Sales Expenses

[Mcb050032]

Received Sellers Statement and I understand as the Seller, Mortgage charges/fees and Selling/Listing agent commissions are considered selling expenses and can be added to seller's basis to reduce cap gain. On the Seller's statement there is also listed a Seller Credit under Primary charges/credits and a temporary buydown paid by Seller under Misc Charges. Are either of these also considered selling expenses to increase the seller's basis and reduce the cap gain? 

[MarilynG1]

Yes, these expenses can count towards Sales Expenses to increase cost basis and reduce gain.  You are allowed to deduct from the sales price almost any type of selling expenses, provided that they don't physically affect the property.

Such expenses may include:

• advertising
• appraisal fees
• attorney fees
• closing fees
• document preparation fees
• escrow fees
• mortgage satisfaction fees
• notary fees
• points paid by seller to obtain financing for buyer
• real estate broker's commission
• recording fees (if paid by the seller)
• costs of removing title clouds
• settlement fees
• title search fees, and
• transfer or stamp taxes charged by city, county, or state governments

[Mcb050032]

Thanks, regarding prorations/adjustments: County Taxes paid by seller are not selling expenses, correct? 

[Opus 17]

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@Mcb050032 wrote:

Thanks, regarding prorations/adjustments: County Taxes paid by seller are not selling expenses, correct? 

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Correct.  You have to break things up by category.

Any fees that are exclusively related to mortgage financing are not deductible and are not adjustments to basis.  That normally applies to buyers, not seller, but I mention it just in case.

Costs for repairs/maintenance are not adjustments, repairs are the ordinary responsibility of any property owner and there are no tax breaks for that.

Selling expenses reduce your net selling price. That can include legal fees, mortgage transfer tax, deed recording fee, etc.  If you pay for "staging", that's an allowable expense (for advertising) as long as it does not physically change the home.  (For example, if the staging crew also paints, that part of the expense is repair/maintenance and is not an allowable adjustment.)

Property taxes do not adjust your basis and also do affect your property tax deduction for the year.  For example, suppose you paid $3000 in property taxes on Feb 15, which covered the entire year 1/1/23 through 12/31/23.  You close the sale on August 31, and the buyer gives you a $1000 credit for the property taxes that you pre-paid, which cover their term of ownership.  They can deduct the $1000 as if they paid the taxes directly to the county, and you can only deduct $2000 on your tax return, because even though you paid $3000, you were reimbursed (and even if you were not reimbursed, you can't deduct any taxes for a period of time when you didn't own the home).

There are some states where taxes are paid in arrears, meaning the taxes for 2023 are paid in 2024.  In that case, you pay the buyer an credit of the $2000 that covers 1/1/23 through 8/31/23 when you owned the home, that they will pay for in January 2024.  In that case, the property tax adjustment is not an adjustment to the selling price, but you can claim it as a property tax deduction as if you had paid it to directly to the county.

[Mcb050032]

Appreciate the info. So would the Seller-Paid Buydown be still considered to reduce the net selling price? Thanks!

[Opus 17]

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@Mcb050032 wrote:

Appreciate the info. So would the Seller-Paid Buydown be still considered to reduce the net selling price? Thanks!

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I don't recognize the term "seller buydown" or "temporary buydown".   What exactly is happening?

In general, most concessions are treated as adjustments to the price, because they really are.  Suppose the house is listed for $150,000, and the buyer says, "I can't play closing costs, let's make the price $160,000 with the seller paying $10,000 in closing costs."  The sales price (as far as the IRS is concerned) is still only $150,000.  

Or, suppose the house is listed for $150,000 but it's kind of run down and the buyer offers $130,000.  The real estate agent says, "it would be bad for property values in the whole neighborhood to sell for $130,000.  Why don't we sell for $150,000 but the seller gives the buyer a $20,000 allowance for repairs and improvements."  In that case, the real selling price is $130,000.  

[Mcb050032]

Thanks for the examples.

Basically the seller is giving the buyer a temporary discount on their mortgage interest rate by paying some money upfront to the lender.