New York State question: Selling expenses vs closing costs for property sale

[khanian]

I am currently filling out form IT2446 which is used when selling a coop by nonresidents of New York state. In one place the form asks for the "sale price less selling expenses." Elsewhere, on the form, it refers to "closing costs" which can be added to the cost basis for the property. Are "selling expenses" and "closing costs" the same thing?

[Critter-3]

Yes they are so only enter them ONCE on the form you are filling out ... personally I would add them to the basis instead of deducting from the selling price since this is how the IRS does it. 

[Opus 17 · Accepted solution]

It's IT-2664.

For federal tax purposes, there are certain closing costs (but not all) that are considered adjustments to cost basis when determining capital gains tax.  The allowable and non-allowable closing costs are listed here starting on page 8. 

https://www.irs.gov/pub/irs-pdf/p523.pdf

Form IT-2664 says to use the same federal rules for this form.

On worksheet 2. you are asked to enter the purchase price and adjustments to basis including "closing costs" (line 7).  This refers to closing costs for the purchase.  On line 15 you are asked to enter the selling price less expenses.  This refers only to those expenses of selling that are allowable adjustments to closing costs.  So the short answer is that closing costs on line 7 refers to the purchase, and selling expenses on line 15 refers to the sale, but only those costs that are allowable adjustments to basis.  

What @Critter-3 is referring to is the fact that if you report a sales price of $550,000 (net after adjustments) but the IRS gets paperwork saying the unadjusted sales price was $600,000, they may send you a letter asking for an explanation, not because you did anything wrong, but because of how the IRS computers work.  She is suggesting that you report the unadjusted selling price on line 15, and include your closing costs from the sale on line 7 along with the closing costs from the purchase.  I haven't had this problem so I can't recommend one method over another.  Form IT-2664 puts the closing costs from the purchase and from the sale in two different places.

One thing you must not do is double-count your closing costs.  Don't include closing costs from the sale on line 7 if you are also reporting the adjusted selling price on line 15, since that would be double-counting your closing costs. 

[khanian]

Thanks for the very insightful response!

[khanian]

You seem very familiar with this form, so I hope I can ask a follow up question. I understand now about the worksheet. Can I also ask about line 1 from page  "Sale price (from Worksheet for Part 2, line 15)"? Given that the form says to use the number from line 15, this suggests that it should include a deduction for eligible selling expenses. So it is not simply the amount the buyer paid, but should reflect the selling expenses deduction as per the worksheet. Is that correct? It contradicts what I normally associate with "sale price" (purchase price) but seems to be what the form is asking for. 

[Opus 17]

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@khanian wrote:

You seem very familiar with this form, so I hope I can ask a follow up question. I understand now about the worksheet. Can I also ask about line 1 from page  "Sale price (from Worksheet for Part 2, line 15)"? Given that the form says to use the number from line 15, this suggests that it should include a deduction for eligible selling expenses. So it is not simply the amount the buyer paid, but should reflect the selling expenses deduction as per the worksheet. Is that correct? It contradicts what I normally associate with "sale price" (purchase price) but seems to be what the form is asking for. 

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The question is, where to account for selling expenses.  The instructions for form 2664 say to make two separate calculations: adjusted cost basis, and adjusted selling price.  They say the selling price on line 1 and on the worksheet line 15 should be the net sales price after adjustment for allowable expenses. 

If the IRS gets a sales report (1099-S) they will get the gross sales price without adjustments.  So if you report an adjusted sales price of $550,000 but the IRS gets a report of a gross sales price of $600,000, the IRS may start asking questions.  You can easily explain what happened, but there is a way to report the sale to avoid the questions in the first place.  You can report the selling expenses along with your purchase closing costs to increase the cost basis, and report the gross sales price as the selling price.  Your taxable gain will come out exactly the same, but it won't raise a red flag with the IRS.  For example:

Purchase price $200,000

Purchase closing costs $10,000

Improvements $10,000

Adjusted cost basis $220,000.

Gross selling price $600,000

Selling expenses $40,000

Adjusted selling price $560,000

Capital gains $340,000.

Here are two ways you could report that on your tax return

Purchase price (line 5)	$200,000	$200,000
Improvements (line 6)	$10,000	$10,000
Closing costs (line 7)	$10,000 (purchase only)	$50,000 (purchase and selling)
Adjusted cost basis (line 14)	$220,000	$260,000
Gross sales price	$600,000	$600,000
Sales expenses	$40,000	--- (already accounted for)
Adjusted selling price (line 15)	$560,000	$600,000
Capital gain (line 15 minus line 14)	$340,000	$340,000

The IRS won't care, as long as the bottom line is correct, and I don't think NY will care either.  However, reporting the gross sales price, and adding the sales adjustments to the purchase adjustments, may avoid an IRS letter. 

[khanian]

perfect answer! Thanks for your generosity in taking the time to respond!