topic When I sell a rental property are any of the real estate closing fees tax deductible? in Investors & landlords

When I sell a rental property are any of the real estate closing fees tax deductible?

rmoshea — Tue, 04 Jun 2019 20:15:32 GMT

I live in the state of Minnesota. The property (condo) was rented out for over two years before I decided to get out of that business and sell the property. The property was never put back into personal use once it was converted to a rental.

I should also mention there were no profits from the sale...

rmoshea — Tue, 04 Jun 2019 20:15:35 GMT

I should also mention there were no profits from the sale of this property. It was actually sold for $40K less than what it was purchased for previously 9 years ago. Does this mean that there are no tax benefits for any of the associated selling costs?

If this a second home, not your main home, the loss is no...

Marketstar — Tue, 04 Jun 2019 20:15:36 GMT

If this a second home, not your main home, the loss is not deductible in any case.

You can reduce your selling price by the amount of the cl...

Marketstar — Tue, 04 Jun 2019 20:15:38 GMT

You can reduce your selling price by the amount of the closing costs paid. Lower selling price produces a lower profit, which in turn lowers your tax bill. .

The following is a list of closing costs that can be deducted from your sales price assuming you paid them:

Attorney fees in connection with obtaining property

Commissions

State stamp taxes and transfer taxes

Tax service fees

Title policy fees or title insurance

Miscellaneous abstracts of title, surveys, recording of deed

See I sold my rental property. How do I report that?

https://ttlc.intuit.com/questions/1933977-i-sold-my-rental-property-how-do-i-report-that

(Edited 02/06/2016, 6:50 pm, EDT)

See added content above.

Marketstar — Tue, 04 Jun 2019 20:15:39 GMT

See added content above.

What about the Home Protection Policy (like a warranty po...

ryan-vargas — Tue, 04 Jun 2019 20:15:41 GMT

What about the Home Protection Policy (like a warranty policy) that we purchased for the buyer? It is part of the closing costs that we paid for. Is that something we can add as a sales expense for the rental property? Please advise. Thanks.

Can't find a direct answer to your question, but a home...

Marketstar — Tue, 04 Jun 2019 20:15:42 GMT

Can't find a direct answer to your question, but a home protection warrant is a legitimate deduction for a rental property, so it would seem by extension to be a legitimate cost of sales deduction.

We also paid the California Real Estate Withholding as pa...

ryan-vargas — Tue, 04 Jun 2019 20:15:43 GMT

We also paid the California Real Estate Withholding as part of our sale of our rental property when we sold it. It's listed in the closing costs. Is that part of the Sales Expense? Please advise. Thanks.

I never got an answer to my question 6 days ago. Here wa...

ryan-vargas — Tue, 04 Jun 2019 20:15:45 GMT

I never got an answer to my question 6 days ago. Here was my question: "We also paid the California Real Estate Withholding as part of our sale of our rental property when we sold it. It's listed in the closing costs. Is that part of the Sales Expense? Please advise. Thanks."

See https://ttlc.intuit.com/questions/2738982-where-in-the-federal-return-do-i-enter-the-3-california-state-withholding-tax-withheld-from-the-sale-of-my-rental-home-in-california-i-am-a-resident-of-utah">https://ttlc.intuit.com/questions/2738982-where-in-the-federal-return-do-i-enter-the-3-california-state-withholding-tax-withheld-from-the-sale-of-my-rental-home-in-california-i-am-a-resident-of-utah</a>

Also https://ttlc.intuit.com/questions/2350021-the-state-withholds-33-3-on-real-estate-sale-when-the-withholding-is-refunded-does-it-count-as-income-in-the-next-year">https://ttlc.intuit.com/questions/2350021-the-state-withholds-33-3-on-real-estate-sale-when-the-withholding-is-refunded-does-it-count-as-income-in-the-next-year</a>

Re: When I sell a rental property are any of the real estate closing fees tax deductible?

nholdway — Sun, 16 Feb 2020 05:42:55 GMT

Thank you for this discussion. Related question: I live in Illinois, which has property taxes. When one sells property, the seller pays the following half-year's or year's property taxes (because the current year's taxes are actually billed the following year). On Schedule E while I owned the rental property, the year's billed taxes are deducted as an expense. So are the taxes that are part of the closing costs listed among the deductions as part of the sale (reducing capital gains), or lumped in with Schedule E expenses? I'm figuring the former but want to make sure. (It may not make a difference or only a minor difference on the overall tax bill in the end, depending on the real estate capital gain tax rate vs. general income tax rate.)

