Three Things the IRS Lets You Subtract Before Taxing Your Gain

August 2026  |  By Michael Reeves · RetirePay Research

Selling something you have held for a long time can come with a large tax bill.

Most people only find out how large after the sale is done.

By then, the number is set. Nothing can change it.

This matters most when what you are selling is worth a lot more than you paid for it. If the difference is small, the tax is small too — and there is not much to plan.

But when the difference is large, the tax code gives you real ways to bring that number down. Most of them have to be used before you sell.

Here are three of them.

1. What You Actually Paid Is Probably Higher Than You Think

The tax is not on what you sell for. It is on the difference between what you sell for and what you paid.

That second number is called your “cost basis.” And most people get it wrong — in a way that costs them money.

Here is the most common mistake.

If you owned a fund or a stock that paid dividends, and those dividends were automatically used to buy more shares, you already paid tax on that money in the year you received it.

Those dividends count as money you paid in.

If you leave them out, you are taxed on the same money twice.

A few others that get missed:

• Commissions and fees you paid when you bought count as part of what you paid.
• Stock splits change your per-share number. The total stays the same, but the math confuses people.
• Inherited investments usually reset to their value on the date of death — not what the original owner paid. This one is often worth the most, and it is often missed.
• Gifted investments are the opposite. You usually keep whatever the person who gave it to you paid.

Why this happens so often: brokers were only required to track and report cost basis starting in 2011. If you have held something longer than that, or moved it between firms, the number on your statement may be missing or simply wrong.

You are the one responsible for proving it. Not your broker.

2. The Costs of Owning the Investment

Some of what you spent while you held the investment can be used to lower your bill.

Margin interest. If you borrowed against your account to invest, the interest may be deductible against your investment income. If you do not have enough investment income this year to use it, it usually carries forward to future years.

One that surprises people: the fee you pay your advisor is no longer deductible. That changed in 2018 and has not come back. Many people are still deducting it, or still assuming they can.

The order you sell in matters too. If you own the same investment bought at different times and different prices, you can choose which shares to sell — the expensive ones or the cheap ones. Pick the expensive ones and your gain is smaller.

But you have to tell your broker at the time of the sale. Not in April. If you say nothing, most brokers sell your oldest shares first, which are usually the ones with the biggest gain.

That single instruction, given at the right moment, can change the size of the bill.

3. The Costs of the Sale Itself — Especially on Property

When you sell property, a large amount of what you spend comes off the top.

The commission you pay the agent is subtracted from your sale price. On a high-value home, that alone is a significant number.

Closing costs count on both ends — what you paid when you bought, and what you pay when you sell. Title fees, legal fees, transfer taxes.

Improvements count. Repairs do not. This is the line most people get wrong.

• A new roof, a new kitchen, an added room, a new HVAC system — these are improvements. They get added to what you paid.
• Painting, fixing a leak, replacing a broken window — these are repairs. They do not.

Over twenty years of owning a home, the improvements can add up to a very large number.

And if the property was your main home, a married couple filing jointly can often exclude up to $500,000 of the gain entirely. A single filer, up to $250,000. There are rules about how long you lived there.

The catch on all of it: you need the records. Receipts, invoices, closing statements. If you cannot show it, you usually cannot count it.

Which is why the work has to start before the sale, not after.