Can I deduct closing costs for sale of a rental property against income rather than capital gain?

[solarz-patel]

Hi Community.  I am quite knowledgeable about taxes, but haven't been able to find a clear answer to my question.  Even my accountant doesn't know for sure.  We sold a rental property in 2022 for a capital gain.  As with any standard sale, we incurred closing cost, which were approximately $50,000, and include standard closing cost items like interest, real estate taxes, transfer tax, agent commission, title fees, etc.  I am aware of the rules for which closing costs are capitalized and which are deductible when you purchase a rental property.  See, e.g., https://www.irs.gov/faqs/sale-or-trade-of-business-depreciation-rentals/rental-expenses/rental-expen....

However, we sold our property in a 1031 exchange, where the taxable capital gain is deferred.  Thus, I want to deduct the closing costs against our rental income rather than apply against the sales proceeds since I do not care that my gain on the sale will be higher since it is a 1031 exchange.  In other words, I am willing to accept a capital gain that is $50k higher since 1031 exchange, but want to deduct the $50k in closing costs  against taxable rental income.  Is that allowed?

[DavidD66]

No, you cannot expense your closing costs incurred when you sold your rental property.  They are a reduction in proceeds from the sale, not a rental expense.

[solarz-patel]

Thank you @DavidD66 .  Do you have a code reference or IRS rule that says you must expense all closing costs against the sale?  I would think you could deduct at least mortgage interest and property taxes against income since those are immediately deductible on purchases.  Thus, I would think this should be consistent for both purchases and sales.

[DaveF1006 · Accepted solution]

Yes, here is a IRS faq sheet that mentions this specifically. It even mentions that interest, certain mortgage points and deductible real estate taxes can be deducted (expensed).

@solarz-patel 

[solarz-patel]

Thank you.  I did read the IRS FAQs previously.  It refers to "purchase" of property, but I would agree that would seem to cover also the "sale" of property even in a 1031 exchange.

[Mike9241]

interest, real estate taxes, deductible as part of rental expenses

transfer tax, agent commission, title fees, selling cost which reduces gain

[Saltysundaze]

I too just filed my taxes and my tax professional is giving me the same answer. I wanted to do exactly what you are saying and consider these costs line item expenses that came out of my pocket and reduced my rental income which in turn reduces my taxable income. She wouldn’t let me do it. I understand where the expenses are going, but I feel cheated because these expenses could’ve been money in my pocket going towards my new loan rather than going into some real estate agent’s pocket. This is frustrating. 

[KrisD15]

Expenses for a rental cannot be claimed until after the property is available to rent. 

Property cannot be available for rent until after closing.