The Internal Revenue Service considers your home, your car, your stocks and just about everything else you own to be a capital asset. If you sell a capital asset for more than you paid for it, the IRS wants its cut of your profit. That's when it becomes important to accurately figure that asset's cost basis. You can typically add commission costs to the asset's purchase price, which increases your basis and lowers your taxes, as long as you're the party who paid the commission.
With any asset, your cost basis (also referred to as its tax basis or adjusted basis) is the starting point the IRS uses to determine how much of a capital gain or loss you receive when you sell that asset. If you bought the asset, your basis is typically the price you paid plus any additional acquisition costs. What those acquisition costs include depends in part on the type of asset.
When you buy a home the seller is traditionally responsible for paying the commission costs, either from the proceeds from the sale or out of his own pocket. While you can add certain settlement costs, such as abstract fees, recording fees, survey fees, title insurance fees and transfer fees to your new home's cost basis, you can't add amounts that you didn't actually pay. If the seller paid the commission, you can't add it to your home's cost basis. If you agree to pays costs that the seller owes, including sales commissions, you can add those costs to your basis.
Stocks and Bonds
You generally go through an investments broker to purchase securities such as stocks and bonds, and in most cases you have to pay a commission for the broker's services. You can add the cost of those commission, plus any transfer or recording fees, to the security's purchase price to determine your cost basis.
If you buy 100 shares of stock, then sell those shares, figuring your cost basis and profit is not too difficult. It gets a bit more challenging if you progressively add to your holdings by purchasing additional shares, reinvesting your dividends or have stock splits. Each new transaction represents a new cost basis for the new shares, which could include different commission structures. This can have a significant impact on how you are taxed when you sell your shares. Your broker should provide you with cost basis information when it supplies your Form 1099-B at the end of each year.
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.