FSBO Home Sellers: Here's How to Reduce Your Capital Gains Tax Bill
You are selling your home and have decided to forgo the services of a real estate agent and list your home “for sale by owner,” or FSBO. Most likely, your motivation is to try to save money. Agents routinely charge a commission of between 5% and 6%. But how much you really save depends in part on how much you successfully sell the house for, as well as what other expenses you will incur and whether you end up owing capital gains tax (if yourtaxable profit exceeds the standard $250,000 exclusion).
How Selling Expenses Reduce Capital Gains
When you prepare your home for sale, regardless of whether you use the services of a real estate agent, you will incur many fees. For starters, you will likely need to have your house thoroughly cleaned, and the windows washed. You may want to hire a stager to bring in replacement furniture and decorate it in a way that appeals to the broadest audience.
And without an agent, you'll need to add on fees for things like photographs and marketing materials and ads, online and off.
Many of these costs are, according to federal tax rules, added to what's called the “basis” of your home. That's another way of saying the total amount the home cost you (including your purchase price).
The resulting increased basis is then subtracted from the total sales price of your home, to calculate the net profit. The higher your basis, the more you reduce your amount of taxable capital gain.
The next question is exactly which costs qualify.
Does the Value of Your Time Showing the Home Qualify as a Selling Expense for Capital Gains Tax Purposes?
When you use a real estate agent to sell a home, the commission you pay is an expense that the IRS says will reduce the amount of capital gain realized on the home sale. When you don’t use a real estate agent, you will probably spend at least ten hours a week responding to prospective buyers via telephone or email and showing your home. That time equals lost revenue.
Unfortunately, the IRS does not view the time you spend as the type of expense that reduces one's capital gains tax obligations.
Does the Cost of a Home Appraisal Offset Capital Gains?
You might want to hire a home appraiser to estimate your home's market value, both to help you set a list price and possibly to show to prospective buyers as support for the price you set.
This expense qualifies as a service to assist in the selling of your home. In Publication 523, the IRS states that the cost of these services can be added to the basis of a home when calculating the amount of taxable capital gain.
Will the Cost of Professional Services to Advertise the Home for Sale Reduce Capital Gains?
The IRS permits a home seller to use any fees for a service hired in order to sell a home without a broker to reduce the taxable capital gains on the sale of the home. Services used to assist in the sale of your home might include listing property on an online listing service, newspaper advertisements, printed signs, Facebook and social media advertisements, and paying a third party to manage your marketing and advertising needs.
This is an area where you can potentially spend a lot of money. Listing fees can add up to several hundred dollars, especially if you post on multiple sites. So, the value of these additions to your home’s basis can be great.
Can Fees Paid to a Photographer to Capture Images for Listings Offset Capital Gains?
The cost to hire a professional photographer to take photos of your home to list on places like the MLS, Zillow, online or print listing services, and newspapers qualify as advertising fees. Advertising fees are a selling expense that can be used to minimize the amount of capital gain realized on your home’s sale.
These photos are also one of the best sources of advertisement, so you want to make sure to have a quality job done, and that they accurately portray your home in a flattering light.
Will Home Staging Expenses Reduce Capital Gains?
Home staging involves various tasks. You might remodel, replace carpeting, and paint the walls for example. Such expenses can be added to the basis of your home if they are considered substantial improvements—ones that increase the useful life of the home. Simple repairs and “patch jobs” will not qualify to increase basis. However, when you rent or buy various furnishings, clean up the home to show it, and take photographs for listings, these may qualify as advertising expenses, which can be added to your home’s basis reducing overall capital gain.
This information is provided for general informational purposes only. No information contained in this article should be construed as legal advice and does not establish an attorney-client relationship.
Originally published in Nolo.