I'm putting my vacant home up for sale as a for sale by owner listing. I paid a $3,000 fee to a professional home stager to help make the house look like a designer showroom and attract buyers. The fee included renting and placing new furniture in the home, redecorating the windows, and adding various decorative items and props such as pillows, artwork, champagne glasses in the bedroom, and indoor plants.
The answer to your question is “yes.” The home staging costs you, the homeowner, incur to sell your home will reduce any capital gains taxes you'll have to pay on the profit you earn from the sale of your home.
Such expenses can reduce your capital gains taxes in two different ways. First, most home staging costs qualify as advertising expenses to sell your home. What constitutes advertising for home sale purposes is fairly broadly construed by the IRS. It certainly includes the fee you pay to a professional home stager to dress up your home and make it look as attractive as possible to potential buyers. You subtract such fees from the proceeds from the sale along with other sales expenses such as real estate broker’s commissions, legal fees, and other sales-related fees and costs. Be sure to keep your receipt from the home stager. Such subtraction reduces the amount of taxable profit you earn from the sale.
However, some types of home staging may not qualify as an advertising expense. This is where a home stager goes beyond merely dressing up a home and performs substantial home improvements such as installing new outside landscaping or adding a new fireplace, patio, or porch. The cost of such home improvements is not subtracted from the proceeds of the sale, or anywhere else. Instead, you add the cost to the tax basis of your house, which you then subtract from the sales proceeds to determine your net taxable profit from the sale. The larger your basis, the lower your net profit, and the lower your capital gains tax on the sale.
So you get a tax benefit whether home staging is a selling expense that reduces your net sales proceeds, or a home improvement that increases your basis and thereby reduces your net profit when you subtract it from the sales proceeds.
If you hire a home stager to perform or arrange for such extensive work, be sure to have him or her itemize the bill you receive so that it separately shows the expenses for improvements and services like furniture rental that qualify as an advertising expense.