When you sell your home, be sure to record the full expense of the real estate agent's commission. You can use this expense to reduce the capital gains taxes from selling the property. In addition, if the home is your primary residence, elect the Section 121 tax exclusion for a further reduction of your taxes.
The basis of your home is your total investment in the property. This includes the original purchase price of the property plus all real estate commissions and sales taxes paid to acquire the property. The basis also includes the cost of any additions or improvements made to the home. Lastly, the basis of your home increases from all expenses paid to sell your home. This includes real estate commissions. You cannot count the expense of repairs toward your home's basis. The Internal Revenue Service considers these costs as normal expenses needed to maintain, not improve your property.
When you sell your home, the sale proceeds are divided between the return of your basis and the gain on the sale. Your basis in a property is returned tax-free. Your total capital gain in a home sale is the difference between the sale price and your basis in the home. If the result is negative, you can declare a capital loss. Note that a capital loss can only be declared on investment properties and cannot be declared on the sale of your primary residence.
The taxation of your capital gain depends on how long you owned the property. If you owned the property for less than one year, the gain is short term and is taxed at your income tax rate. If you owned the property for more than one year, the gain is long term and taxed at the capital gains rate of 15 percent. A capital loss from a home sale can be used to reduce your capital gains taxes on other sales. By adding your real estate commissions to the home's basis, you reduce your total capital gain taxes from the sale of the property.
The IRS provides an additional deduction against capital gains from the sale of a primary residence through the Section 121 exclusion. By electing Section 121, a single taxpayer may exclude up to $250,000 from the sale of a primary residence and married taxpayers may exclude up to $500,000. To qualify for this exclusion, you must have used the home as your primary residence for two of the last five years. By claiming Section 121 and recording your home's full basis, you should be able to reduce a large portion of your home sale's capital gain taxes.
- IRS.gov: Basis of Assets
- IRS.gov: Selling Your Home
- Beacon Exchange Company: Section 121 Exclusion for Principal Residences
- IRS. "Topic No. 701 Sale of Your Home." Accessed Jan. 27, 2020.
- IRS. "Publication 523 (2018), Selling Your Home." Accessed Jan. 27, 2020.
- IRS. “Publication 523 (2018), Selling Your Home.” Accessed Jan. 27, 2020.
- IRS. “Property (Basis, Sale of Home, Etc.).” Accessed Jan. 27, 2020.
- IRS. "Sale of Residence - Real Estate Tax Tips." Accessed Jan. 27, 2020.
- The Tax Foundation. "2020 Tax Brackets." Accessed Jan. 27, 2020.
- Tax Policy Center. “How Did the Tax Cuts and Jobs Act Change Personal Taxes?” Accessed Jan. 27, 2020.
- IRS. “Topic No. 503 Deductible Taxes.” Accessed Jan. 27, 2020.
- IRS. ”With New SALT Limit, IRS Explains Tax Treatment of State and Local Tax Refunds.” Accessed Jan. 27, 2020.
David Rodeck has been writing professionally since 2011. He specializes in insurance, investment management and retirement planning for various websites. He graduated with a Bachelor of Science in economics from McGill University.