Understanding Tax Write-Offs for Sellers of Real Estate

Ways to minimize capital gains tax when selling a house

1. Exclusion of gain

The exclusion of gain isn’t technically a deduction, but it’ll impact your bottom line to the same effect: less taxable gain.

Most sellers who sell their personal residence (as opposed to an investment property or second home) are qualified to exclude $250,000 if they are single or married and filing separately and $500,000 if they are married and filing jointly.

To fully understand the value of exclusion of gain, you’ll need to learn a couple of new vocabulary words:

• Capital gains: These are the taxable profits you make from the sale of your home. Capital gain is equal to how much you sell your home for minus your home’s cost basis.
• Cost basis: This is the original purchase price of the home.
• Adjusted cost basis: Whatever you paid for your home plus any capital improvements you put into your home.

If your capital gains minus your cost basis are less than the exclusion of gain you qualify for, you won’t owe the IRS any taxes on your gain. If your capital gains minus your cost basis exceed your exclusion amount, you’ll pay tax on only the overage. And, if you don’t qualify for an exclusion at all, you’ll be taxed for your entire gain.

How do I know if I qualify for the exclusion?

According to IRS Publication 523, in order to exclude the above gains from your tax obligation, you need to meet the following 3 qualifications:

• Ownership: You owned the property for at least 24 months during the last five years.
• Use: You lived in the property for at least 24 months during the last five years.
• Look-back: You did not exclude the gain from the sale of another house within two years from the sale of this house

So, if your profit is less than your exclusion, does the IRS even want to know about the sale at all?

“Definitely still report it,” Skinner cautions. “If you don’t, the IRS may well assume it’s all gain.” To help you report the sale to the IRS, Skinner says you should look out for a 1099-S issued by the sale’s title company.

2. Partial exclusion of gain

Let’s say you haven’t had the opportunity to own or live in your house for two of the last five years before the date of sale. The IRS says you may still qualify for a partial exclusion of gain.

To qualify, your main reason for selling your home must be a change in workplace location, a health issue, or an unforeseeable event. To find out how much of your gain is taxable, the IRS directs taxpayers to Worksheet 3.

3. Capital improvements

If your home sale profits exceed the capital gains exemption threshold ($250,000 for single filers, and $500,000 for married filers), it’s time to review any capital improvements you made to the home while you owned it.

“Adding capital improvements to your cost basis mitigates your tax liability by reducing your taxable gains,” Skinner says. It boils down to this equation:

Taxable income = amount realized – adjusted basis

IRS Publication 523 defines capital improvements as improvements that “add to the value of your home, prolong its useful life, or adapt it to new uses.”

Routine and run-of-the-mill home repairs are not capital improvements. Confused about the difference?

Think of repairs as reactive projects you take on when something breaks. Capital improvements, in contrast, aren’t reactive repair projects but rather forward-thinking and intentional projects done with the intention to add value.

Modernizing your kitchen into this century or opening up your floor plan are capital improvements that differ from repairs because they are investments in the value of the home — and they’ll be reflected in the home’s sale price. That’s why they raise the cost basis of your home.

Fixing a leaky faucet or repairing a hole in your roof, however, doesn’t add value. They simply maintain the baseline condition and value of the home. While they’re necessary for keeping your home in working order and may cost a bit, they can’t be deducted from your home sale.

Examples of capital improvements

So what can be deducted? Page 10 of IRS Publication 523 provides specific examples of improvements that actually add to the value of the house and, thus, can be deducted from your tax obligation:

• New bedroom, bathroom, deck, garage, porch, and patio
• New landscaping, driveway, walkway, fence, retaining wall and swimming pool
• New storm windows or doors, roofing, siding, and satellite dish
• New attic, walls, floors, pipes, and ductwork
• New HVAC, furnace, central humidifier, central vacuum, air and water filtration systems, wiring, security system, and lawn sprinkler system
• New septic system, water heater, soft water system, and filtration system
• New built-in appliances, kitchen modernization, flooring, wall-to-wall carpeting, and fireplace

“It’s important to remember that the IRS only lists examples of capital improvements,” Skinner notes. “It’s not a definitive list.” The key to determining whether a capital expenditure is a repair or a capital improvement comes down to added value.

Remember that you can’t deduct capital improvement projects from your taxable income like a mortgage interest or property tax write-off. These reductions of capital gain are instead added to your home’s cost basis to decrease the amount you’ll owe in taxes when you sell.

4. Selling expenses

Selling expenses quickly add up, as they include costs of advertising, agent commissions, and other closing fees, totaling thousands of dollars depending on the home’s sale price and location. Luckily, you can subtract all of these selling expenses from your gain to lower your tax liability.

