Typically, the Internal Revenue Service (IRS) wants to know everything about your finances when you’re selling a home. However, there are exceptions. For instance, when you’re selling a home and making less than $250,000 profit filing as an individual or less than $500,000 filing jointly, and if you have lived in the home for two of the five years prior to selling, the IRS is not interested in the home sale. The reason is that the profit is excluded from being taxed, according to the US Code Section 121.
5 Key Tax Deductions
As far as taxes, there are five primary deductions that you should know about.
Selling Costs—If you do not qualify for the exclusion under US Code Section 121, you must pay taxes on any profit made. Therefore, be sure all selling costs from the gain are deducted. However, if you sell the home because of employment change, divorce, health problems, or other unforeseen circumstances, you may qualify for a partial exclusion. By working with a qualified tax preparer, you can easily determine whether you qualify.
Moving Expenses—When you’re selling the home because of relocating for work, some of the moving expenses can be deducted. For example, costs associated with storage, transportation, lodging, and other travel expenses for reaching the new destination are deductible.
Property Tax—For the portion of the year that you owned the home, property taxes can be deducted. Be sure that you deduct taxes up to but not including the actual date of the sale. According to the Internal Revenue Service, the buyer is responsible for taxes starting from the date of sale.
Improvements to the Home—Beyond making improvements for your own enjoyment while living in the home, you might do upgrades and repairs to benefit the new owner. For instance, you may need to make changes to the home in preparation for getting it on the market, such as having a leaking roof repaired, an air conditioning unit fixed, and so on. If modifications are for that purpose or made within 90 days of closing, the IRS classifies the expenses as selling costs, which are tax deductible.
Points—When you’re paying points to reduce interest as part of refinancing the home, you may qualify for an additional tax deduction. Since a proportional share of the points can be deducted until the loan is paid, if you’re paying off the loan by selling the home, the remaining value of those points are deductible.
Since tax deductions vary from one state to another and change year to year, you should always work with a reputable tax preparer when selling your home, so that you get the most deductions possible.
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