Are Real Estate Commissions Deductible From Capital Gains?

More and more people put up properties for sale these days, and they are required to pay a commission. As with any average person, you want to minimize costs when selling property so that you make as much capital gains as possible while minimizing the total tax burden. So, is there a way to get the real estate commission back? Are real estate commissions deductible from capital gains?

Are Real Estate Commissions Deductible from Capital Gains?

No, real estate commissions are not deductible from capital gains like closing costs or escrow fees. Rather, you can subtract the commissions from the selling price of your property. Once you’ve done this, the tax on your capital gains is, in turn, affected; allowing you to avoid losing money on the commission you have paid. 

The IRS regards commissions as an added cost to the total sale or purchase of your property. But they cannot be directly deducted from capital gains like home mortgage interest. Instead, you could deduct the commission from the total selling price of your property.

So, if your house sells for $400,000 and the commission is fixed at 5%, the net amount of $380,000 is what the IRS views as your selling price. Therefore, this amount is the basis on which they would determine how much you would be taxed.

A man and a woman calculating real estate fees

An Alternative To Real Estate Commissions

While most realtors deal based on percentages, an alternative type of commission is a fixed fee. This allows you to keep most of your gains when selling your property, so you’re happy. 

CA Flat Fee lists your home for a flat fee of $5,000 instead of charging the regular three to five percent most traditional realtors charge. For instance, if your property sells for $400,000 you would only be paying the $5,000 flat fee as opposed to the $12,000 that a realtor charging 3% would bill.

Additionally, with California Flat Fee, you receive more services than a typical flat fee company who typically only provides a Multiple Listing Service. This includes showings coordination, professional photography, and marketing, as well as negotiation and closing management.

Sales Expenses that You Can Deduct from Capital Gains

Certain costs are incurred while selling a house, and thankfully, some of them are deductible from capital gains. 

  • Appraisal fees
  • Advertising
  • Attorney fees
  • Escrow fees
  • Closing fees
  • Mortgage satisfaction fees
  • Document preparation fees
  • Notary fees
  • Settlement fees
  • Costs associated with removing title clouds
  • Title search fees
  • Recording fees (if any is paid)
  • City, county, or state-charged transfer or stamp taxes

Deduction of these costs in addition to using the flat fee model guarantees that you’re left with significant capital gains afterward without the stress of handling every aspect of the transaction yourself.

Recovering Expenses Incurred on Home Improvement from Capital Gains

While minor expenses incurred to increase the physical outlook of your house cannot be deducted, it turns out that expenses on major improvements or renovations can be.

However, they would have to absolutely qualify as major renovations. If you made any significant physical additions or overhauls, even years before putting your property up for sale, you can include the costs on a tax basis. This would in turn reduce the portion of your capital gains that would be taxable after the sale.

To clearly define this, the home improvements made must have been done to increase the material value of your home (not necessarily the physical overview as in minor renovations), increase property life expectancy, or additional sections included for various uses. Here are some of these deductible home improvements that qualify for deductions:

  • Installation of pipes, new insulation, or ducts
  • Landscaping activity, such as a new lawn
  • Replacing old fences, as well as building new porches, decks, or patios
  • Upgrading or replacing heating and air conditioning system
  • Adding a new garage, bedroom, or bathroom
  • Replacing an old roof, doors, or windows
  • New floors or walls
  • Adding new In-built appliances
  • Installing new walkways or driveways
  • Replacing the wall-to-wall carpeting
A person filling out a tax form

The Capital Gains Rule or Exclusion

The rule guiding capital gains isn’t exactly a rule, rather, it qualifies as an exclusion, but it still increases your gain. At this point, you should recall that your capital gain is what would be left over after covering expenses, as well as paying off any existing mortgage debt.

And taxation of your capital gains falls under income taxes. So, here comes the silver lining: you’re allowed to exclude as high as $500,000 of capital gains that you made from the sale if you’re married, and $250,000 if you’re single.

The only requirement is that the house must have been your primary residence for at least two out of the past 5 years.

Note that using the flat fee model doesn’t imply that the real estate commissions be directly deducted from capital gains. You would also have to follow the same ‘subtraction from the sale price’ process mentioned above.

A Detailed Scenario

Remember that capital gains aren’t calculated based on the original purchase price of your home, rather, the cost basis of your home is considered. So, say you bought your home for $400,000 and $100,000 went into improvements, you now end up with $500,000 as your cost basis.

If this house is sold by a married couple, who have lived in it for a minimum of two years, for $1,000,000, they would be required to pay nothing in the way of capital gain taxes. A higher cost basis implies that your tax bill would be lower when you sell.

Therefore, all you would be required to do is pay the real estate commission, which would be less than usual, using the flat fee model. You would have to present evidence that you’ve lived in the house for that time, and make sure you keep all receipts detailing home improvement costs safe.

Related Questions

When Do You Have To Pay Capital Gains Taxes?

You have to pay capital gains taxes before the fixed payment date that is specific to the exact quarter that you sold your property. For the first quarter, April 15, second quarter, June 15, third quarter, September 15, and the fourth quarter is fixed for January 15 of the following year.

Do Seniors Have to Pay Capital Gains Taxes?

Yes, seniors have to pay capital gains tax just like any other property owner, including on property sales. Although there are other factors that can affect if capital gains must be paid, such as how long someone has lived in their home, age does not change that. 

Conclusion

While real estate commissions are not directly deductible, now you know just how to get your funds back. And if you decide to opt for a flat fee realtor (which is a pretty great idea), you would no longer be left in the dark as to how to get your refund.