What Hidden Tax Deductions Can You Make During a Home Sale?

What Hidden Tax Deductions Can You Make During a Home Sale?

There are a few potential tax deductions that are commonly overlooked during a home sale that you shouldn’t miss out on.

Today I’m joined by Greg Cash from Greg Cash Tax Plus to talk a little bit about the most common tax deductions people miss out on when they’re buying or selling a home.

As far as buyers go, one of the most common write-offs that get neglected is loan origination fees. They usually miss out on this deduction because they associate loan origination fees with the closing costs. As long as they’re not a part of the amortization of your mortgage payments, however, they are deductions.

Two more deductions for buyers that usually get passed over are the prorated interest that might be included in the HUD form and the property taxes allocated between the time of purchase and the time of payment. In selling the home, a seller may include a percentage of what they paid for property taxes on the HUD statement as part of what you had to pay them back. You get to take that as a deduction on top of the property taxes that you would ordinarily take as a result of the purchase of the home.

As far as sellers go, any costs you incur in preparing the property for sale (painting, upgrades, repairs, etc.) are deductible. If you’re a single person, you get a Section 121 exclusion of up to $250,000. For married couples, that amount goes up to $500,000. In deciding whether to include those costs in the sale of your home, it’s important to examine whether or not it’s really going to impact you as far as being able to take that exclusion from your capital gain income.

If you’re a seller, any costs you incur in preparing your home for sale are deductible.

If you’re a single person fixing up your house to be sold and you want to lower your gain, you can take that $250,000 plus repairs or just the $250,000. The $250,000 is what’s automatically excluded. If your capital gain exceeds $250,000, you definitely want to make sure you capture all of those additional costs that are incurred with the sale of the property. As we all know, sellers are typically responsible for the payment of the commissions, so that’s usually a very large amount of money you can deduct as part of the cost of the sale.

Additionally, there is no time limit in which you’re required to reinvest this money from one primary residence to another. This rule changed a couple of decades ago because people weren’t accurately accounting for the actual basis of their homes when calculating their capital gains. Before that, the trend was to buy upward so you could avoid any current-year gains.

Now, gains for all properties are recognized in the year of sale. You don’t have to worry about purchasing up or down because it’s all based on your purchase price plus adjustments (or improvements to the home), and the difference between the basis of your home and what you sell for will determine what that actual gain is.

If you have any other tax-related questions, you can call Greg’s assistant Matt Coulombe at (562) 597-4600 or call Greg directly at (562) 597-4300.

As always, if you have any real estate-related questions, don’t hesitate to give me a call or shoot me an email. I’d be happy to help!

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