Here are some questions home sellers commonly ask.
I'm putting my home up for sale, and have paid a $3,000 fee to a professional home stager. The idea is to 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.
Will this fee reduce what I owe if I end up with a high enough profit that I must pay capital gains tax?
The basic answer is “yes.” Home staging costs you, as the homeowner, incur in order to sell your home will reduce any capital gains taxes you'll have to pay on profit earned from the sale. Such expenses can reduce capital gains taxes in two different ways.
First, most home staging costs qualify as advertising expenses. What constitutes advertising for home sale purposes is fairly broadly construed by the Internal Revenue Service (IRS). It certainly includes the fee you pay to a professional home stager to dress up your home and make it look attractive to potential buyers.
When it's time to compute your tax obligation, you will subtract such fees from the sale proceeds along with other sales expenses, such as the real estate broker’s commission, legal fees, and other sales-related fees and costs. This reduces the amount of taxable profit you earn from the sale. (Be sure to keep your receipt from the home stager, in case of an eventual IRS audit.)
However, some types of home staging may not qualify as advertising expenses. This is where a home stager goes beyond merely dressing up a home and performs substantial improvements, such as installing new outside landscaping or adding a new fireplace, patio, or porch.
This isn't necessarily bad news: For qualifying home improvements, you can 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.
But the IRS wants to see more than just a simple repair. Before it will count something as a capital improvement, it looks to see whether the work is part of an overall remodeling project or whether the improvement results in a benefit that lasts for greater than one year. This is also known as the "one-year rule." Improvements must also add to the value of the property, prolong its life, or adapt it to new uses.
Some examples of improvements that increase your basis include installing wall-to-wall carpeting, central air systems, built-in appliances, a new roof, and storm doors and windows. IRS Publication 523, Selling Your Home, provides a list of the types of improvements that can be added to basis.
Remember, the costs of home improvements that satisfy the “one year rule” or are part of remodeling project are not subtracted from the sale proceeds. Still, 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 eventually subtract it from the sales proceeds.
The one year rule and the remodeling project standard help distinguish improvements from repairs that every homeowner must make in the course of ordinary home maintenance. These might include, for example, fixing a leaking sink, replacing rotting floor boards, spackling a cracked wall, and repainting. You won't see any tax benefits for such maintenance.
If you hire a home stager to perform or arrange for such extensive work, have him or her itemize the bill you receive so that it separately shows expenses for improvements and for services (like furniture rental) that qualify as an advertising expense.
My wife and I own a large, old home with equity over $600,00 (we hope). This is more than the $500,000 home sale tax exclusion for married couples, so we know we can face capital gains taxes on part of our profit when we sell. Our real estate agent tells us we should have both the inside and outside of the house repainted. This will cost $25,000. If we pay for this, will it reduce the amount of capital gains tax we’ll have to pay on our profit?
Repainting your house inside or outside is a classic example of a home repair. Ordinarily, these and other home repairs—for example, fixing your gutters or floors, repairing leaks or plastering, and replacing broken window panes—provide no tax benefits to the homeowners who pay for them.
You can’t deduct home repairs from the sales proceeds you receive. Nor can you add them to your home tax basis (cost for tax purposes). This is so even though you repaint or do other repairs to make your home more attractive to prospective buyers. Of course, this doesn’t mean you shouldn’t go ahead and paint your home anyway. It’s usually easier to sell a freshly painted home.
However, there is an exception to the rule that home repairs provide no tax benefits. If repairs are made as part of an overall home improvement project, they can be included in the cost of the improvement. Unlike repairs, home improvement costs can be added to your home’s tax basis. This will reduce any taxable profit you receive when you sell the home.
A home improvement is something that adds to your home’s value, prolongs its useful life, or adapts it to new uses. Examples include extensive home remodeling or restoration projects—for example, remodeling a kitchen, replacing walls and floors, or adding a new bathroom. If you repaint part of your home as part of such a remodeling project, you can include the cost in the overall cost of the project and add the total to your home’s basis. Be sure to keep good records showing that the painting was done at the same time as, and as part of, the overall home remodel or improvement project.
