Are Real Estate Commissions Tax Deductible?

by Steve Lander, Demand Media Google
    Your real estate agent's commission could shelter you from capital gains tax.

    Your real estate agent's commission could shelter you from capital gains tax.

    Some real estate commissions are tax-deductible and some aren't. The Internal Revenue Service looks at the commission in context. If you pay it to sell your house, it's not deductible although it is a part of the cost of selling your house. Commissions paid on investment properties get treated differently since the IRS lets you write off most of those properties' expenses.

    Commissions and Your Home

    The IRS looks at commissions as a part of the cost of buying or selling your property. Like the other costs involved in having a piece of property change hands, it isn't tax deductible the way that you write off your home mortgage interest, but you can subtract it from the price at which your property transacted, which affects your capital gains tax. For instance, if you sell your house for $300,000 and pay a six percent commission and another $3,000 in miscellaneous fees, the IRS considers the net amount -- $279,000 -- to be your realized selling price. That "sale basis" is how the IRS determines if you have a profit. If you pay commission when you buy a property, it gets added on to the purchase price along with your other closing costs to give you a higher cost basis.

    After-Commission Tax on Your Home

    The IRS lets you collect up to $250,000 of tax-free profit on the sale of your primary house if you are single or $500,000 if you are married and file a joint return. If your sale is on the line where you might need to start paying capital gains tax, the commission that you pay reduces your selling price so that you may not have to pay tax. Please note that these exclusions, which are in the tax code as of February of 2013, only apply to long-term capital gains. If you have to sell your house after you have held it for less than a year, you will not be able to take advantage of these exclusions.

    Commissions and Rental Properties

    When you have rental properties, you might periodically need an agent's help to find a tenant. Given the relatively short length of most residential leases, the IRS allows you to write the commissions off in the year you pay them. To do this, you combine them with all of your other operating expenses on your Schedule E and subtract them from your rental income to find your net profit. When you sell your rental property, though, the IRS treats your sale commission differently from the leasing commissions that you claimed as expenses on your Schedule E. Instead of allowing you to deduct your sale commission from your operating profits on Schedule E, you subtract it from your selling price. If you sold your rental property for $200,000 and you paid $12,000 in commission, you'd have a net selling price of $188,000. Since your net selling price is lower, your potential profit is lower. While this won't reduce your income tax, it will reduce the profit that is liable for capital gains taxes.

    Commissions and Commercial Properties

    Commercial property leases usually last longer than residential leases. This means that the commissions you pay to leasing agents add value to you over a period of multiple years. Since the effect of the commission is longer than a year, the IRS requires you to spread the commission expense over an equally long period, meaning that you will have to amortize the leasing commission over the life of the lease. For example, if you pay $12,000 in commissions for a three-year lease on a small business that you are opening, you'd be able to write off $4,000 per year.

    About the Author

    Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.

    Photo Credits

    • Thinkstock Images/Comstock/Getty Images