Re: When I sell a rental property are any of the real estate closing fees tax deductible?

Carl — Sun, 16 Feb 2020 14:10:06 GMT

Since you sold the property at a loss, don't waste to much time on this. It's not like you're trying to decrease your tax liability on a taxable gain, since there is no gain to tax.

But do understand that depending on the amount of depreciation taken, you "Might" actually have a profit. But I seriously doubt it, if you only had it classified as a rental for two years. (But in CA, it would not be impossible.)
If you follow the below guidance, the program will take care of the math "for you" under the assumption that you entered everything correctly to begin with, in the first year you started renting out the property.

- Fees associated with the acquisition/deposition of the loan (your existing loan) are flat out deducted.

Fees associated with acquisition/disposition of the property (such as title transfer fees) are added to the cost basis of the property.

Reporting the Sale of Rental Property

If you qualify for the "lived in 2 of last 5 years" capital gains exclusion, then when prompted you WILL indicate that this sale DOES INCLUDE the sale of your main home. For AD MIL personnel who don't qualify because of PCS orders, select this option anyway, because you "MIGHT" qualify for at last a partial exclusion.

Start working through Rental & Royalty Income (SCH E) "AS IF" you did not sell the property. One of the screens near the start will ahve a selection on it for "I sold or otherwise disposed of this property in 2019". Select it. After you select the "I sold or otherwise disposed of this property in 2019" you continue working it through "as if" you still own it. When you come to the summary screen you will enter all of your rental income and expenses, even it it's zero. Then you MUST work through the "Sale of Assets/Depreciation" section. You must work through each individual asset one at a time to report its disposition (in your case, all your rental assets were sold).

Understand that if more than the property itself is listed in your assets list, then you need to allocate your sales price across all of your assets. You will only allocate the structure sales price; you will NOT allocate the land sales price, since the land is not a depreciable asset. Then if you sold this rental at a gain, you must show a gain on all assets, even if that gain is $1. Likewise, if you sold at a loss then you must show a loss on all assets, even if that loss is $1

Basically, when working through an asset you select the option for "I stopped using this asset in 2019" and go from there. Note that you MUST do this for EACH AND EVERY asset listed.

When you finish working through everything listed in the assets section, if you ever at any time you owned this rental you claimed vehicle expenses, then you must also work through the vehicle section and show the disposition of the vehicle. Most likely, your vehicle disposition will be "removed for personal use", as I seriously doubt you sold your vehicle as a part of this rental sale.

Re: When I sell a rental property are any of the real estate closing fees tax deductible?

nholdway — Mon, 17 Feb 2020 02:26:35 GMT

This answer about the original post is turning out to be very helpful. I realized I was wrongly completing the "Sale of a business asset" section when I should just note the disposition of the rental property -- as well as related depreciating assets.

So how do you spread the sales price (and the expenses of the sale) over the depreciating assets? Proportionally? Like, I had electrical rewiring done -- I have to figure out some sort of sales price for it?

Re: When I sell a rental property are any of the real estate closing fees tax deductible?

tsch — Sat, 07 Mar 2020 22:52:04 GMT

I have a similar situation and could not find a definite answer. Did you get an answer by now.

Re: When I sell a rental property are any of the real estate closing fees tax deductible?

Anonymous — Sun, 08 Mar 2020 00:34:32 GMT

@Carl :

As @nholdway said "So how do you spread the sales price (and the expenses of the sale) over the depreciating assets? Proportionally? Like, I had electrical rewiring done -- I have to figure out some sort of sales price for it?"

I have been depreciating a $20K remodel, appliances, and refinance points along with the frame rental house. I did make a profit on the sale, so how do you apply sales price to these assets (knowing that they are part of the "property improvement" portion of the sale and not the land portion).

Re: When I sell a rental property are any of the real estate closing fees tax deductible?

Carl — Sun, 08 Mar 2020 01:28:38 GMT

I'll give an example. First a reminder. As you know, the cost basis and sales price of the non-depreciable land asset will not change for any reason. (I'm assuming the land is the only non-depreciable asset you have.)

I purchased property in 2000 for $100,000. Allocated $30K to the land which means the remaining $70K is the structure value, and that's the value being depreciated over the next 27.5 years.

In 2005 The central A/C died and I purchased a new A/C (both inside blower and outside compressor) at a cost of $10,000. Since that becomes "a material part of" the property it gets classified as residental rental real estate and depreciated over 27.5 years just like the rental property.