Yet another reason why it’s worth it to hire a top real estate agent — who’ll guide you through the daunting home selling process to sell your house faster for more money: You can deduct their fees fully from your capital gains tax obligation.

Examples of deductible selling expenses

Skinner says it’s vital to keep track of all the money you spend attracting high bids on your home. “Remember that staging is also a selling expense,” he remarks, alongside these other selling expenses detailed in IRS Publication 523:

Real estate agent commissions: Traditionally, real estate commissions averaged 6% of the home’s sale price, with sellers covering the cost, which was then split between the listing and buyer’s agents. 

However, under the updated rules that stemmed from the historic National Association of Realtors (NAR) settlement, buyers are expected to negotiate compensation directly with their agents. Some sellers though offer to cover the buyer’s agent fees to attract more buyers or speed up the sale. 

If a seller chooses not to pay the buyer’s agent, they only cover their own listing agent’s fee, typically around 3% of the sale price. If they opt to pay both agents, the total commission can still reach 6%. Use HomeLight’s Commission Calculator to know how much you’ll pay in agent fees.

Transfer taxes and recording fees: Transfer taxes are one-time fees levied on home sales as a percentage of the property’s value, typically paid by the owner. They cover the cost of transferring the home’s deed to its new owner and vary by state, county, and city. Some states charge no transfer taxes at all. If you do have to pay them, though, they can be treated as selling expenses.

Settlement or escrow fees: Settlement fees, sometimes called escrow fees, are paid directly to the third-party company that handles the money and title transfers for your home sale. They are generally divided between the buyer and seller depending on what the purpose of the specific settlement fee is and what is customary in the market where the property is located. However, who pays these fees can be a matter of negotiation in many instances. Expect them to cost about 1% of the home’s sale price.

Recording fees: Recording fees are a one-time expense charged by the government to record the sale of your home to its new owner. Whether the buyer or the seller pays the fee is up to negotiation. Recording fees vary widely by county, from as low as $15 to upwards of $60 per page.

Advertising fees: How much did you spend marketing your home to buyers? Staged homes left the market faster than unstaged homes, but staging costs anywhere from $1,500 to $4,000. Tack on home photography and you’ll have a sizable pot of deductible costs. Just be careful not to double-dip. If your agent included the costs of these marketing services in their commission, you can’t count them as selling expenses twice.

Attorney fees: If you hire a lawyer to help sell your home (some states require it), expect to pay $150 to $500 an hour.

Mortgage points or loan charges paid on behalf of buyer: Seller-paid points are concessions paid by the seller on behalf of the buyer to lower the interest rate on the home’s mortgage. They’re paid in a lump sum by the seller to sweeten the sale for a buyer. How much you spend on points will vary depending on the number of points you buy and the home’s price.

Appraisal fees: Appraisal fees are paid to obtain a neutral assessment of your home’s value. They are typically paid by the buyer and required by their lender, although you can choose to cover some portion to make a deal more attractive. On average, appraisal fees are around $350 – $550.

It’s likely that you won’t incur every single one of these costs when you sell your home. Keep track of your receipts and invoices for all services pertinent to selling your home so you know where you stand before tax season. Many closing costs will be detailed in the settlement sheet prepared by your closing agent (or, in some states, an attorney).

5. Mortgage interest deduction

Though it’s not technically a seller-specific tax break, we’d be remiss if we didn’t mention the mortgage interest tax deduction. Homeowners have long enjoyed this tax deduction as one of the major benefits of owning a home. 

No matter how long your house has been on the market, if you have a mortgage on the house you’re selling — and it’s your main house — there’s a good chance you can deduct your mortgage interest from your income taxes.

The IRS allows you to deduct interest on up to $750,000 of a loan for homes bought after December 15, 2017 — down from $1 million for loans obtained before the Tax Cuts and Jobs Act (TCJA) took effect. Because most homes nationally cost well below $750,000 according to the 2024 Census data on home sales, most homeowners are able to deduct mortgage interest in its entirety using Form 1040, Schedule A on Itemized Deductions. 

In addition to mortgage interest, you should also check into whether you can deduct mortgage “points,” which describe charges you may have paid to get a mortgage, such as prepaid interest or loan origination fees.

However, keep in mind that you must meet certain requirements to deduct the points in full in the year you pay them.

“Typically, if you own a home with a mortgage, you will itemize,” Skinner says. “But keep in mind, the standard deduction has increased so there are circumstances where the standard deduction is more favorable. For instance, if you are retired and the house is paid for.”

