Can You Deduct Realtor Fees From Capital Gains?

Selling a home or investment property is a significant financial event, and understanding their tax implications is crucial for property owners.

Understanding Capital Gains from Property Sales

When a property is sold, the profit is considered a capital gain. Real estate, whether a primary residence, rental, or investment property, is a capital asset. A capital gain arises when the “amount realized” from selling a property exceeds its original cost, or “basis.” Conversely, a capital loss occurs if the basis is greater than the amount realized.

The basis includes the initial purchase price along with certain acquisition costs. Capital gains are categorized as either short-term or long-term, depending on how long the property was owned. Short-term gains are from assets held for one year or less, while long-term gains come from assets held for more than one year.

Impact of Selling Expenses on Your Gain

Various expenses incurred when selling a property directly influence the capital gain calculation. Realtor fees, for instance, are not a direct income deduction; instead, they reduce the “amount realized” from the sale. By lowering the net proceeds, these selling expenses decrease the capital gain.

Other common selling expenses function similarly to realtor fees. These include legal fees, title insurance premiums paid by the seller, and escrow fees. Costs associated with marketing, such as advertising, or preparing the home for sale, like staging, also reduce the amount realized. These expenses must be directly related to and necessary for the property’s sale to qualify.

Identifying Other Costs That Adjust Your Basis

Beyond the initial purchase price, several other costs incurred during property acquisition and ownership can significantly adjust its basis. These adjustments are important because a higher basis generally leads to a lower calculated capital gain. Certain acquisition costs, such as attorney fees, recording fees, title search and insurance expenses, survey costs, and transfer taxes, are added to the original purchase price, thereby increasing the property’s basis.

Furthermore, capital improvements made to the property during the period of ownership also increase the basis. These are improvements that add value, prolong the property’s useful life, or adapt it to new uses, rather than simply maintaining it. Examples include adding a new room or garage, replacing an entire roof or HVAC system, or undertaking major kitchen or bathroom remodels. If the property was a rental or investment property, any depreciation previously taken on it must be subtracted from the basis, as depreciation reduces the property’s adjusted cost for tax purposes. Maintaining meticulous records of all these expenditures is important for accurately determining the adjusted basis.

Calculating Your Taxable Gain

To determine the taxable capital gain from a property sale, a clear calculation is followed, integrating the sales price, selling expenses, original cost, and basis adjustments. The general formula begins with the gross sales price, from which all qualified selling expenses are subtracted to arrive at the “net amount realized.”

Concurrently, the property’s “adjusted basis” is calculated. This involves taking the original purchase price, adding acquisition costs and the cost of any capital improvements, and then subtracting any depreciation claimed if it was a rental or investment property. The final capital gain or loss is then determined by subtracting this adjusted basis from the net amount realized. For instance, if a property sells for $450,000, with $30,000 in selling expenses, and has an adjusted basis of $300,000, the net amount realized is $420,000 ($450,000 – $30,000). The capital gain would be $120,000 ($420,000 – $300,000). This gain is reported on specific tax forms, such as Form 8949 and Schedule D, which are used to detail capital asset transactions.