Q. Do real estate agents fees get deducted before any capital gains liability on a home sale?
A. Absolutely. This is just one element of determining whether there will be any gain or loss when a home is sold.
In a nutshell, here is how to determine whether a homeowner has a gain or loss on a sale. Subtract the home’s adjusted basis on the date of sale from the sales price, and the result will be any net gain or loss. In other words: Sales price, minus the adjusted basis, equals the net gain (or loss) on the sale.
The sales price, for tax purposes, is the total amount realized on the sale, minus selling expenses. Selling expenses include:
- Real estate sales commissions
- Points paid by the seller to the buyer’s lender
- Attorney and accountant fees
- Settlement charges
- Closing fees
- Appraisal fees
- Escrow fees
- Title examination fees
- Title insurance
- Title certificate (Torrens) and registration
- Document preparation fees
- Recording fees
- Transfer tax stamps
- Land survey fees, and
- Pest inspection fees.
However, not everything qualifies as a sales expense. First of all, you can’t deduct prorated items such as prorated taxes, insurance and rent.
You also can’t include any expense that physically affects the property, even if it was needed to sell it. For example, you can’t deduct the cost of painting the property or doing new landscaping. However, as shown below, the cost of such improvements is added to the home’s basis, thereby reducing the gain on the sale.
To determine a home’s adjusted basis, add to its original cost the cost of any improvements, and subtract from this amount:
- The amount of any depreciation deductions taken (ordinarily taken only where there was a business office in the home, and;
- The amount of any insurance or other payments received as the result of a casualty or theft loss;
- Any deductible casualty loss not covered by insurance.
The equation: (original cost plus improvements cost) minus (the sum of depreciation plus casualty losses) is the adjusted basis.
The original cost includes the total sales price plus some settlement fees and closing costs. These include:
- abstract fees,
- attorney fees,
- charges for installing utility services,
- escrow fees,
- legal fees,
- recording fees,
- termite inspection fees,
- transfer taxes,
- title insurance, and
- any amounts the seller owes that the buyer agrees to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions.
A buyer purchases a home for $200,000, plus pays $10,000 in closing costs. The original cost of the home is $210,000. A few years after the sale she installs a new bathroom for $5,000. She also had a home office for her eBay sales business, for which she took a total of $5,000 in depreciation deductions. Her adjusted basis on the date of sale is:
The sum of $210,000 and $5,000, minus $5,000, is $210,000
She sells the house for $250,000 and has $20,000 in selling expenses, including $15,000 in commissions. Her total sales price is $230,000.
Her total gain on the sale is $230,000, minus $210,000, which is $20,000.
Since she lived in the home for more than two years before it was sold, she owes no tax on the $20,000 because she qualifies for the $250,000 exclusion on capital gains for single people who sell their homes after two years of residence.
Had she not qualified for the exclusion, she would have to pay a 15 percent federal capital gains tax on her profit, or $3,000.
Stephen Fishman is a tax expert, attorney and author who has published 18 books, including "Working for Yourself: Law & Taxes for Contractors, Freelancers and Consultants," "Deduct It," "Working as an Independent Contractor," and "Working with Independent Contractors." He welcomes your questions for this weekly column.