5 Things You Didn’t Know Were Tax Deductible When Selling Rental Property
When it comes to selling rental property, one of the biggest concerns for many landlords is the amount of money that must be paid in closing costs. These costs can add up quickly and eat into the profit from the sale. However, the good news is that some of these costs are tax deductible. Here’s what you need to know about closing costs and taxes when selling rental property.
1.Commission fees for the real estate agent –
Commission fees for the real estate agent are a cost associated with the sale of a property and are tax deductible as a rental expense. This means that the fees paid to the real estate agents involved in the sale, both the listing agent and the buyer’s agent, can be claimed as a rental expense on the landlord’s tax return. This can reduce the amount of taxable income generated from the sale of the property.
2.Legal and title fees –
Legal and title fees are costs associated with the transfer of ownership of a property and are also tax deductible as rental expenses. These fees include expenses for title searches, title insurance, and closing costs. Title insurance protects the owner against title-related problems, such as liens or outstanding mortgages, that may arise during the transfer of ownership. By claiming these fees as a rental expense, landlords can reduce their taxable income from the sale of the property.
3.Transfer taxes –
Transfer taxes, also known as stamp duty or conveyance tax, are a tax that is paid by the seller when a property is sold. These taxes are tax deductible as a rental expense, meaning that landlords can claim them as an expense on their tax return and reduce the amount of taxable income generated from the sale of the property. Transfer taxes vary depending on the jurisdiction and the sales price of the property.
4.Recording fees –
Recording fees are fees paid to the government to record the transfer of ownership of a property. These fees are tax deductible as a rental expense, meaning that landlords can claim them as an expense on their tax return and reduce their taxable income from the sale of the property. Recording fees vary depending on the jurisdiction, but they are usually a small percentage of the sales price of the property.
5.Repairs and improvements –
If the landlord pays for repairs or improvements to the property before closing, these costs are tax deductible as rental expenses. This means that the cost of fixing any damage or making upgrades to the property can be claimed as a rental expense on the landlord’s tax return. This can help to reduce the amount of taxable income generated from the sale of the property.
It’s important to keep detailed records of all expenses related to the sale of the property, including receipts and invoices, as these may be needed to support your tax deductions. Additionally, it’s important to note that not all closing costs are tax deductible when selling rental property. For example, expenses such as prepaid insurance premiums, property taxes, and mortgage interest are not tax deductible. It’s always best to consult with a tax professional to determine which expenses are eligible for tax deductions and to ensure that your tax return is accurate and compliant with tax laws.
In conclusion, while selling rental property can be expensive, some of the closing costs associated with the sale are tax deductible. By understanding which expenses are eligible for tax deductions, landlords can minimize their tax liabilities and maximize their profits from the sale of their rental properties.
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