With Tax Season Approaching, Here’s What Home Sellers Can Write Off

Tax season is upon us, and if you sold a home last year, you’re probably wondering how that will affect your tax bill.

Will you have to pay capital gains tax? Can you write off your real estate agent’s fee? How will your property tax figure in?

Well, thankfully, there are several expenses that home sellers can write off. Here’s how to ensure you’re doing what you can to lower your tax bill.

Find any records and documents pertaining to the home sale.

As with any and all expenses related to taxes, you’ve got to have documentation just in case the IRS decides to question that $5,000 contractor bill.

Before you start doing your taxes, it’s a good idea to gather all the records you’ll need:

  • Your closing statement
  • Your 1098 form, which records your mortgage interest payments
  • Your 1099S form, which records capital gains, if you received one
  • Documents proving your home was your primary residence
  • Receipts and records of any work done on the home, including DIY projects

Depending on your situation, you may have additional documentation to find—it’s always best to check with a CPA or other tax professional if you think this may be the case.

Look for these write-offs:

Capital gains exclusion

Capital gains tax is levied on any profit from the sale of a home that was your primary residence, and that exceeds $250,000 for a single tax filer, and $500,000 for a married couple. If you made less than these amounts on your home sale, then you don’t need to pay capital gains tax.

Most home sellers, therefore, qualify for the capital gains tax exclusion, which is good news—the capital gains tax rate can be up to 15 percent.

Mortgage interest and property taxes

The amount you paid in mortgage interest and property taxes are deductible if you itemize deductions, according to TurboTax.

Major home improvements

While the cost of things like paint and general maintenance cannot be used to decrease your tax bill, the cost of certain major home improvements can be added to the original value of your home in order to increase its cost basis.

This is really only useful if you do not qualify for the capital gains tax exclusion. If you earned more than $250,000 in profit on the sale of your home, then you can add the cost of renovations like adding a bedroom, replacing a water heater, and other specific improvements that the IRS has designated, to the price of your home when you purchased it in order to decrease the net profits you made—and thereby, decrease the amount of capital gains tax you need to pay. 

Agent’s fees, inspection fees, legal fees, escrow fees, administrative fees, and advertising fees

The fees associated with the act of selling your home, from what you paid your agent to any additional money you spent to advertise your home, pay for a closing attorney, etc. can be deducted. 

If you need help itemizing these things, your agent should have records of any expenses he or she billed you for.

Selling a home can make your taxes more complicated, but there’s plenty you can write off. The key is to keep all documentation and stay organized. Happy filing!

How a phone call to the IRS saved me $2,000.

Last April, as tax season was ending, I decided to take advantage of a little thing called filing an extension. I’d never done it before, because my taxes had always been pretty straightforward. Last year, however, was when MANteresting went from hobby to holy-crap-this-thing-is-growing-too-fast. My business partner and I decided to make MANteresting a LLC, where we both held 50% stakes.

Whenever two people get added to any equation things get more complicated. Jesse had some receipts from MANteresting bills he paid. I had some receipts from bills I had paid. And we even had some revenue to report too. 

Since neither of us had operated a partnership before, we thought we would file personal tax extensions and deal with the LLC taxes this fall.

Apparently we are big idiots. Although we filed personal extensions, we didn’t know we also had to file a separate extension for MANteresting’s taxes.

Cue IRS Penalties. 

I got a fun little letter in the mail last week from our friends at the IRS letting me know that MANteresting was five months late on filing a tax return. We were charged $195/month, per partner, resulting  in a total financial obligation of $1,950 to be paid by October 30th. 

I felt sick.

Like I wanted to projectile vomit everywhere, pass out, and wake up from what I was hoping was a bad dream. Unfortunately, it was my reality. To make things worse, MANteresting wasn’t even profitable. So while we had a $0 tax obligation, we were being charged $1,950 for not reporting our $0 obligation to the IRS in April. Ugh! 

Fortunately, after a bit of internet research I stumbled upon first time penalty abatement. Apparently, the IRS is pretty cool about forgiving fees/penalties for first time offenders. I called some generic 1-800-IRS number and after being on hold for about 40 minutes, spoke to an IRS employee. She pulled up my account and explained why the IRS was charging the penalties.

