Selling a home can result in a significant capital gains tax liability, but there are several ways to reduce this burden. Here are four effective strategies to minimize capital gains on the sale of your home:
When you sell your home at a profit, you may owe capital gains taxes on the difference between what you originally paid and the selling price. However, certain home improvements you make during your ownership can reduce the taxable gain and lower your tax bill. Understanding what qualifies as a deductible capital improvement is key to maximizing your tax savings.
What Are Capital Improvements?
The IRS distinguishes capital improvements from regular repairs and maintenance. Repairs simply restore a home to its original condition, while capital improvements add value by enhancing or upgrading the property.
To qualify for capital gains tax deduction an improvement must
- Add value, extend the useful life, or adapt the home to new uses
- Have a useful life of more than one year
- Still exist at the time of sale
Keeping your house in good shape doesn’t count as a capital improvement. Capital improvements include bigger changes and additions.
Examples of Deductible Capital Improvements
Sometimes, when you sell your home, you can deduct the cost of the following projects:
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Adding living space Finishing a basement, converting an attic, building an addition like a sunroom
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Major remodels: Kitchen upgrades, opening up floor plans, installing built-in appliances.
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Outdoor additions: Decks, patios, porches, detached garages, swimming pools.
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Systems upgrades: New roof, windows, siding, insulation, HVAC, plumbing, electrical systems.
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Landscaping: Trees, sod, irrigation, fences, stone walls and patios. Driveways, walkways, lighting systems.
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Security: Fire protection systems, security systems, emergency generators.
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Accessibility: Wheelchair ramps, stair lifts, accessible showers and tubs.
Generally, bigger projects that make things work better, look better, be more energy efficient, or make people feel better qualify. Upgrading outdated or damaged systems to modern standards also counts. Small repairs or regular upkeep, like painting, fixing appliances, cleaning carpets, and so on do not qualify.
Costs That Can Be Deducted
If you make certain capital improvements to your home, you can deduct their fair market value from the amount of money you gain. This includes:
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Contractor labor and materials
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Permit fees, inspection costs, architectural plans
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Related expenses like debris removal or utility connections
Keep detailed records like invoices and contracts to document the costs. Home appraisals before and after major renovations can also help establish value.
How the Deduction Is Calculated
When you sell your home, capital gains taxes apply to the difference between the sale price and your cost basis. This is what you originally paid for the home plus certain costs like closing fees and improvements.
For example:
- You bought your home for $200,000
- You made $40,000 in capital improvements over the years
- Your home sells for $350,000
Without deductions, the taxable gain would be $150,000 ($350,000 sale price – $200,000 original cost). But you can deduct the $40,000 spent on capital improvements. So the taxable gain lowers to $110,000 ($350,000 – $200,000 – $40,000).
Depending on your tax bracket, that $40,000 deduction could reduce your capital gains taxes by $4,000 to $8,000.
Limitations and Considerations
A capital improvement deduction won’t benefit all homeowners:
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If your gains are under the capital gains exclusion limits ($250k single, $500k married filing jointly), you won’t owe taxes anyway.
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Improvements must still exist at the time of sale to qualify. Replacing items like carpeting before selling makes them non-deductible.
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You can’t deduct expenses that were subsidized by tax credits or rebates.
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Keep detailed records and receipts to validate deductions in case of an audit.
For primary residences, capital gains taxes don’t apply to the first $250k profit for single filers or $500k for married couples. So focus on improvements that boost value well beyond your potential excluded gains.
Consult a tax professional to understand how capital improvements might impact your specific tax situation. With proper planning and documentation, this deduction can help many homeowners reduce taxes owed on home sale profits.
Bottom Line
When selling your home at a substantial profit, capital improvements you’ve made over the years could potentially lower your tax bill. Additions, renovations, upgrades that improve functionality or efficiency generally qualify. But repairs and maintenance that just retain existing value won’t count. Keep detailed records and factor this deduction into your overall tax planning strategy.
Ownership and Use Test
To qualify for the home sale exemption, you must pass both the ownership and use tests:
- Ownership Test: You must have owned the home for at least two out of the five years preceding the date of sale.
- Use Test: You must have used the home as your principal residence for at least two out of the five years preceding the date of sale.
These two years do not have to be continuous, and they do not have to overlap.
Special Circumstances and Partial Exclusions
Certain circumstances may allow for a partial exclusion if you do not meet the full two-year requirements. These include:
Change of Place of Employment: If you need to sell your home due to a job change that qualifies as a long-distance move.
Health Reasons: If you need to sell your home for health-related reasons.
Unforeseen Circumstances: These might include events like: natural disasters, death, divorce, or multiple births from the same pregnancy.
In these cases, you may be eligible for a prorated exclusion based on the time you owned and used the property as your principal residence.
What Home Improvements Can Be Deducted From Capital Gains? – CountyOffice.org
FAQ
What improvements can be offset against capital gains tax?
… landscaping the garden with a new layout, building new patios, adding a summer house or garden office, installing lighting or drainage systems, or …Feb 22, 2025.
What home improvements are against capital gains?
The Bottom Line. A capital improvement is a permanent alteration to addition to a property that increases its value or useability. When you sell your home, you can deduct the money you spent on improvements from your capital gains. This is because the improvements are considered capital improvements.
Can renovation cost be deducted from capital gains?
Capital Improvement Deduction Basics Funds spent to improve a home can be deducted from the capital gains when a home is sold, potentially reducing capital gains taxes. The deductible expenses have to be for improvements that last more than a year.
What can you deduct from home sale capital gains?
In addition to the home’s original purchase price, you can deduct some closing costs, sales costs and the property’s tax basis from your taxable capital gains. Jan 8, 2025.