If your itemized deductions don’t add up to be greater than the standard deduction, it’s in your interest to take the standard deduction: $14,600 for single filers and $29,200 for married couples filing jointly in the 2024 tax year. If your combined deductible expenses, including things like property taxes (see below), mortgage interest, and charitable contributions don’t exceed this amount, it doesn’t make sense to itemize.

Not sure where you stand? Work with a tax professional who can both guide you through the itemization form and confirm if you can write off mortgage interest and mortgage points, given the requirements.

6. State and local property taxes

The median property tax on single-family homes in 2024 was $3,018. Luckily, all of that tax is likely to be deductible for the average American. While this tax break isn’t necessarily specific to sellers, you can still take advantage of it for any taxes you paid for the portion of the year you still owned the home.

The 2017 Tax Cuts & Jobs Act caps the amount a homeowner can deduct for property taxes, state and local income, or sales tax at $10,000, and you can only deduct property taxes if they were assessed by your local government and paid the previous year.

What does this mean for home sellers? If you’re up to date on your property taxes at the time of home sale, you can use what you paid last year in taxes to figure out your deduction for this year up until the property’s sale date — up to $10,000.

Just like mortgage interest, property taxes are an itemized deduction. Get acquainted with Schedule A (Form 1040) to familiarize yourself with how itemizing real estate taxes works. As always with itemization, it’s sometimes advantageous to take the standard deduction. It’s always worth consulting a tax professional to accurately assess your situation and crunch the numbers.

Types of selling expenses that you can’t write off

There are more than a few deduction myths on the internet. Don’t fall into the trap of assuming you can write off these expenses, and remember that tax law is a constantly evolving beast. The latest IRS documentation or a tax professional should always be consulted for the most accurate information.

Moving expenses

Thought you could deduct the cost of a U-haul, packing tape, boxes, or moving crew? Sorry, that’s simply not a thing — unless you’re a member of the military.

According to the IRS Publication 3, you may be able to exclude moving expenses from your income only if you meet the following conditions:

• You’re a member of the Armed Forces on active duty.
• You’re relocating permanently for a change of station, due to a military order.

If you meet these criteria, you can claim the cost of your moving expenses using Form 3903. Note, however, that you can only deduct what the IRS considers “reasonable for the circumstance of your move,” which does cover transportation and storage of your possessions and travel from your old home to your new home, including lodging. It does not, sadly, include the cost of meals.

General home repairs

While you are allowed to increase your cost basis by tacking on additional costs spent on capital improvements for the home, you aren’t allowed to deduct run-of-the-mill repairs necessary to maintain your property’s condition or get it ready for sale under the current tax code Publication 523.

Confused about the difference between a repair and a capital improvement?

“For some homeowners, it can feel like a murky area,” Skinner says. The key difference is added value.

Repairs involve fixing issues to maintain a property’s current functionality, such as cutting the grass, clearing blocked drains, or refreshing worn-out paint. In contrast, capital improvements are upgrades made to enhance the property’s value and longevity.

For example, you can’t deduct the cost of cleaning the carpets in your home or hiring a lawn service to keep up with the grass. You can, however, deduct the cost of finishing a basement, which has a 70% ROI, or replacing unsightly old floors with polished hardwood, yielding a 70 to 80% ROI.

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What can I deduct from the sale of my second home?

“Other than the loss of the exclusion, the other rules apply,” Skinner says. That means that while you must pay capital gains tax on any profit from selling a second home, you can still qualify for the following deductions:

• All selling expenses should still be figured into the amount realized to minimize your taxable gains.
• In most cases, sellers can still deduct full mortgage interest for a home loan up to $750,000 on homes purchased after December 15, 2017 on their second home.
• “State and local property taxes are generally deductible,” according to the IRS, and you can still deduct up to $10,000 in state and local taxes total between all properties you own per tax return. If you’re already meeting or exceeding that limit with your first home, you won’t be able to deduct additional property tax from your second home.

Don’t miss money-saving deductions

Selling a home comes with plenty of expenses, but tax write-offs can help ease the financial hit. From agent commissions to home improvements, knowing what deductions you qualify for can save you serious cash. Be diligent in keeping records, stay informed, and don’t leave money on the table.

As is the case with most tax situations, Skinner says it’s wise to consult a tax adviser to confidently maximize your deductions, which vary state-to-state and year-to-year.

As you work with a tax professional to navigate your deductions and maximize your savings, take the next step in your home-selling journey by reaching out to a real estate agent. They can help you prepare your property, set the right price, and attract potential buyers, ensuring a smooth and profitable sale from start to finish.

Editor’s note: This article is for educational purposes only. Contact an advisor for professional guidance on your tax needs.

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