{"id":32556,"date":"2022-08-10T16:32:52","date_gmt":"2022-08-10T23:32:52","guid":{"rendered":"https:\/\/www.homelight.com\/blog\/?p=32556"},"modified":"2025-11-25T08:42:54","modified_gmt":"2025-11-25T16:42:54","slug":"what-expenses-are-deductible-when-selling-a-house","status":"publish","type":"post","link":"https:\/\/www.homelight.com\/blog\/what-expenses-are-deductible-when-selling-a-house\/","title":{"rendered":"What Expenses Are Deductible in Selling a House?"},"content":{"rendered":"

DISCLAIMER: This blog post is meant to be used for educational purposes only, not legal advice. If you need assistance navigating the legalities of tax deductions when selling a home, HomeLight always encourages you to consult your tax advisor.<\/i><\/p>\n

Before most homeowners seriously think of putting their home on the market, they usually do some quick calculations to get a ballpark figure of their potential profit<\/a>.<\/p>\n

When you\u2019re estimating the costs of the sale<\/a>, taxes can be a big part of the equation. But, oftentimes, it\u2019s challenging to project how taxes will impact your equity.<\/p>\n

Even spending endless hours sifting through regulations on irs.gov doesn\u2019t guarantee you\u2019ll arrive at the right answer.<\/p>\n

That\u2019s because we often think of IRS Code as laws created by a higher power that are not to be questioned.<\/p>\n

In reality, the laws\u2019 complexity lends itself to a lot of nuance and interpretation, which can even confound the most seasoned tax professionals.<\/p>\n

Daylong seminars are filled with certified public accountants (CPAs) and tax attorneys debating energy credits.<\/p>\n

Book chapters are written about the latest changes to medical deductions.<\/p>\n

And, ultimately, well-educated tax professionals may maintain different perspectives on the application of any section of the code.<\/p>\n

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How Much Is Your Home Worth Now?<\/h3>\n

Get a near-instant home value estimate from HomeLight for free. Our tool analyzes the records of recently sold homes near you, your home\u2019s last sale price, and other market trends to provide a preliminary range of value in under two minutes.<\/p>\n \n

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How can I estimate the taxes I\u2019ll owe on my home sale?<\/h2>\n

To arm you with the most, updated, easy-to-understand information about home sales tax, we turned to the National Society of Accountants<\/a>.<\/p>\n

The NSA\u2019s Tax Line Help Desk independent consultant Don Schippa has researched tax issues for CPAs, tax attorneys, and other clients\/professionals for nearly 40 years.<\/p>\n

In that time, \u201cOne of the real estate questions that comes across my desk the most relates to the IRS code section 121<\/a> home sale exclusion,\u201d Schippa begins. \u201cIn other words, the biggest concern a seller has is: Is my gain non-taxable?\u201d<\/p>\n

His simple, no-nonsense approach to home sales tax is invaluable in helping you understand and anticipate the federal tax factors that are likely to affect your home sale profits.<\/p>\n

Because the issue can be quite complex, we\u2019ll start by answering some common questions.<\/p>\n

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Can I claim expenses related to the sale of my home the same way I claim other deductions such as medical expenses?<\/h2>\n

The first part of figuring out how much taxes affect your profit starts with understanding how home sales taxes differ from other deductions.<\/p>\n

Many taxpayers are used to thinking about reducing their tax burden by lobbing deductions \u2014 eligible expenses \u2014 against their income and revenue from other sources to come up with what they owe.<\/p>\n

If a family itemizes deductions on their 1040 form, medical expenses go on Schedule A along with contributions charitable contributions, mortgage interest, property taxes, and some miscellaneous items.<\/p>\n

\u201cThere’s nothing else relating to a home that goes on that form,\u201d Schippa says. \u201cThat mortgage interest and property taxes are the main deductions a principal residence has on an annual basis \u2014 even in the year of sale.\u201d<\/p>\n

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What deductions apply in the year of a sale?<\/h2>\n

\u201cThis might come as a shock,\u201d says Schippa. \u201cThere isn’t really, technically a \u2018deduction,\u2019 when you’re selling your personal residence.\u201d<\/p>\n

