Your capital gains is the difference between your adjusted cost basis and the selling price and has nothing to do with the amount of cash you got or the loans you have to pay off. (If you bought the home for $100,000, then refinanced for $200,000 and sold for $200,000, you have a $100,000 gain even though you got no cash at the closing, because you took the cash out early in the form of the equity loan.). Allowable adjustments to the cost basis are listed in publication 523.
Sale:
1. You must report the sale if you got a 1099-S, although you might not pay capital gains tax depending on the circumstances. If you did not get a 1099-S, you still have to report the sale if you don't qualify for the gains exclusion. If you report the sale in Turbotax and don't owe tax, turbotax will give you the option of leaving it out of your actual tax return.
2. You only deduct property taxes paid for the days you owned the home. For example, suppose you paid $3000 of property taxes on January 15 that covered Jan 1-Dec 31, 2021. If you sold the home on June 25, you owned the home for 175 days, so you can only deduct 175/365=47.9% of the property taxes you paid. You will generally get a credit on your closing statement from the buyer, reimbursing you for taxes that you paid to cover their period of ownership, but you must reduce the amount of taxes you claim as a deduction to only cover the days you owned the home, even if you did not get such a adjustment.
3. If you paid points on the mortgage for this house and were deducting them spread out over time, you can now deduct the remaining amount of the points as a lump sum.
For the purchase:
1. You can deduct the daily mortgage interest from the closing date to the end of the month, this will be shown on your closing statement. You can deduct this interest even if it is not included on your 1098. If you aren't sure if the daily interest at closing is included in your 1098, compare the interest on your monthly mortgage statements with your 1098.
2. You can deduct property taxes allocated to the days you owned the home. For example, suppose the seller paid $3000 of property taxes on January 15 that covered Jan 1-Dec 31, 2021. If you bought the home on September 25, you owned the home for 97 days, so you could deduct 97/365=26.6% of the property taxes as if you paid them to the taxing authority yourself. You will generally give the seller a credit at the closing for the taxes they paid in advance that cover your ownership period, but you are allowed to deduct the property taxes as if you paid them to the town or county, even if you did not give such a credit.
3. If you paid points on the mortgage, you may be able to deduct the entire amount in 2021. This depends on the financial circumstances of the transaction and Turbotax will ask you questions to guide you through this deduction. If you can't deduct the points in a lump sum, you will deduct them spread out over the life of the mortgage.
4. If you paid monthly mortgage insurance premiums they will be listed on the 1098 and may be deductible if you are not subject to an income limit. If you paid a lump sum mortgage insurance premium as part of your closing costs, you can deduct this spread out over 84 months, even if it is not shown on your 1098. You will have to manually add the correct figure to the mortgage insurance premiums shown on your 1098. (If you paid a VA funding fee for a VA loan, or a guarantee fee to the Rural Housing Service, this is a special type of mortgage insurance and may be deducted fully in the year of the purchase.)
5. Items placed in escrow are not deductible when the escrow account is funded, because is it still your money until the insurance premium or property tax bill is paid.