All I said was “Yeah, I’m an idiot and this is the first time I’ve operated a business, I didn’t realize my personal extension didn’t also cover my business venture.” 

To which she literally replied; ” Oh, no problem sir. Give me a few minutes and I’ll have the penalties dropped.”

She put me on hold for about 5 minutes while she did her IRS thing, and then let me know I would be receiving a letter from the IRS indicating MANteresting was in good standing.

It really was that easy. So while taxes are probably my least favorite thing in the world, after Diet Coke, at least dealing with the IRS was surprisingly pleasant. Who woulda thunk it?

You ever dealt with the IRS before? 

Dear IRS: I’m not paying you anymore.


Screw taxes. I’m over them. So over them, in fact, I decided I’m not paying the IRS another penny. Yeah, that’s right, not one freaking penny. I went in to my payroll solutions system a few weeks ago and jacked my exemptions up to 18, which means I am effectively paying no more federal income tax. That’s how I roll. 

“But Ninja, you work for the federal government, wont you get fired for not paying taxes?”

No. I won’t. 

….

Okay, time for me to stop pretending like I’m a hardened criminal. I’m not paying any more federal income tax because I’ve already paid enough in taxes to cover my projected tax obligation. 

That’s right, I’m off the hook with the IRS. A few times a year I use this handy-dandy IRS withholding calculator and compare what I’m paying in taxes to what I should owe in taxes. Seeing that the end of the year is less than 60 days away, I felt it was important I made sure no surprises were coming my direction.

I don’t know why, but for some reason Girl Ninja’s school only takes out like 4% of her gross pay for federal income tax. It’s really annoying because it should be more like 18%.  All year I’ve been overcompensating by paying an excessive amount of federal income tax on my salary to make sure we didn’t fall short and get hit with penalties. Turns out I was paying so much extra we were predicted to get a fat refund; to the tune of $2,500.

Important question to ask oneself: Why the heck would I wait until February-ish to get that money back, when I can change my deductions and start getting paid back now?

With the click of a few buttons, I claimed 18 exemptions (as suggested by the IRS calculator) and eliminated all of my federal income tax payments. That’s $900/month extra going to my bank account. Couldn’t have come at a more opportune time with Xmas right around the corner.

I personally have an issue giving the government more than required. I know they would never give me an interest free $3,000 loan, so I’m not about to give them one. Think about it like this, would any of you give me $250/month for the next 12 months if I gave it all back to you a year from now? Heck no you wouldn’t, so why do you do that for Uncle Sam?

Have you predicted your estimated tax obligation this year? Are you expecting to owe or be owed? How much? 

random fun fact: WA state does not have state income tax 😉

Shove it tax man.

I’ve been doing a bit of financial spring cleaning lately (yea, I know spring is far gone). I’m quite proud of myself honestly. We are in the process of rolling $4,000 of forgotten retirement funds in to a traditional IRA for Girl Ninja. My last post was an update on how we are doing in regards to our 2012 personal finance goals. So today, I thought we’d keep the ball rolling and check in with our friends enemies at the IRS.

If you’ve been around PDITF for a while you’ll recall last year when I did my mid-year IRS check I was shocked to find out that we were going to owe about $4,000 come tax time. 2011 was our first full year as a married couple and, while dual income is definitely sexier than David Beckham in a Calvin Klein underwear shoot, it does have one drawback….it puts us in a higher tax bracket.

At the beginning of this year, I made some adjustments to our withholdings hoping we would owe (and be owed) nothing this go around. Turns out, I must have overcompensated. Instead of owing a few thousand dollars like last year, we are actually set to get a refund check of about $1,500 come next tax season.

If you are thinking “That’s awesome!”, I have some unfortunate news for you…

You might be dumb.

Or at the very least, you don’t understand that a tax refund is really just the government giving you back your own money. Money that you loaned to them for free. Last time I checked, I’m not in the business of making interest free loans to anyone, so why the heck would I start now? You bet your lumpy bottom as soon as I saw we were scheduled to get a refund, I submitted a witholdings adjustment form to my employer. I’d way rather owe The Man $1,500, than be owed $1,500. It’s simple math.

