Are Realtor Fees Tax Deductible? What You Need to Know

Realtor fees, also known as real estate commissions, represent a significant cost in property transactions. These fees are typically a percentage of the property’s sale price, ranging from 4% to 6% of the home’s value, split between the buyer’s and seller’s agents. The tax implications of these fees are not uniform; their deductibility depends on the nature of the property and the specific transaction. Understanding their tax treatment is important for both buyers and sellers.

Realtor Fees for Selling a Primary Residence

When selling a primary residence, realtor fees are not deductible on your income tax return as an itemized deduction. Instead, these fees are considered selling expenses that reduce the capital gain realized from the sale of your home.

For example, if a home sells for $500,000 and realtor fees amount to $30,000, the “amount realized” for tax purposes is reduced to $470,000. This reduced amount is then used to calculate any capital gain, which is the difference between the adjusted sales price and your home’s cost basis. The IRS provides guidance on this in Publication 523.

The reduction of the capital gain is beneficial due to the principal residence exclusion allowed under Internal Revenue Code Section 121. This exclusion permits single filers to exclude up to $250,000 of capital gain from their income, and married couples filing jointly can exclude up to $500,000, provided certain ownership and use tests are met. By reducing the overall gain, realtor fees can help ensure the gain falls within these exclusion limits, potentially eliminating federal tax liability on the sale. If selling expenses cause your sale to result in a loss, that loss is not deductible for tax purposes.

Realtor Fees for Buying a Primary Residence

Realtor fees incurred when purchasing a primary residence are not tax-deductible in the year they are paid. Instead, these fees are added to the property’s cost basis. The cost basis represents the original cost of an asset, including acquisition expenses, used to determine gain or loss upon sale.

By increasing the cost basis, these fees can reduce the capital gain recognized when the property is eventually sold. For instance, if you purchase a home for $400,000 and incur $10,000 in realtor fees as part of closing costs, your adjusted cost basis becomes $410,000. This higher basis means that when you sell the home, the difference between the selling price and your basis will be smaller.

This adjustment to basis is a long-term benefit, deferring the tax advantage until the property is sold. It is not an immediate deduction that reduces your taxable income in the year of purchase. Settlement statements, such as a Closing Disclosure, detail these fees, providing documentation for the basis adjustment.

Realtor Fees for Investment Property Transactions

The tax treatment of realtor fees for investment properties differs from that of primary residences, reflecting their income-generating purpose. For investment properties, realtor fees have distinct implications whether buying or selling.

When selling an investment property, such as a rental home or a property held for business, realtor fees are considered selling expenses that reduce the capital gain from the sale. This treatment is similar to selling a primary residence, but without the principal residence exclusion. For example, if an investment property sells for $600,000 with $36,000 in realtor fees, the net sale price for capital gain calculation would be $564,000. If the property is part of an active trade or business, these selling expenses can also be considered ordinary and necessary business expenses under Internal Revenue Code Section 162, further reducing taxable income.

Conversely, when purchasing an investment property, realtor fees are not immediately deductible but are added to the property’s cost basis. This increased basis is advantageous for investment properties because it can be recovered over the property’s useful life through depreciation. Under Internal Revenue Code Section 168, the cost of tangible property used in a trade or business or for income production, including real estate, can be depreciated over a set number of years, typically 27.5 years for residential rental property.

A portion of the purchase price, including added realtor fees, can be deducted annually over many years, providing ongoing tax benefits. For example, if an investment property’s depreciable basis is $300,000 (after adding realtor fees), approximately $10,909 ($300,000 / 27.5 years) could be deducted each year as depreciation expense. This annual deduction reduces the property’s taxable rental income, offering a long-term strategy for minimizing tax liability. IRS Publication 527 provides information on rental property income and expenses, including depreciation.

Essential Recordkeeping

Accurate recordkeeping is important to substantiate the tax treatment of realtor fees. Detailed documentation proves the amount of fees paid, the transaction date, and the nature of the property involved, whether personal or investment. Maintaining these records supports any adjustments to basis or reductions in capital gains.

Key documents to retain include the settlement statement, often a HUD-1 or Closing Disclosure, which itemizes all costs associated with the real estate transaction, including realtor commissions. Invoices from real estate agents or brokerage firms confirming fees paid are also important. Receipts showing the payment of these fees should be kept.

These records are necessary for calculating the adjusted cost basis of a property or the net sales price when determining capital gains. For tax purposes, records should be kept for at least three years from the date you filed your original return or two years from the date you paid the tax, whichever is later. Records related to property basis should be kept until the period of limitations expires for the year in which you dispose of the property.