When you sell your home for more than you paid for it, the Internal Revenue Service considers the profit as a taxable gain. IRS regulations allow you to claim the fees you paid to a Realtor for selling your home as a selling cost when calculating your taxable gain. This deduction lowers the taxable gain that you declare on your federal tax return and, in some cases, reduces the amount of tax you owe from the sale of your home.
The taxable gain for selling your home is not simply the amount of profit you made. To determine the taxable gain, IRS regulations allow you to subtract other costs from the selling price besides the original purchase price. You may subtract certain closing costs, the cost of capital improvements and selling costs.
Selling costs include title insurance, legal fees, inspection and surveying expenses, advertising costs and Realtor commissions. To take advantage of the selling-costs deduction, you must declare these amounts as costs when you report the sale of your home on IRS Schedule D.
Calculating Taxable Gain
IRS Publication 523 provides the formula you must use to calculate the taxable gain from selling your home. You subtract all your selling expenses, including Realtor fees, from the selling price to compute the amount realized. The IRS defines selling price as the total amount you receive from the sale of your home. It includes all types of payments that are part of the sale, including services that the buyer provides you. You then subtract the adjusted basis from the amount realized to calculate the taxable gain or loss from selling your home. Under IRS regulations, the adjusted basis is the amount you paid for the house plus most closing costs. To this amount, add increases to the basis, such as an addition built onto the house and other improvements, and deduct decreases to the basis, such as storm damage and other losses not covered by insurance.
Taxable Gain Exclusion
Federal tax laws permit you to exclude all or part of the profit from selling your home from your overall taxable income. The taxable gain exclusion for selling your home depends on your filing status. A single tax filer may exclude $250,000. Married couples filing separately and single people who jointly own a house may exclude $250,000 each. The exclusion for married couples filing jointly is $500,000. To qualify for this exclusion, the house must have been your primary residence and you must have owned it and lived in it for at least two of the past five years before you sold the house.
If you’re single and sell your home for $700,000, you begin to calculate your taxable gain by deducting the selling costs from the selling price. If your selling costs were $40,000, including a Realtor commission of $35,000, subtract that amount from sale price, which yields an amount realized of $660,000. You then calculate your adjusted basis. Take the price you paid for the house 15 years ago — $350,000, for example — and add improvements and other increases to the basis and subtract damages and other decreases to the basis. If your increases totaled $50,000 and your decreases totaled $20,000, your adjusted basis is $380,000. Subtract your adjusted basis from your amount realized, $660,000, to yield a taxable gain of $280,000. As a single tax filer, your taxable gain exclusion is $250,000, so you owe taxes on $30,000 of the proceeds from selling your home. By claiming the Realtor commission fee as a selling cost, you reduced the amount of your taxable proceeds by $35,000.