off your mortgage loan, you're able to deduct the remaining amount all at once. This is one of the most forgotten-about home selling tax deductions, but it can be significant in some cases.
6. Moving Expenses
Unfortunately, not everyone can deduct their moving expenses. However, if you're active-duty military personnel, you'll want to take advantage of this deduction.
7. BONUS: Capital Gains Taxes
The capital gains tax rule isn't really a deduction, it's an exclusion. However, it's so important that we decided to add it to this list. Capital gains are the profit you make from selling your home. It's the cash left over after you've paid off your mortgage and other expenses. As long as you have lived in the home at least two of the last five years, single filers can exclude up to $250,000 of capital gains, and married filers can exclude up to $500,000.
While the information above is an excellent starting point, remember that each person's finances are different. It's always a good idea to speak to a tax professional before filing your taxes, particularly in years when you have a major life change, like a home sale.
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