I am in the process of preparing my home for sale. Having lived here for 23 years, it has gone up quite a bit in value. I'm afraid I'm not much of a housekeeper, so the first thing my real estate agent did upon setting foot in the door was to pull out her cell phone and start calling cleaning people and a hauling company.
Now I'm expected to foot the bill for all this. Can I at least add these to my list of selling expenses, so as to lower my capital gains tax obligation?
The cost of cleaning a home to help make it attractive to potential buyers is not deductible from the proceeds received from the sale. Nor can it be added to your home's cost for tax purposes (its "adjusted basis" in tax parlance).
In short, home cleaning expenses have no tax benefit. The only home sale expenses you can deduct are those that don’t physically affect the property, such as real estate broker commissions and various other fees involved in selling such as escrow fees, settlement costs, attorney fees, and so forth. Take comfort in the fact that a clean, move-in ready home will be more appealing to buyers, and will hopefully command a higher price.
I'm a single person who owns a home with equity well above the applicable $250,000 home sale tax exclusion for single taxpayers. I want to avoid paying as much capital gains tax as possible when I sell. I'm thinking about having extensive landscaping done before I list the house, including installing a new lawn, new plantings, and resurfacing the driveway. Will paying for such pre-sale landscaping help reduce my capital gains obligation when I sell?
Yes. People with substantial equity in their homes do need to be concerned with capital gains taxes when selling their homes. If your gain exceeds the applicable home sale tax exclusion ($250,000 for singles, $500,000 for married filing jointly), you’ll have to pay capital gains taxes on the overage. The way to reduce such taxes is to reduce the amount of taxable gain (profit) you receive from the sale.
Your gain is calculated by subtracting your home's adjusted basis from the sales proceeds. The higher your adjusted basis, the lower your profit and less taxes you'll have to pay. Your home's adjusted basis consists of its original cost plus the cost of improvements you make while you own it. Improvements include any expense that materially adds to the value of your home, significantly prolongs its useful life, or adapts it to new uses.
Home landscaping is one of the most common types of improvements homeowners make. They include, but are not limited to: installing new lawns, trees, and plants; replacing driveways and walkways; installing new fences; and putting in new sprinkler systems.
Add the cost of all of these items to your home’s basis. For example, if your basis was $200,000, and you spend $50,000 on landscaping, your new adjusted basis will be $250,000. If you receive $550,000 when you sell the home, your profit will be $300,000. Subtracting your $250,000 home sale tax exclusion, you’ll be left with $50,000 to pay capital gains tax on. But, had you not done the landscaping, your taxable profit would have been $350,000, leaving you with $100,000 to pay tax on after applying your exclusion.
My husband and I have listed our luxury home for sale. We have over $500,000 of equity. Thus, even though we qualify for the $500,00 home sale tax exclusion, we could be stuck having to pay substantial capital gains taxes on the sale.
Our real estate agent is holding an open house. She's providing canapes and other snacks. But we think a good way to attract the type of high-end buyers we’re looking for is to hire musicians to play during the open house. If we pay for this, is the expense tax deductible?
Advertising-related expenses homeowners incur to sell their homes may be subtracted from the amount received from the sale to determine the amount of taxable profit, if any. Arguably, hiring musicians to play during an open house should constitute a home-sale advertising expense. It serves the same purpose as any other advertising—attracting potential buyers to purchase a product.
You don’t want to go overboard, however. The IRS has a general rule that lavish or unreasonable expenses are not deductible. So you probably don’t want to hire a symphony orchestra or college marching band. But hiring a jazz combo or similar small group of musicians to serenade potential buyers at your open house should be deductible.
If, for example, you spend $1,000 for such musicians, you can add the amount to your other sales expenses such as real estate broker's commission, closing costs, and other fees and costs you must pay to sell your home. The total amount may then be deducted from the amount you realize (receive) from the sale.