Are Realtor Fees Deducted From Capital Gains?

Selling real estate involves significant financial implications, particularly concerning taxes. Understanding how a property sale is handled for tax purposes directly impacts the net proceeds. This article explains how selling expenses and property improvements affect the taxable gain from a real estate sale.

Understanding Capital Gains on Real Estate Sales

A capital gain arises when a capital asset, like real estate, sells for more than its adjusted cost. This profit is subject to taxation by the Internal Revenue Service (IRS). To determine a gain or loss, subtract the property’s adjusted basis from its selling price. A positive result signifies a capital gain; a negative result indicates a capital loss.

Capital gains are classified as short-term or long-term, based on how long the property was owned. Short-term gains apply to assets held for one year or less and are taxed at ordinary income rates. Long-term gains apply to assets held for over one year and benefit from lower tax rates. This distinction directly influences the tax rate applied to any profit.

Costs That Reduce Your Taxable Gain

Realtor fees and other selling expenses are not traditional deductions from capital gains. Instead, these costs reduce the “amount realized” from the property sale. This lowers the gross proceeds before calculating the capital gain, reducing the taxable profit. The amount realized is the selling price less these direct costs.

Common selling expenses that reduce the amount realized include real estate agent commissions, legal fees related to the sale, advertising costs, and closing costs paid by the seller. These can include transfer taxes, title insurance premiums for the buyer (if paid by the seller), and escrow fees. For example, if a property sells for $500,000 and realtor commissions are $25,000, the amount realized is $475,000 for capital gain calculation. Keep detailed records of all expenses to accurately determine your reduced sales proceeds.

Adjusting Your Property’s Basis

The original cost of acquiring a property forms its initial basis, including the purchase price and certain acquisition costs. These costs can include legal fees, title insurance premiums, and survey fees incurred at purchase. Over time, specific expenditures can increase this initial basis, which reduces the eventual capital gain when the property is sold.

Capital improvements add to a property’s basis. These are expenses that add value, prolong useful life, or adapt the property to new uses. Examples include adding a room, installing a new roof, or major renovations. Routine repairs and maintenance, like repainting or fixing a leaky faucet, are not considered capital improvements and do not increase the basis. Maintain thorough records of all improvements to maximize this adjustment.

Calculating Your Net Capital Gain

To determine the net capital gain, begin with the gross sale price of your property. From this, subtract all eligible selling expenses, such as realtor commissions and legal fees, to arrive at the net amount realized from the property sale.

Next, calculate your adjusted basis by adding the original purchase price to any qualified capital improvements made during ownership, along with other acquisition costs. Finally, subtract this adjusted basis from the net amount realized. The resulting figure represents your net capital gain or loss, which is the amount on which capital gains tax will be assessed. For example, if the net amount realized is $475,000 and the adjusted basis is $300,000, the net capital gain is $175,000.