The deductions for a home the year of a sale are the same as any other year.<\/p>\n

\u201cThere is literally no deductible expense that a seller of their principal residence can take that\u2019s any different from when they were living in and owning the home,\u201d Schippa explains, \u201cThey can deduct only prorated mortgage interest and property taxes.\u201d<\/p>\n

However, there are allowable exclusions on the proceeds from the sale of a principal residence, which we\u2019ll address in a minute.<\/p>\n

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Are home repairs deductible?<\/h2>\n

Whether the homeowners are filing yearly taxes while living in the home or after a sale, the short answer is no.<\/p>\n

\u201cThe IRS Code 262(a) says the amount of taxpayer spending for repairs, and upkeep is a nondeductible personal expense from which a taxpayer derives no tax benefit,\u201d Schippa explains.<\/p>\n

So, maintenance<\/a> costs such as painting, yearly HVAC inspection, lawn mowing kid or service, and replacing a toilet are considered personal expenses, which are non-deductible.<\/p>\n

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Can I apply depreciation?<\/h2>\n

\u201cResidences are a personal asset, and depreciation is a business deduction on an income-producing asset,\u201d says Schippa.<\/p>\n

For example, if you make repairs<\/a> to a rental property, they could potentially be deductible or depreciable.<\/p>\n

However, personal residences don\u2019t depreciate, so deductions cannot be claimed through the Modified Accelerated Cost Recovery System (MACRS<\/a>).<\/p>\n

Taxes on the sale of a primary residence are calculated differently.<\/p>\n

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How does the IRS tax a home sale?<\/h2>\n

Taxes are based largely on the amount of capital gain<\/a> \u2014 the profit the homeowner makes after the cost basis<\/a> (the sellers\u2019 total investment in the home) is deducted from the sales price.<\/p>\n

Beyond that, \u201cThere\u2019s a simple principle that\u2019s kind of a bombshell,\u201d says Schippa. \u201cSection 121 Exclusion grants the sellers of a personal residence the ability to exclude up to $500,000 of gain from being taxable if they are filing jointly or up to $250,000 if the taxpayer is filing individually.\u201d<\/p>\n

Those exclusions apply regardless of the tax bracket. The main condition is: The sellers must have lived in the house two out of the last five years.<\/p>\n

So, Schippa says, \u201cTo benefit from the exclusion, you don’t have to necessarily be living in the home when you sell it.\u201d<\/p>\n

To explore the way the exclusion works, let\u2019s say your friends are a married couple in their 40s, who are selling the house they bought 15 years ago for $200,000.<\/p>\n

They\u2019ve been living abroad for the last two years and renting the property. But, now, they\u2019ve decided to relocate to London permanently.<\/p>\n

With the improvements they\u2019ve made over the years, they’ve got a basis of $300,000.<\/p>\n

Because they\u2019re working with a knowledgeable HomeLight real estate agent<\/a>, the property sells for $700,000. That means their $400,000 gain is non-taxable.<\/p>\n

Likewise, you\u2019re helping an elderly aunt sell her house, so she can transition to yours or a retirement community. She bought the house for $35,000 in 1960 and put on an addition in 1980 for $35,000.<\/p>\n

Your aunt has kept a meticulous, well-maintained home, and millennials are eager to snap up any available property in her neighborhood.<\/p>\n

Her agent says $15,000 in updates could increase the home\u2019s value by $50,000 and result in a sale of around $150,000.<\/p>\n

Because you\u2019ve confirmed the Realtor\u00ae\u2019s calculations by using HomeLight\u2019s home value estimator<\/a>, you\u2019re not surprised when the house closes at $152,000.<\/p>\n

Now, your aunt has great cash flow to cover her move. Even better, there\u2019s no tax implication. Her gain \u2014 $67,000 \u2014 is not taxable because it does not exceed $250,000.<\/p>\n

You can only exclude home sale profits from capital gains tax once every two years<\/a>.<\/p>\n

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How Much Will I Make Selling My Home?<\/h3>\n

