Can I deduct a seller credit from my reported profit of real estate sales? Will I be taxed (for capital gains) on the seller credit?

[murray_03]

How is real estate sales "profit" calculated for the purposes of capital gains tax? If I own my home outright and sell it for a purchase price of $100 with a $20 seller credit and $10 closing costs, will I pay capital gains tax on $100 or $70?

[KrisD15 · Accepted solution]

70. 

The 20 of Seller Credits are subtracted from the sales proceeds. 

The 10 of closing costs has the same effect. 

Be sure you are not counting your share of taxes as credits (for example when you sell property in March in a state that taxes the following year, you will pay your share (3 months) of Property tax at closing) 

[murray_03]

Excellent, thanks so much Kris!

[Opus 17]

Seller credits are treated as a reduction in selling price.

There are several other selling expenses that also reduce your capital gains, see publication 523 starting on page 8. 

https://www.irs.gov/forms-pubs/about-publication-523

However, if you received a 1099-S for the full listed selling price, the IRS may send you an inquiry letter if the sales proceeds figure you report on your tax return does not match the 1099-S.  In that case, you can chose to enter your selling expenses as adjustments to the cost basis instead.  In other words, suppose your purchase price was $150,000, the selling price was $300,000, and you paid an $18,000 real estate commission and gave a $10,000 sellers credit to the buyer. Your net sales price is $272,000.  However, if you received a 1099-S for $300,000, you might choose to report the selling price as $300,000 and the purchase price as $178,000.  The net capital gain is the same, but reporting the 1099-S figure as the selling price may reduce your chances of getting a letter from the IRS asking to explain the difference. 

[KrisD15]

Additionally, be aware of the exclusion to capital gain if you owned and lived in the home 2 of the last 5 years. 

According to the IRS:

"If you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse. "

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