Can You Write Off Realtor Fees on Your Taxes?

Realtor Fees for Selling a Primary Residence

When selling your primary home, the realtor fees you pay are not deductible as an expense from your ordinary income. Instead, these fees are considered a selling expense that reduces the “amount realized” from the sale of your home. This reduction impacts the calculation of any potential capital gain or loss. For instance, if you sell your home for $500,000 and pay $30,000 in realtor commissions, your “amount realized” for tax purposes would be $470,000.

Reducing the amount realized is advantageous because it lowers your taxable capital gain, or it can even increase a capital loss. Internal Revenue Code Section 121 allows homeowners to exclude capital gains from the sale of a primary residence, up to $250,000 for single filers and $500,000 for those married filing jointly, provided certain ownership and use tests are met. Even with this exclusion, reducing the gain through selling expenses can be beneficial, especially if your gain approaches or exceeds these exclusion limits.

Realtor Fees for Buying a Primary Residence

Realtor fees incurred when purchasing a primary residence are not deductible as a current expense. Instead, these fees are added to the “cost basis” of the property. Cost basis represents the original value of an asset, encompassing the purchase price and certain acquisition costs.

A higher cost basis is advantageous because it reduces the capital gain when you eventually sell the property. For example, if you buy a home for $400,000 and pay $10,000 in buyer-side realtor fees, your cost basis becomes $410,000. This increased basis means that when you sell the home, the difference between your selling price and adjusted cost basis will be smaller, potentially leading to a lower taxable capital gain.

Realtor Fees for Investment or Business Property

The tax treatment of realtor fees for investment or business property, such as rental properties or commercial buildings, differs significantly from that of a primary residence. These properties are held for generating income or for use in a trade or business.

When acquiring an investment or business property, realtor fees are not immediately deductible as an expense. Instead, these fees must be capitalized, meaning they are added to the property’s cost basis. These capitalized costs, with the purchase price, are recovered over the property’s useful life through depreciation. Residential rental properties are depreciated over 27.5 years, while nonresidential real property is depreciated over 39 years. Depreciation expenses are reported on forms such as Schedule E or Schedule C.

Conversely, realtor fees incurred when selling an investment or business property are deductible as selling expenses. These expenses reduce the “amount realized” from the sale, which in turn decreases any capital gains or increases any capital losses. This reduction is important for calculating the taxable gain or loss. Sales, including associated selling expenses, are reported on Form 4797 and summarized on Schedule D.

Other Related Real Estate Transaction Costs

Beyond realtor commissions, numerous other costs arise during real estate transactions, each with its own specific tax treatment. Understanding how these common fees are handled for tax purposes can provide a clearer financial picture for buyers and sellers.

Appraisal fees, for example, are typically added to the property’s cost basis for buyers, increasing the overall value for tax purposes. For sellers, appraisal fees are generally considered a selling expense that reduces the amount realized from the sale. Legal fees, depending on their purpose, can also be added to the buyer’s basis if they relate to acquiring the property or treated as a selling expense for the seller if they relate to the disposition.

Title insurance premiums and survey fees are generally treated as capitalized costs, meaning they are added to the property’s cost basis for the buyer. Recording fees, which cover the official registration of the property deed and mortgage, are also typically added to the buyer’s basis. These additions to basis serve to reduce future capital gains when the property is eventually sold.

Loan origination fees, often referred to as “points,” represent charges paid to the lender for processing the loan. For a primary residence, these points may be deductible over the life of the loan, provided certain criteria are met, such as the points being for a loan used to buy or build your main home and being customary in the area. For investment properties, points are generally added to the property’s basis and recovered through depreciation. Property taxes, which are often prorated at closing, are generally deductible in the year they are paid, regardless of whether they are for a primary residence or an investment property.