Historically real estate is the best investment one can make in terms of growing your assets. In addition to increasing net worth, there are multiple tax breaks for both buyers and sellers that will enhance your bottom line.
Here are some of the 2023 real estate tax breaks for buyers and sellers.
Tax Deductions for Home Sellers
The costs associated with selling your home are tax-deductible if you lived in the home for 2 out of the 5 years prior to selling. Fees can include advertising costs, escrow and attorney’s fees, and even the real estate commissions that you paid.
Additional tax-deductible costs for home sellers may include:
- Title Insurance
- Title fees
- Survey costs
- Transfer fees
- Doc Stamp fees
- Utility installation fees
Home improvements and repairs made within 90 days of selling the home can be deducted from taxes. This includes things like painting supplies and costs, home repairs, and any replacements like lighting fixtures, showerheads, faucets, etc.
All these costs are deducted from the sales price of your home and come right off the capital gains tax that you pay.
Capital Gains Exclusions
Capital gains are your profits from selling the home and are counted as taxable income.
You can exclude up to $250,000 of the capital gains from the sale if you’re single, and $500,000 if married.
The catch, to qualify for your capital gains exclusion is that you must have lived in your home for at least two of the past five years.
Property Taxes & Mortgage Interest Paid Before Sale
Property taxes and mortgage paid the year of the sale can be deducted from your 2023 personal taxes. Property tax credits are capped at $10,000 and apply to property taxes paid for that calendar year.
The mortgage interest paid in the year that you sold, just like the property taxes, are itemized tax deductions. You must be itemizing deductions rather than taking the standard deduction, to take advantage of these.
In addition, the IRS limits the home mortgage interest deduction to interest paid on up to $750,000 of mortgage debt.
Tax Deductions for Home Buyers
The government strives to promote homeownership in America and offering tax breaks related to the expenses related to owning your home is a way that they do this.
If you are a new home buyer it is important that you research the deductions that apply to you for 2022 before filing your taxes.
Here are some tax deductions that may apply to home buyers in 2022:
Study the Standard Deduction chart below for 2022.
If you take the Standard Tax Credit Deduction when you file, you cannot itemize your deductions.
Standard deduction amounts 2022-2023
Tax filing status:
2022 tax year (file by April 18, 2023)
- Single – $12,950
- Married filing separately – $12,950
- Head of household – $19,400
- Married filing jointly – $25,900
2023 tax year (file by April 15, 2024)
- Single – $13,850
- Married filing separately – $13,850
- Head of household – $20,800
- Married filing jointly – $27,700
If the deductions you qualify for as a homeowner are higher than the standard deduction above, then it may make more sense for you to itemize your deductions. Otherwise, the standard deduction may work in your favor.
Consult your tax professional for specific guidance.
Same as for Sellers, the IRS allows home buyers to deduct the interest they pay on a mortgage used to buy, build or improve their main home or second home.
You can deduct the interest paid up to $750,000 if you’re an individual or a married couple filing a joint tax return. For married couples filing separately, the limit is $375,000.
If you bought your home before Dec. 16, 2017, the mortgage interest deduction limit is $1 million for singles and married filing jointly and $500,000 for married couples filing separately.
Home Equity Loans and HELOCs
The same deductions that apply to mortgage interest also apply to home equity loans and HELOCs.
Single taxpayers with a combined amount of their first mortgage and HELOC less than $750,000 may deduct the full amount of interest paid on both loans — but only if they were both used to build, buy or make improvements to a primary or second home.
Mortgage Insurance Premium (PMI)
If you pay mortgage insurance as part of your monthly mortgage payment, you may qualify to deduct that expense from your taxable income.
VA Home Loans where you paid a VA funding fee, or a USDA guarantee fee paid as part of a USDA home loan in the tax year you’re filing for, can also be included as a deduction.
The IRS considers these fees to be forms of mortgage insurance, allowing you to deduct them even if you didn’t pay the fee upfront and instead rolled it into the loan amount.
Mortgage Interest Credit
You may be eligible for a mortgage interest credit if you’re a first-time homebuyer, a military service member, or are purchasing a home in an area targeted by the U.S. Department of Housing and Urban Affairs (HUD).
A Mortgage Tax Credit Certificate (MCC) is issued by the government directly to a homeowner allowing them to reduce their tax bill by a specific percentage of their mortgage interest.
Mortgage Discount Points Deduction
If you paid mortgage points upfront when closing on your home, you can deduct that expense.
In general, you will deduct this cost over the life of your loan. However, there is an IRS test you can take to find out if you’re eligible to deduct it all in the 1st tax year.
SALT Property Tax Deduction
There is a deduction for state and local taxes (SALT) including property taxes.
The total deductible amount is capped at $10,000 for single taxpayers and married couples filing taxes jointly. The deduction limit is $5,000 for married couples filing separately.
It is important to read up on the tax rules and/or consult a professional on this one.
Tax Breaks for Green Upgrades
Tax breaks for Green upgrades apply to energy-saving improvements made to a home. Green upgrades may include solar panels, and wind turbines, among other energy-efficient upgrades.
Depending on the specific equipment, improvements made at a second home may qualify.
Special Use Tax Breaks
Other tax breaks may apply to the special use of your home such as a Home Office Deduction or expenses related to renting if you rent out the home.
Tax Advantages for Buying & Selling Homes
As you can see, there are many tax advantages to buying or selling a home. To get a jump start on tax season, start early, gather all of your documents and receipts in one place, and categorize your digital files.
Do consult the IRS or your tax professional for clarification on the tips in this article and whether you are eligible. Hiring a professional can also reduce errors and the stress of tax preparation.
We can connect you to a trusted and skilled professional in our network to help you get the most out of your tax benefits and get the job done!