Is Mortgage Payoff Considered a Selling Expense?
Understand how mortgage payoff is handled in a home sale, how it differs from other closing costs, and its potential tax implications.
When selling a home, various costs come into play, from agent commissions to title fees. A major financial obligation is the remaining mortgage balance, which must be paid off at closing. This raises an important question: Is the mortgage payoff considered a selling expense?
Understanding how mortgage payoff differs from other settlement costs is key when reviewing closing documents and potential tax implications.
Mortgage Payoff vs Other Settlement Costs
The mortgage payoff is often the largest financial obligation at closing, but it differs from other settlement costs. Expenses such as real estate commissions, title insurance, and escrow fees are directly tied to the transaction, while the mortgage payoff is a pre-existing debt that must be settled before ownership transfers.
Settlement costs include fees for services that facilitate the sale, such as attorney fees, recording charges, and transfer taxes. These arise solely because the property is being sold. The mortgage payoff, however, consists of the remaining loan principal, accrued interest, and any prepayment penalties. Since this is an existing liability rather than a transaction-specific expense, it is not considered a selling cost but a debt that must be cleared to complete the sale.
Treatment on Closing Documents
On the closing statement, the mortgage payoff appears as a deduction from the seller’s proceeds rather than a selling expense. The settlement statement—typically a Closing Disclosure or ALTA Settlement Statement—lists the mortgage payoff separately from traditional selling costs.
Lenders provide a payoff statement detailing the exact amount required to satisfy the loan, including the remaining principal, accrued interest up to the closing date, and any applicable fees. Because mortgage interest accrues daily, the payoff amount can vary depending on the closing date. Some lenders also impose a per diem interest charge if funds are not received by a specific deadline on closing day.
In some cases, sellers may face a prepayment penalty. While less common today, certain adjustable-rate or non-traditional loans may impose a fee for early repayment. If applicable, this penalty is deducted from the seller’s proceeds and reflected on the closing statement.
Possible Tax Considerations
Selling a home can have tax implications, particularly regarding capital gains. The IRS allows homeowners to exclude up to $250,000 of gain from taxable income if filing single, or up to $500,000 if married filing jointly, under the primary residence exclusion (IRC Section 121). To qualify, the seller must have owned and used the home as their main residence for at least two of the past five years. Any gain beyond this threshold is subject to capital gains tax, which in 2024 ranges from 0% to 20%, depending on income.
Certain selling expenses can reduce taxable profit. Real estate commissions, legal fees, and advertising costs are deductible when calculating the gain on sale. Additionally, home improvements made before selling can impact tax liability. Renovations that increase the home’s basis—such as a kitchen remodel or roof replacement—can be added to the original purchase price, reducing the taxable gain.
If the gain exceeds the exclusion, sellers may receive a Form 1099-S from the closing agent, which must be reported on their tax return. Even if no tax is owed, keeping records of all improvements, selling costs, and purchase documents is advisable in case of an IRS audit.