With HomeLight’s free Net Proceeds Calculator, you can estimate the cost of selling your home and the net proceeds you could earn from the sale.<\/p>\n \n

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What happens if the capital gain totals more than the Section 121 exclusion?<\/h2>\n

On the tax return, capital gains appear on Form 8949<\/a> or Schedule D<\/a>.<\/p>\n

\u201cThe typical taxpayer will pay no more than a 20% tax on gains exceeding the tax-exempt $250,000 or $500,000,\u201d says Schippa.<\/p>\n

So, if your friends sell that same house for $1 million, they’ve got a $700,000 gain.<\/p>\n

IRS Code Section 121 allows them to exclude $500,000; however, the remaining $200,000 gain is taxable. It could cost them up to $40,000 \u2014 unless they have receipts for eligible expenses to add to their cost basis.<\/p>\n

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Is there a way to reduce the tax burden on the taxable part of the proceeds?<\/h2>\n

Homeowners can reduce the taxable portion of their capital gains \u2014 profits that exceed the tax-exempt threshold \u2014 by adding the cost of substantial home improvements made during the entire time of ownership to their cost basis.<\/p>\n

Small home repairs cannot be applied to reduce the tax burden.<\/p>\n

However, looking at your friends\u2019 $700,000 gain, suddenly the receipt for a $15,000 roof replacement that hadn\u2019t been added to their basis becomes very important.<\/p>\n

Once it\u2019s added to the basis, the $200,000 gain goes down by $15,000. Subsequently, they save $3,000 (20% of $15,000) in taxes just with that one receipt.<\/p>\n

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What\u2019s the difference between a home repair and a home improvement?<\/h2>\n

In terms of the expenses that can be added to the cost basis to decrease capital gains in home sales, home improvements<\/a> are generally eligible; home repairs typically are not.<\/p>\n

Typically, \u201cA repair is more attributed to maintenance,\u201d Schippa says. \u201cAn improvement is attributed more to some substantial addition to the house or substantial repair or betterment.\u201d<\/p>\n

However, sometimes, repairs can rise to the level of improvement.<\/p>\n

Impressed by the profit your aunt realized and her happiness with her new living situation, her brother \u2014 your uncle \u2014 asks you to work the same magic, so he can move. The property values in his neighborhood are also skyrocketing.<\/p>\n

His house and lot are large. He hasn\u2019t done much upkeep since he retired. Since he\u2019ll be living in the house until it sells, he\u2019s nixed the idea of a full renovation. But, he will let you make repairs, so the house is more attractive to buyers.<\/p>\n

You turn the stoop into a wrap-around porch, install crown molding, replace the shutters, upgrade the security system, replace the stairs, replace the cabinet doors, improve the yard\u2019s hardscape to increase accessibility, drainage, and curb appeal<\/a>.<\/p>\n

In three months, you\u2019ve hired eight different contractors and spent a total of $22,000.<\/p>\n

Lightning strikes twice and you sell the home your uncle bought for $80,000 for $350,000. While $250,000 of the profits are non-taxable, the remaining $20,000 is.<\/p>\n

However, if you kept the receipts, you can capitalize the $22,000 in expenses. Then, all the funds become a non-taxable gain.<\/p>\n

\u201cIndividual small repairs cannot be added to the cost basis,\u201d Schippa explains. \u201cbut a series of aggregated small repairs that result in an improvement over time might be considered.\u201d<\/p>\n

So, again, you emerge from the closing as the family\u2019s real estate hero.<\/p>\n

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Are there any other expenses that can decrease the taxable amount in addition to the capital gains exclusion?<\/h2>\n

Another way to increase the cost basis and decrease tax burden over the threshold is through other eligible expenses.<\/p>\n

As far as the costs involved in the sale of the home, some can be used to reduce capital gains.<\/p>\n

In general, many of the closing costs<\/a> and agent commissions<\/a> can be used to reduce capital gains.<\/p>\n

However, most marketing expenses are excluded.<\/p>\n

Some typical kinds of expenses that can be capitalized include:<\/p>\n