I'm putting my home up for sale, after many years and some impressive appreciation in value. I moved out and paid a $3,000 fee to a professional home stager, so as 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.
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 to your question is “yes.” The home staging costs you, the homeowner, incur in order to sell your home will reduce any capital gains taxes you'll have to pay on the profit earned from the sale.
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 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 as attractive as possible to potential buyers.
When it comes 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. Such subtraction 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 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.
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 done 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 proceeds of the sale. 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 serve as ways to to 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, be sure to have him or her itemize the bill you receive so that it separately shows the expenses for improvements and for services (like furniture rental) that qualify as an advertising expense.