Are you a landlord looking to sell one of your rental properties? If so, be aware of the many deductible selling expenses available to you.
This blog post will provide an overview of the most common deductible selling expenses and how they can help reduce your taxable income when it’s tax time. So if you’re ready to sell your rental property, keep reading for more information on the potential tax benefits.
Key takeaways
- When you sell a rental property, you may be able to deduct certain expenses from your taxable income.
- These deductible selling expenses include commissions, legal fees, and advertising costs.
- Keep good records of your expenses to deduct them from your taxes.
- Deductible selling expenses can save you money on your taxes, but understand the rules before you take these tax deductions.
10 deductible selling expenses for rental property
When you sell an investment or rental property, you may be able to deduct certain selling expenses from your taxes. These deductible selling expenses can include advertising, broker fees, legal fees, and repairs made as part of the home sale.
To deduct these expenses, itemize them on your tax return. Additionally, the selling expenses must be for services related to the sale of the property and must be considered “ordinary and necessary.”
If you’re unsure whether an expense qualifies, you should speak with a tax expert.
Here are 10 common deductible selling expenses you may be able to claim when selling a rental property:
1. Real estate commission
The real estate commission paid by the seller is often the largest rental property selling expense. While deductions to reduce taxable net income are one of the benefits of investing in real estate, paying a hefty real estate commission can significantly reduce your bottom line.
One of the many advantages of selling your rental property on Roofstock is paying a competitive real estate commission. The selling commission on the Roofstock Marketplace is just 3%, lower than the 5% to 6% commission that many real estate agents charge.
2. Marketing and advertising expenses
When selling a rental property, you can deduct many marketing and advertising expenses incurred in the process. Common deductible marketing and advertising expenses include:
- Flyers and brochures. You can deduct the cost of designing and printing these to promote your rental property.
- Advertising. Costs for placing ads in newspapers, online, or on billboards are all deductible.
- Open houses. If you host an open house, you can deduct associated costs like refreshments, signage, and more.
3. Repairs and maintenance
You’re probably used to setting aside money each month for repairs and maintenance for normal wear and tear. But did you know that these expenses can also be deducted when you sell the property?
As a general rule, any repairs or maintenance requested by a buyer are considered selling expenses. Some of the most common repair and maintenance issues that come up during a buyer’s inspection include painting, fixing leaking faucets, and repairing damaged flooring.
4. Owner’s title insurance policy
A title insurance policy is a type of insurance that a seller pays for that protects the buyer from any legal issues that may arise related to the title of the property. This type of policy is important to have in place in case there are any problems with the title of the property, such as outstanding liens or encumbrances on the property.
5. Transfer taxes
Transfer taxes are taxes levied by many state and local governments on transferring property from one person to another. When you sell your rental property, the government will levy a transfer tax on the sale. The tax amount depends on the property’s value and the jurisdiction in which it is located.
6. Deed recording fees
Recording a deed documents the transfer of property ownership from one person to another and registers the sale with the local government. The fees for recording the deed are typically a percentage of the purchase price and may be paid by the seller or the buyer. If you’re a seller and agree to pay, you can deduct these fees as part of your selling expenses when you file your taxes.
7. Other closing costs
There are a few other deductible selling expenses you may incur that are less common. For example, if you have to pay for an appraisal or inspection to get the property ready for sale, those costs are deductible. Additionally, those costs can be deducted if you need to pay for a survey to update the property boundaries.
8. Home warranty costs
When you’re selling a rental property, offering a home warranty to the buyer can be a great way to sweeten the deal and help to ensure a quick, smooth sale. Home warranties protect buyers against unexpected repairs, giving peace of mind that they won’t be faced with hefty bills down the road.
In addition, home warranties can differentiate your property from similar rentals on the market. By offering this added protection, you can show that you’re invested in your property and willing to go the extra mile to ensure your buyer is happy. You’ll also be pleased because the home warranty cost can be a deductible expense when you sell.
9. Legal and professional fees associated with the sale
If you hire an attorney to help with the sale of your rental property, their legal fees are deductible. Common legal costs associated with selling a rental property include drafting and reviewing the sales contract, handling the escrow process, and dealing with any title issues that may come up.
While you can deduct attorney fees as a selling expense, you generally can’t deduct the cost of your own time spent on legal work related to the sale. So if you handle the sale yourself, you won’t be able to deduct any time spent on legal work like drafting the sales contract or researching title issues.
10. Property taxes paid during the sale process
You can also deduct any property taxes paid in the year the rental home is sold. This includes any prorated property taxes due at closing and any unpaid property taxes from the previous year.
Typically, when a property is sold, the seller pays any property taxes due up to the closing date, and the buyer pays any property taxes due after the closing date. Once you’ve calculated the amount of property taxes each party owes, you can deduct your portion of the taxes paid as a selling expense when you file your taxes.
The Tax Foundation publishes an interactive map of property taxes in all 50 states, plus Washington, D.C., and a table to help investors better understand the tax climate in each state.
How to create a record for deductible selling expenses
To create a record for deductible selling expenses, keep all receipts and invoices related to the sale of the property. You should also keep any canceled checks or credit card statements as proof of payment.
If you pay any expenses electronically, save a copy of the transaction history. If you hire professionals to help sell the property (such as a real estate agent or attorney), keep a copy of the contract or invoice.
When it comes time to file your taxes, you’ll be glad you took the time to create a record. It helps you maximize your deductions and make tax time much less stressful. That’s why Stessa offers free online storage for real estate investors and landlords.
With Stessa, you can upload, organize, and store all your important documents in one secure place. Plus, Stessa automatically categorizes your expenses so you can easily find what you’re looking for come tax time.
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