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6 Tax Deductions When Selling a Home in Utah

Avoiding taxes is the full-time preoccupation of accountants, billionaires, and anyone who’s about to see a large influx of cash. If you’re fortunate enough to turn a big profit on selling your home, then you fall into latter category. The good news is, whether you live up in Lehi or down in Goshen, there are quite a few tax deductions and exclusions for sellers. We’ll walk you through 6 of the biggest ones as well as a few bonus tips for Utah residents.

And just in case you’re tempted to print the best efforts of some real estate investors as gospel fact, please speak to a CPA regarding any of the concepts below before you go full Bezos and report negative income or something crazy like that.

1. Capital Gains Exclusion

The almighty Wikipedia defines capital gains as “the profit earned on the sale of an asset which has increased in value over the holding period.” In short, it’s money you make when you sell. For example, if you bought your home for $100,000 and you sell for $150,000, you’d make $50,000 in profit (minus the costs of selling and any realtors fees unless you opted to sell to a professional homebuyer).

Short-term capital gains (when a property is sold within one year or 365 days of purchasing it) are taxed at the same rate as ordinary income while long-term capital gains (when a property is sold after a year or 365 days of purchasing it) are taxed at only 15%.

Here’s the good news: the Capital Gains Exclusion allows single persons to exclude up to $250,000 worth of gain and married couples to exclude $500,000 worth of gain from their taxes—so long as that property was your primary residence for two out of the previous five years. And those years don’t need to be consecutive.

Here’s the bad news: the average price of a home in Utah as of June 2022 is $545K. That’s across all housing types sold. If it’s in good condition, you may end up netting a gain over the exclusion(s). Oh wait, I guess that’s kind of good news actually….

2. Partial Capital Gain Exclusion

Now, what if you didn’t live in the property for two of the last five years? Are you subject to the full force of capital gains? The IRS states that you might still be eligible for a partial exclusion. As long as the reason for selling your home is due to the business changing location or a new job altogether, you’re moving for health reasons, or an unforeseeable event has necessitated a move.

If that applies to you, then definitely have a chat with your accountant.

3. Selling Costs

Selling a home is sort of like running a business—you’ll only pay taxes on the profit you make (though that’s not entirely true if you qualify for either of the Capital Gains Exclusions above).

The formula for calculating profit is about as straightforward as anything you learned but can’t remember from first grade: Profit = Total Income – Costs

In other words, selling costs aren’t included in your profit, which means you don’t need to pay taxes on them. In fact, you can include these costs as a deduction.

Here’s a list from NOLO of the selling costs you can write off:

  • Advertising
  • Appraisal fees
  • Attorney fees
  • Closing fees
  • Document preparation fees
  • Escrow fees
  • Mortgage satisfaction fees
  • Notary fees
  • Points paid by seller to obtain financing for buyer
  • Real estate broker’s commission
  • Recording fees (if paid by the seller)
  • Costs of removing title clouds
  • Settlement fees
  • Title search fees, and
  • Transfer or stamp taxes charged by city, county, or state governments.

Just make sure to keep your receipts!

4. Mortgage Interest

Once your home sells, you’re free from the mortgage that was attached to it AND any interest you paid that year is now a write-off. Unfortunately, you can only deduct the interest on $750K of that mortgage debt unless you got your mortgage before December 15 of 2017.

This deduction is itemized, and therefore separate, from your property tax deduction.

5. Property Taxes

You can also write off the property taxes you paid while the home was in your name. It’s capped at $10K, and the best way of tracking the requisite info down is through your billing or bank statements.

6. Home Improvements

You can also write off home improvements you made to the property so long as they were made with the intent to increase the value of the property. The IRS distinguishes between “repairs” and “capital improvements.” If you’re simply fixing stuff that breaks down that won’t be tax deductible.

Instead, capital improvements are proactive projects aimed at fetching a higher price when the property sells.

And here are some things that might fit the bill…

  • New bedroom, bathroom, deck, garage, porch, or patio
  • New landscaping, driveway, walkway, fence, retaining wall or swimming pool
  • New storm windows or doors, roofing, siding, or satellite dish
  • New attic, walls, floors, or pipes and ductwork
  • New HVAC, furnace, central humidifier, central vacuum, air/water filtration systems, wiring, security system,
  • or lawn sprinkler system
  • New plumbing, septic system, water heater, soft water system, or filtration system
  • New built-in appliances, kitchen modernization, flooring, wall-to-wall carpeting, or fireplace

That’s a huge list, and if you’ve lived in your home a long time you’ve likely made a bunch of those improvements. To be safe, however, Realtor.com recommends only excluding improvement costs done within 90 days of closing:

If you needed to make home improvements in order to sell your home, you can deduct those expenses as selling costs as long as they were made within 90 days of the closing.”

We fall down on the side of intent more so than timeline but recommend talking to a CPA to determine which home improvement projects are tax deductible and which ones aren’t regardless.

Final Thoughts

Naturally you want to save as much money in taxes as you can when you sell your home. It’s a bit of stretch, but maybe the thought of losing profit to fees and commissions when you sell also keeps you up at night. If that’s the case, and if you want to get a fair cash offer for your home, give us a call at 385-336-3442.We can make you an offer within 24-hours — we’re fun to work with, buy as-is, and close in as little as two weeks!

Bonus Tip for Real Estate Investors

Look into a “Like Kind Exchange” (also known as a 1031 Exchange) to defer your profit from selling a property to another time. Your property is considered eligible so long as the old property and the one you’ll exchange it for are both investment properties (or otherwise used for the production of income). The full benefit of this swap can only be realized if the replacement property is of equal or greater value than the original. All the proceeds from the property you “sell” must be used to acquire the new investment property.

It’s next-level stuff, and involves more nuance than we went into, but we wanted to plant the seeds for your future retirement now.