You almost had me IRS….almost.

p.s. for those that are curios we are supposed to owe about $13,000 in federal income tax by years end…think about how many california burritos I could have gotten with that money 🙁

p.p.s. Here is the calculator the IRS provides to figure out how much you will owe.

Paying the tax man.

For the first time ever I/we finally owed the IRS money come tax time. I use to think getting a big return after efiling was awesome since it was like free money, but then I was reminded it was my money all along. I just loaned it to the government for free all year.Suddenly, a couple thousand dollar return was more depressing than cool. Last year we got back a tiny bit, couple hundred dollars I think. But this year, we finally turned the table and owed instead of being owed.

We wont share exact amounts, but we had already paid $13,000 in taxes and had more than a couple thousand dollars left to pay. I’d say I am deeply troubled by this obligation, but I anticipated this would happen back in May so we had money set aside just for this purpose.

Some people thought that since we owed more than $1,000, we would possibly face a penalty for underpayment. While that can happen, the penalty doesn’t apply to us since we had already paid more in 2011 than we did in 2010. Couldn’t imagine the pain that comes with owing thousand of dollars, and having to add on another couple hundred in penalties.

We dream of the things we could have done with the taxes we paid last year (like bought a brand new car), but at the end of the day we love America and we know it takes taxes to keep the system running, the roads paved, and the military doing military things. Taxes are a necessary, confusing, and very frustrating part of life. Not to mention they are terribly boring and in no way, shape, or form sexy.

Have you filed yet? Did you get a refund or did you owe? Fill in the blank, Taxes are ______.

Lay off my taxes you filthy Accountant

Got this email from a PDITF reader a few days back…

Do you recommend getting an accountant for pretty much everyone making a decent wage? Currently my wife makes $50,000 a year and I make $70,000. We live in the Washington, DC area. We do no active trading, only W2 pay from our employers, a small amount of unemployment benefits from my wife, 401k and 401k roth contributions, nothing out of the ordinary.

We are new to our city, so I’m not sure if I should just do our taxes online or actually find someone more qualified.

Thoughts? Seems like a wise investment, but I’m really not sure where to start.

That is a good freakin’ question sir. One that I’m not sure I am qualified to answer. All I can do is tell you how the Ninja household operates…

I finished college back in 2007. I got a big-boy job, and for the first time in my life, was faced with the grim reality that I now had to file my own taxes (apparently my mom wasn’t willing to do it anymore :(). Since I only made $38,000/year and hadn’t done much in the way of managing my money, everything was pretty straightforward. I filed through a website called Tax Act in about 30 minutes. It didn’t cost me a dime and I was stoked to get a $400 refund back from the IRS.

Obviously, things have changed quite a bit since then. I got married (dual income!). Moved 1,200 miles for a job (unfamiliar deductions). Our income is much higher than it use to be. We tithe. Could take mileage deductions for some stuff. blah. BLAH. BLAH.

Even though our situation has become a little more complex over the years, we still file our taxes online. Every year I think “This will be the year I finally pay someone to do my taxes for me!” but I never freakin’ do it. It’s probably because I’m frugal. No scratch that, it’s definitely because I’m frugal.

I don’t know if this next statement is completely accurate (any tax people want to verify accuracy?) but my understanding is that itemizing deductions is only worthwhile if those deductions total a greater amount than your standard deduction would. As a married couple our standard deduction is $11,600. Our itemized deductions would be very close to that amount so I don’t see a reason to itemize. I could either show Uncle Sam all the things I’ve done to earn a $12,000 deduction, or I could just take the $12,000 deduction they already offer.

I would totally pay an accountant to do our taxes if we owned a house (thus getting to deduct mortgage interest) because then we would have $30,000 in itemized deductions. But since we have no kids, don’t own a home, aren’t making $500,000/year, and don’t really have any investments outside of standard retirement accounts, things are still pretty simple. I don’t think hiring an accountant is really a bad idea, but until our life gets more interesting we will probably steer clear.

How bout you all? Do you pay someone to do your taxes or do you do them yourself? Was my understanding of itemizing and standard deductions even correct? Should I pay someone to do our taxes this year?