Selling your home doesn't always mean a big tax bill.
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You might not think of your home as a capital asset, but the Internal Revenue Service does. And, when you sell it for a gain, Uncle Sam could be expecting to share in your windfall. There aren't "deductions" for selling your home, but taxpayers often overlook certain items when it comes to figuring the taxable gain on a home sale.
Increases to Basis
When you sell your home, your taxable proceeds equal your net proceeds minus your basis. Your basis starts out at what you paid to buy the home, including not only the purchase price, but also certain additional costs like abstract fees, legal fees, costs of installing utilities and recording fees. However, if you've made substantial improvements
to your home since you bought it, those costs boost your basis, too. These increases include improvements that have a useful life more than one year, such as adding a patio; paying special assessments for local improvements, such as sidewalks; or paying to repair damage after a disaster, such as a hurricane.
Decreases to Proceeds
Just because the buyer is writing a check for $500,000 doesn't mean you got to keep it all. Instead, the IRS bases your tax bill on the net proceeds from the sale, not the gross proceeds. That means you can take out all the selling expenses, such as your real estate agent's commission, advertising costs and legal fees. For example, if you paid a $30,000 commission and $1,000 in legal fees, your proceeds total only $469,000.
Exclusion for Primary Residence