Investors who sell investment real estate can deduct many of their settlement and closing costs, and these deductions can have significant tax implications.
According to the Internal Revenue Service, allowable tax deductions on the sale of rental properties typically include many standard settlement and common closing costs, as well as title transfer taxes, which can be added to your basis in the property. An increase in basis can help lower the amount of realized capital gain from the sale, which can help reduce your overall capital gains tax liability.
Let’s take a look at what closing costs are tax deductible when selling a rental property.
Expenses That are Tax Deductible When Selling An Investment Property
When you sell a rental property, you can take a host of income tax deductions. These deductions are important because the tax implications for divesting investment real estate can be higher than when you sell a primary residence since it is considered a business investment by the IRS.
Allowable expenses when selling a rental property include:
- 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 your allowable tax deductions based on the sale of a rental property investment.
Capital Gains Tax
Any investment you sell for a profit will generate a capital gains tax liability. This tax is based on the original purchase price (basis) of the investment and its value when you sell. The closing costs associated with selling a rental property that are tax deductible, however, can adjust your overall basis and potentially reduce your capital gains tax liability.
Defer Capital Gains Taxes Through A 1031 Exchange
There are ways to defer the capital gains taxes you owe after selling a rental property. Real estate investors who roll over the entirety of their sales proceeds into a like-kind replacement property through a 1031 exchange can defer capital gains and depreciation recapture taxes.
Ultimately, when selling rental property, it’s best to consult with a tax advisor to make sure you take advantage of all eligible tax deductions.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
Costs associated with a 1031 transaction may impact investor's returns and may outweigh the tax benefits. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities.