If you’re planning to sell your home in the coming year, there is a new tax break designed specifically for you. Understanding the details of the tax deductions for selling a home – single-family house, condo or co-op – means you’ll save money and pay no taxes to the Internal Revenue Service up to a certain amount.
For married couples who file taxes jointly, the exclusion is capped at $500,000 and $250,000 for married couples filing separately and for singles. Here how to get the most out of your tax break when you sell your home.
Claim tax deductions for selling a home
In order to qualify for the new tax break when selling your home, the property must be the personal home that you have lived in for two of the past five years. Your time in the home doesn’t have to be consecutive, just two years total.
To determine how much of a tax break you’ll earn, begin with the cost basis – the original cost – of your property. Add the totals from any investments you’ve made through home improvement projects as well as costs incurred through the purchase or sell of your home, like real estate commissions.
Keep record of all the improvements and expenses incurred for your projects. New windows, sunroom, swimming pool or sprawling deck – there are a number of improvements that count toward your deduction. If you sell your home for more than the original cost plus home improvement investments, the profit you make would normally be taxed as a long-term capital gain tax and an additional state tax.
For a married couple filing jointly, the house selling tax break allows an exclusion of up to $500,000 of profit from any capital gains tax.
What home improvements are included in the tax break?
The IRS offers online worksheets to help guide you in tallying up the total cash you’ve spent in qualifying home improvement projects.
Home improvements that can be added to your cost basis:
- Additions: Bedroom, bathroom, deck, garage, porch, patio
- Exterior: Storm windows/doors, new roof, new siding, satellite dish
- Interior: Built-in appliances, kitchen modernization, flooring, wall-to-wall carpeting, fireplace
- Lawn and Grounds: Landscaping, driveway, walkway, fence, retaining wall, swimming pool
Home improvements that cannot be added to your cost basis:
- Altered upgrades: Improvements you made and then later changed, like installing a swimming pool then having it removed and refilling the hole.
- Temporary upgrades: Home repairs that have a life expectancy of less than one year.
- Upkeep: Normal repairs and maintenance that keep your home in good working order. To include: fixing a leak, painting, filling a hole or crack.
Before you make the move to sell your home, itemize your improvement costs. Add the total home improvement investment into your cost basis prior to filing your tax returns.
