What Closing Costs Are Tax Deductible When Selling Rental Property?

What Closing Costs Are Tax Deductible When Selling Rental Property?

If you’re a landlord of a rental property searching for a buyer, you may wonder what closing costs are tax deductible when selling a rental property.

Selling a rental property is a big decision. Not only do you have to worry about what’s going on in the real estate and rental markets and how to get your investment property ready to list, but you also have to understand the financial aspects of the sale. 

Below we’ll take a look at what closing costs are tax deductible for rental property and which cannot be included as part of your tax deductions.

How to Deduct Closing Costs for Rental Property Sellers

The short answer to “Can you deduct closing costs when selling a rental property?” is yes. 

There’s more juggling of how to deduct closing costs when you purchase a rental property, but selling it allows you to deduct most closing costs from the net sale price, which, along with your depreciation recapture tax total, determines the amount of capital gains tax you’ll have to pay.

What Closing Costs Are Tax Deductible?

At an average of 6% to 10% of the selling price, closing costs add up to thousands of dollars of capital loss. You can anticipate paying the following fees, all of which are tax-deductible: 

Real Estate Agent Commissions

Sellers usually pay both the listing and buying agent commissions, which typically average 6% of the investment property sale price (3% for each).

You can lower this cost by choosing a for-sale-by-owner route, using a discount agency, or selling directly to an iBuyer, investor, or house flipper. If so, be sure you know how to analyze the market, value and market your property, and negotiate a sale without an agent’s help. 

Title Costs

Sellers pay for a pre-sale title search to verify ownership and a title insurance policy which protects the lender against unexpected future ownership claims. A limited number of states also require title review by an attorney.

Title costs are generally 0.1% to 0.5% of the sale price. 

Transfer Taxes and Recording Fees

Unlike property tax, you’ll have to pay property or deed transfer taxes when a sale closes. There are also state and local fees for filing and recording sale records—sometimes referred to as a conveyance, documentary, or recording fee. 

National averages come in at 0.45% for transfer taxes and 0.03% for recording fees (but the latter can range anywhere from zero to 5% in a few high-dollar cities).

While transfer taxes are usually paid by sellers, in some areas, buyers may be held responsible for this tax liability. 

Escrow Fees

Escrow fees cover multiple service charges related to document preparation and money distribution. They’re usually split between the buyer and seller. 

Most title or escrow companies charge a base fee plus a small percentage, which may total about 1% – 2% of the sale price for a simple sale. 

Prorated Taxes and HOA Fees

Ongoing housing costs need to switch hands from the seller to the buyer of the residential property. For things like utilities, it’s a simple matter of stopping the seller’s account and starting the buyer’s service on a set date. Property taxes and homeowners association dues, however, are handled during closing. 

This is partly due to the critical nature of keeping up these payments to avoid imperiling the loan security (the home). Additionally, depending on location, property taxes may be paid on an annual, semi-annual, or quarterly cost basis. 

Additional Deductible Closing Costs

Seller closing costs may also include: 

  • A lawyer and additional legal fees 
  • Appraisal, inspection, and survey fees
  • Loan origination fees 
  • Mortgage interest and points 

What Closing Costs Are NOT Tax-Deductible?

While you can deduct most rental property closing costs, there are a few exceptions. You cannot deduct: 

  • Rent
  • Fees associated with refinancing the loan
  • Fire insurance premiums

Consider meeting with a tax professional to review your unique situation prior to selling your rental property. 

Are You Ready to Sell Your Rental House? 

Do you have a rental or primary residential property you’d like to sell quickly or without the time and cost of preparing for a traditional listing? One way to increase the speed and decrease the work of closing a sale on a rental or primary residence is to choose the right partner. 

FlipSplit can take a rental residence in any condition and handle the clean-up, repair, and renovation needed to maximize its market value. 

Our expert team has the knowledge and skills to figure out exactly what’s selling at top dollar in your potential buyer pool and get it done. Whether that’s house and exterior clean-up, major construction work, or staging and marketing your property correctly, we’ll handle it. 

How does that help you? In addition to a quick sale and none of the time, hassle, and cost of taking on labor and construction work yourself, you’ll also save on real estate agent commissions and fees such as appraisals. Best of all—you won’t lose out on the profit opportunity. Once we resell the property, we split extra profits with you! 

Ready to learn more and get started on an offer for your rental property? Visit FlipSplit today.

Sources: 

  1. Roofstock. Are closing costs tax deductible on rental property in 2022? https://learn.roofstock.com/blog/closing-costs-tax-deductible-rental-property
  2. Nerdwallet. What Are the Closing Costs for a Home Seller? https://www.nerdwallet.com/article/mortgages/closing-costs-home-seller
  3. Real Estate Witch. Seller Closing Costs: Here’s What You Need to Know. https://www.realestatewitch.com/seller-closing-costs-explained
  4. Realized. What Closing Costs Are Tax Deductible When Selling Rental Property? https://www.realized1031.com/blog/what-closing-costs-are-tax-deductible-when-selling-rental-property

Reviewed by: Brandon Brown

As a long-time Asset Manager, Investor, Real Estate Agent, and Broker/Owner of BayBrook Realty in Orange County, Brandon Brown is one of FlipSplit’s lead Real Estate experts. Having worked on over 2,000+ real estate transactions, Brandon brings a depth of knowledge that ensures clients are appropriately treated with honesty and integrity. His insights and advice have been published in numerous blogs beyond FlipSplit, and he keeps a close eye on market trends and statistics, which are updated weekly on his social media pages. Outside work, you can find him participating and serving at church, cycling, mountain biking, surfing around Orange County and beyond, and enjoying time with his wife and two daughters.

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