A Practical Guide for Real Estate Investors
For investment property owners, selling real estate, a top concern is often: How much tax will I owe—and is there any way to reduce it? The good news is that certain expenses can be used to offset capital gains, potentially reducing your capital gains tax liability.
Understanding which costs qualify, and how they’re applied, can potentially make a difference in your after-tax return. Below, we break down the most common categories of deductible and offsettable expenses related to investment real estate sales.
First, How Are Capital Gains Calculated?
To calculate your capital gain, you subtract your adjusted cost basis from the net sale price of the property:
Capital Gain = Net Sale Price – Adjusted Basis
Your adjusted basis starts with the original purchase price and is adjusted for certain expenses:
- Added: Capital improvements (e.g., a new roof or HVAC)
- Subtracted: Depreciation claimed during ownership
The net sale price is what you sell the property for minus allowable selling expenses.
Expenses That Offset Capital Gains
The following are a few common categories that can either reduce your taxable gain by increasing the adjusted basis or lower the gain by reducing net proceeds:
1. Capital Improvements
Substantial upgrades that add value to the property or extend its useful life—like remodeling a kitchen or building an addition—can be added to your basis. These reduce your taxable gain when you sell.
Note: Routine repairs and maintenance are not considered capital improvements.
2. Selling Costs
Certain expenses reduce the net sale price, thus lowering the gain:
- Real estate commissions
- Title insurance
- Legal fees
- Escrow fees
- Advertising costs
- Transfer taxes
These reduce the “net proceeds” from the sale, reducing the taxable gain.
3. Purchase Costs (if previously excluded)
If not included in the basis, some original acquisition costs—like specific closing fees—may be added. Examples include:
- Title search fees
- Recording fees
- Surveys
- Attorney fees related to the purchase
Depreciation Recapture Warning
If you claim depreciation on the property during ownership—as most investment property owners do—be aware that this amount is recaptured up to a 25% tax rate upon sale. You cannot offset recaptured depreciation with capital improvements, these improvements only increase your basis and may reduce overall capital gain—not the depreciation recapture.
What You Can’t Offset
When selling investment property, the following expenses do not reduce taxable gain:
- Mortgage interest (already deducted annually)
- Property taxes (also typically deducted annually)
- Routine maintenance or repairs
- Personal use portions of the property (if it was partially a residence)
Final Thoughts
Reducing capital gains tax starts long before a sale—it begins with accurate recordkeeping and thoughtful planning. Investment property owners who track eligible improvements and selling costs accurately may be able to reduce their taxable gain.
Before completing a sale, consult a tax advisor or real estate professional to review your property’s cost basis, depreciation history, and eligible offsets. A strategic approach can help you manage tax obligations and support long-term financial goals.
The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
Article written by: Story Amplify. Story Amplify is a marketing agency that offers services such as copywriting across industries, including financial services, real estate investment services, and miscellaneous small businesses.
