Wondering which closing costs can provide tax deductions when selling a home? Keep reading to get the answers and useful tax-saving tips.
The process of selling a residence often costs thousands, or even tens of thousands, of dollars. While buyers often cover many individual line items that crop up during closing, sellers shoulder the total burden of realtor commissions and some additional taxes and fees.
In most states, sellers can anticipate closing costs of between 2–5% of the property sale price (or 6–10% if you include commissions).,
Although you don't need to have cash on hand, it's still a significant amount to be deducted from your sale proceeds. You can whittle away at some of the burden through negotiation, shopping around, and understanding what closing costs are tax deductible when selling a home.
When you sell a property, there’s a lot more involved than just handing over your keys and receiving a bag full of cash. Real estate transactions usually involve government filings, taxes, multiple financial stakeholders, and a pile of paperwork to comply with each state’s regulations.
Buyers and sellers have unique sets of closing costs that they traditionally pay for, although that can vary based on specific state guidelines and individual sale negotiations.
In general, the home seller pays all real estate agent commissions (buyer’s and seller’s) plus these closing costs:
If not already paid, you’ll also owe for these items at closing:
Depending on your contracts and prior negotiations, you may also need to fund:
About three days prior to your closing, you’ll get a disclosure statement that provides a run-down of all closing costs and their exact amounts. It will show how much will be transferred to your current lenders if you have outstanding mortgage debt and the exact figure that will be wired to your bank account or handed to you via check.
Review it carefully for errors and ask questions of your agent, lawyer, or the title or closing company if anything is unclear.
Most closing cost deductions fall under the capital gains umbrella (more on that below), but there are a few items that you might see on your closing disclosure that apply to Schedule A, Itemized Deductions, of your federal 1040 or 1040-SR income tax return.
These include:
Based on the 2017 tax code change, which nearly doubled the standard deduction amount, many taxpayers don’t end up opting to itemize deductions any more. If you do itemize, however, be aware that there are limits on these deductions—so read the Schedule A instructions carefully or consult a tax specialist.
A capital gain is a profit received from the sale of an asset, such as the significant payout you’ll receive when you sell your home. Capital gains are taxed differently from income, and the gains from sale of a residence have their own rules.
The IRS doesn’t start collecting on capital gains from the sale of a home until the profit exceeds the exclusion limits, which are:
Even better, profit is determined by subtracting specific expenses, such as numerous closing costs, from the sale price of your home.
For instance, if you sell a home for $275,000, you would normally be taxed on $25,000 (after the $250,000 exclusion). But if your selling expenses totaled $25,000, then you wouldn’t owe a nickel in capital gains taxes.
Selling expenses can be deducted from capital gains tax if you meet certain qualifications. These include:
Understanding what closing costs are deductible when selling a home can be a bit tricky if you pore through the IRS guidelines, as they tend to include every exception to every rule. Either connect with a tax professional or at least walk through the various worksheets and read the fine print within Publication 523, Selling Your Home, to make sure your circumstances don’t prohibit you from taking these deductions.
While the list of seller closing costs tends to be fairly short, state regulations and individual negotiation and concessions can lead to more items coming in under the seller.
Of these, closing costs that can be deducted through the capital gains exclusion include:
When you figure out your home selling costs total to reduce any capital gains you owe, there are more items to include beyond what you pay at closing. Be sure to keep track of these expenditures that you incur prior to closing:
Not every line item can be deducted. You can’t include these costs when it comes to tax deductions:
Also note, not every pre-closing cost that you consider part of the selling process can be deducted from your capital gains taxes. This includes general upkeep such as lawn mowing or housecleaning that doesn’t qualify as capital improvement.
Further, your list of deductions and requirements will change if you have special circumstances such as:
Learn if homeowner’s insurance is tax deductible in our guide.
If you’re accustomed to going it alone with your tax prep, you may want to make an exception for the year of a home sale. Effective decision-making prior to a sale and the subsequent tax filing both demand meticulous preparation to fully take advantage of all available tax deductions and exclusions.
Tax laws related to home sales and capital gains see frequent changes, so you may want a tax professional by your side.
Keeping your costs low when selling a property includes knowing which costs are tax-deductible and which you can reduce or eliminate. You can also lower your expenses by looking beyond traditional home sales at cash offers, including sell and stay transactions.
A sell and stay transaction allows you to skip the weeks or months devoted to preparing a property for an open house and buyer showings. With Truehold's sell and stay transaction, you’ll also save the time that goes into a traditional sale.
Truehold provides a simple closing at a competitive price, and you don’t have to pack up and leave right away. At closing, you’ll sign a lease agreement and switch from owner to a renter.
Our clients unlock their home equity, pay off any remaining mortgage debt, and are no longer responsible for property tax or property insurance. Plus, Truehold takes over the hassle of essential repairs.
Ready to find out if a sell and stay transaction is a good fit for your needs? Reach out to us, and a Truehold representative will explain the process and answer your questions.
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