Everyone must file their income taxes by April 15th to avoid penalties from the IRS. While that seems like a long time from now, it will be here before you know it. Did you sell a Tucson home last year? Then you may be able to take advantage of a few tax deductions when you file this year.
Tax Deductions for Home Sellers
As long as you utilized the property as your primary residence and the expenses you claim directly related to selling the property, you may deduct these expenses on your taxes. This does not apply to income property. And you must have resided on the property for at least two of the previous five years. This tax deduction includes any advertising costs, legal fees, escrow fees, and even commissions paid to your real estate agent. Did you hire a professional home stager to get your property "show ready"? Did you use a professional photographer for your listing photos? The costs for these services also count as a tax deduction. Add these all up and subtract the total from the sale price of your home. This lowers your capital gains which also reduces your capital gains tax.
While technically an "exclusion" and not a "deduction", this affects how much you pay in taxes. When you sell your Tucson home, the money you receive over the amount you pay is called capital gains. The IRS considers this as income. However, with the capital gains exclusion, a certain portion of your capital gains is non-taxable. For individuals, that amount goes up to $250,000. For couples, it rises to $500,000. Let us say that you originally paid $100,000 for your Tucson home several years ago. In 2020, you sold it for $420,000. Your deductible selling expenses totaled $20,000. Your capital gains comes to $300,000 (total amount sold for minus total originally paid and expenses). Individuals only pay tax on $50,000 of that $300,000 profit. Couples pay no taxes on it.
Did you need to make some updates and/or repairs to your home to make it more saleable? As long as these were completed within 90 days of closing, you may deduct these costs from your taxes. Always make sure you keep your receipts. This includes painting, landscaping, flooring, etc. Timing is everything here. If your closing date falls outside that 90-day window, you cannot claim them as a deduction.
Mortgage Interest & Property Taxes
When you buy a home, you get to deduct the interest you pay on your mortgage (up to $750,000 mortgage debt obtained after December 15, 2017, up to $1 million of mortgage debt before then). as well as up to $10,000 of your property taxes. The same goes for when you sell it. You may deduct what you paid on both (within the restrictions stated) up until the point you officially closed escrow.
As always, talk to your tax advisor/preparer before making any deductions. Ask them to clarify anything you do not understand. No matter who prepares your taxes, the government ultimately finds you responsible for what you file. So, you want to make sure you are clear about every aspect of your return.
Rebecca Schulte, Schulte Real Estate Group, Your Source for Tucson Real Estate