If you are an investor selling a rental property, you are likely looking for all of the income tax deductions you qualify for, including what closing costs are tax deductible.
The tax implications for selling a rental property can be higher than when selling a primary residence, because it is considered a business investment by the IRS.
However, when selling rental property there are closing costs that can be used to reduce the taxable income earned from the property, thus lowering the overall tax liability.
These include, but are not limited to:
- Appraisal fees
- Loan origination fees
- Title fees
- Transfer fees
- Mortgage interest
- Mortgage points
- Real estate property taxes
- Legal fees
Items that cannot be deducted include any fees associated with refinancing the loan, fire insurance premiums, and rent. It is important to meet with a tax advisor to make sure you are taking all of the tax deductions you are allowed based on the sale of a rental property investment.
Capital Gains Tax
When selling an investment property for a profit, you can be subject to a capital gains tax. This is a tax paid on the profit you made on the investment property, based on the price you purchased the property for and the value of the property when you sell. The price you paid for the home is also called the tax basis.
The closing costs associated with selling the rental property that are tax deductible, discussed above, can be used to lower overall basis (or price you paid for the home), thus potentially lowering the capital gains tax.
There are ways to defer capital gains taxes owed when selling a rental property by using something called a 1031 exchange. A 1031 exchange is when you use the profit made from selling an investment property to buy a like-kind property within a certain amount of time. In a 1031 exchange the capital gains taxes are deferred, which can be a very attractive feature to many investors.
Ultimately, when selling rental property it is best to consult with a tax advisor to make sure you are taking advantage of all the tax deductions you are eligible for.