In 2010 the refridgerator died. I purhcased a new refridgerator for $1100. Since that's not "a material part of" the rental property it get's classified as equipment (Tool, Machinery, Equipment, Furniture in TurboTax) and depreciated over 5 years.

In 2019 I sell the property. First, I need to figure the total cost basis.

Paid for house/land - $100,000 Depreciation taken as of sale date in 2019 - $47,000

New A/C system - - - $10,000 Depreciation taken as of sale date in 2019 - $4,500

New refridgerator - - $1,100 Depreciation taken as of sale date in 2019 - $1,100 (completely depreciated)

TOTAL - - - - - - - - - - - $111,100 Total depreciation taken on all assets - - - - $52,600

My cost basis in the land is still $30K. My cost basis in the remaining depreciable asstes is $81,000.

My sales price is $200,000.

At this point, I'm going to allocate $40,000 to the sales price of the land. That gives me a $10K gain on the sale of the land. I have $160,000 of my sales price left to allocate. This will be allocated across my depreciated asset only. (which includes the rental structure.)

Now, I need to allocate the remaining sales price across these assets. Since I sold the property at a gain, I need to actually show a gain in each asset - even if that gain is only $1 on some assets. The allocated amount needs to be at least $1 above the "cost basis".

So of the remaining $160,000 of my sales price left to allocate, I"m going to allocate $140,000 to the structure, $15,000 to the A/C and $5,000 to the refrigerator. I've now shown a gain on each and every asset.

Understand that you don't have to allocate your sales price proportionately. It should be obvious above that I most certainly didn't. But it doesn't matter. What does matter is that if you sold the property at a gain, then you must show a gain on every listed asset. Even if that gain is only $1 on some assets.

Likewise, if you sold the property at a loss, then you must show a loss on all assets, even if that loss is only $1 on some assets.

If I just report the property sold for $200,000 and the assets sold for $0, that shows a loss on some assets and a gain on others. On those assets that have not been fully depreciated yet, the program will do the math wrong and not recapture that depreciation. That makes the 4797 and SCH D flat out wrong. Sometimes the program can handle this. But more often than not it screws things up on the 4979 and SCH D. When that happens the program checks do not see this as an error. They see the sale of that asset as a loss is all. You will also be able to e-file successfully with no problem and the IRS computers will accept the e-filed return.

But in the review it's very likely the depreciation recapture will not be correct - particularly on those assets that you show a loss on when you in fact sold the property at a gain. This generates a nasty gram from the IRS, and you don't want that.

Re: When I sell a rental property are any of the real estate closing fees tax deductible?

nholdway — Mon, 09 Mar 2020 00:59:48 GMT

This is excellent. That the IRS doesn't require proportional allocation of the sales price among all the assets is ... bonkers, as many IRS regs are -- I did figure it that way. But I guess it doesn't matter because the totals come out the same and therefore the income to be taxed will come out the same.

I don't think anyone has answered my question on whether the real estate taxes listed as part of the closing costs are figured into the expenses of the sale (effectively adding to the cost basis), as opposed to being figured into the taxes on Schedule E (along with the taxes paid before the sale), but it looks to me from reading elsewhere that they indeed would be figured into the expenses of the sale.

Re: When I sell a rental property are any of the real estate closing fees tax deductible?

Carl — Mon, 09 Mar 2020 01:47:47 GMT

That the IRS doesn't require proportional allocation of the sales price among all the assets is ... bonkers, as many IRS regs are -- I did figure it that way

While you can allocate proportionally, there's no need. Regardless of how you allocate, it will not change the "bottom line" gain or loss, provided you follow the two simple rules in the allocation process.

1) If sold at a loss, then you show a loss on all assets - even if that loss is only $1 on some assets.

2) If sold at a gain, then you show a gain on all assets - even if that gain is only $1 on some assets.

Re: When I sell a rental property are any of the real estate closing fees tax deductible?

Carl — Mon, 09 Mar 2020 01:52:40 GMT

It was actually sold for $40K less than what it was purchased for previously 9 years ago

Actually, its possible you sold at a gain. Remember, in the year you sell rental property you are required to recapture all prior depreciation taken on the property. You show that recapture by adding that depreciation to your sales price. Then, if that adjusted sales price is more than your cost basis in the program, you sold at a gain. Of course, depending on how close the adjusted sales price is to your cost basis, once allowed deductions are taken into consideration, that gain could be offset and become a loss.