Yes – you can deduct realtor fees from capital gains as part of your selling expenses under U.S. tax law.
In fact, about 90% of home sellers use an agent and pay roughly 5–6% in commissions, which can significantly impact your net profit. By deducting these fees from your sale proceeds, you lower the capital gain that’s subject to tax.
What will you learn in this guide?
- 💰 Impact of Realtor Fees: How real estate agent commissions reduce your taxable gain and lower your tax bill.
- 📊 Cost Basis & Net Gain: Calculating your property’s cost basis, factoring in improvements, and subtracting selling expenses to find your net capital gain.
- 📑 IRS Rules & Forms: Key federal tax rules, Schedule D, Form 8949, and how the Section 121 home sale exclusion can save you up to $500,000 in gains.
- 🌆 State-by-State Taxes: A 50-state overview of how capital gains on real estate are taxed, from states with no income tax to those with high rates.
- ⚠️ Pitfalls to Avoid: Common mistakes (like misclassifying expenses or missing depreciation recapture) and strategies for investors to minimize taxes, including 1031 exchanges.
With home sale profits surging in recent years (often exceeding $100,000 on average), understanding these tax rules can save you potentially thousands of dollars in taxes when you sell your property.
Understanding Capital Gains Tax on Real Estate
A capital gain is the profit you earn from selling a capital asset like real estate for more than its adjusted basis (the property’s purchase price plus improvements). When you sell real estate, the IRS and state tax authorities consider any increase in value as taxable income in the form of capital gains. For example, if you bought a property for $300,000 and sell it for $400,000 (after subtracting selling costs), you have a $100,000 gain.
Not all gains are taxed equally. Real estate held for more than one year is typically a long-term capital gain, eligible for favorable federal tax rates (0%, 15%, or 20%, depending on your income). If you owned the property for one year or less, any profit is a short-term capital gain, taxed as ordinary income at your regular tax rate. For high earners, an additional 3.8% Net Investment Income Tax (NIIT) can also apply to investment income (including capital gains) if your modified AGI exceeds $200,000 ($250,000 for couples).
Regardless of short or long term, calculating your gain accurately — by accounting for your cost basis and all selling expenses — is critical to avoid paying excess tax on your sale.
Calculating Your Gain: Cost Basis, Selling Expenses, and Net Proceeds
Cost basis is essentially what you put into the property financially. It starts with the purchase price and includes capital improvements (like renovations or additions) that add value or prolong the property’s life. For example, if you bought a home for $200,000 and later spent $20,000 adding a new roof, your cost basis becomes $220,000. If the property was a rental or business asset, remember that any depreciation claimed will reduce the adjusted basis, which can increase your gain (and trigger depreciation recapture tax on that portion).
Selling expenses are the costs you incur to sell the property — and yes, they directly reduce your sales price for tax purposes. These include realtor commissions, of course, but also other closing costs such as escrow fees, title insurance, legal/attorney fees, transfer taxes, recording fees, and even marketing or advertising costs to sell the property. Any expense that’s ordinary and necessary to effect the sale can count. The key is that these costs are subtracted from your gross selling price to arrive at the net proceeds (what the IRS calls the amount realized). This means you’re taxed only on the profit that actually ends up in your pocket after paying these costs.
| Calculation | Amount |
|---|---|
| Sale price | $320,000 |
| Less: Realtor commission (5%) | $16,000 |
| Less: Other selling costs (taxes, escrow, etc.) | $4,000 |
| Net proceeds (Amount Realized) | $300,000 |
| Less: Adjusted cost basis (purchase $200K + improvements) | $220,000 |
| Capital Gain | $80,000 |
If you’re wondering whether it’s worth paying a realtor’s commission or trying to sell by owner (FSBO), consider the trade-offs:
| Pros of Using a Realtor | Cons of Using a Realtor |
|---|---|
| Professional marketing and negotiation can lead to a higher sale price (offsetting the fee). | Commission (5–6% of price) directly reduces your proceeds at closing. |
| Realtor handles paperwork and legal formalities, reducing risk of mistakes in the sale. | You have less control over the sale process and must rely on the agent’s strategy. |
| Commission is tax-deductible (reduces taxable gain), softening the financial impact. | Commission isn’t an extra deduction against other income – it only benefits you if there’s a gain to offset. |
Deducting Realtor Fees vs. Claiming a Tax Deduction
It’s important to clarify that deducting realtor fees from capital gains is not the same as deducting an expense on your income tax return like mortgage interest or property taxes. You do not write off the commission paid to your agent as a separate deduction; instead, it’s baked into the calculation of your gain on the sale.
In practice, this means if you sold a property for $320,000 and paid $16,000 in realtor fees, the IRS sees your sale proceeds as only $304,000 for tax purposes. The $16,000 commission effectively isn’t taxed because it reduced your profit. Bottom line: realtor fees and similar selling costs reduce your taxable capital gain rather than reducing your ordinary income.
Reporting the Sale: IRS Forms and Paperwork
When you sell real estate, you must report the transaction on your income tax return if you have a taxable gain (or any gain not fully excluded). The IRS uses several forms to document the details:
| Tax Form | Purpose in the Sale |
|---|---|
| Form 1099-S | Issued by the title or escrow company to report the gross sale proceeds to the IRS. You’ll receive a copy after closing. |
| Form 8949 | Itemizes each capital asset sale. You list your home or property sale here with the selling price, cost basis, and adjustments for selling expenses or exclusions. |
| Schedule D (1040) | Summarizes your total capital gains and losses for the year. The net gain from Form 8949 (after all adjustments) is entered here and flows into your 1040 tax calculation. |
| Form 4797 | Used for sales of rental, investment, or business property that had depreciation. Depreciation recapture is calculated here, and any remaining gain is treated as capital gain (which then goes to Schedule D). |
| Form 6252 | If you sell property via an installment sale (taking payments over time), this form reports the gain to be recognized each year based on payments received. |
Note that if you qualify to exclude your entire gain under the home sale exclusion (discussed next) and you aren’t issued a 1099-S, you generally don’t need to report the sale on your return. If you do get a 1099-S or have any taxable portion, you should report the sale on Form 8949/Schedule D. When using the Section 121 exclusion for a primary residence, you can mark the portion of gain that’s excluded on Form 8949 (so that it doesn’t count as taxable income).
Primary Residence Home Sale & Section 121 Exclusion
One of the biggest tax breaks in real estate is the home sale exclusion under IRC Section 121. If the property you’re selling was your primary residence for at least 2 out of the 5 years before the sale, you may qualify to exclude up to $250,000 of capital gains from income (or $500,000 for married couples filing jointly).
This means that much of your profit can be completely tax-free. Realtor fees and other selling costs still reduce the gain first, potentially making it easier to fall under the exclusion limits.
To claim this exclusion, you must meet certain tests: the ownership and use test (you owned and lived in the home for at least 24 months total in the past 5 years), and you generally cannot have used the exclusion on another sale in the past 2 years. If you qualify, you simply omit that portion of the gain when reporting (though you might still report the sale as noted above).
For example, if you bought a home for $200,000 and sold it for a net $550,000 (after costs), your gain is $350,000. A married couple could exclude $500,000 of gain, which covers all $350,000, so no tax is owed. Even if your gain exceeds the limit, the exclusion will cover the first $250K/$500K, and you only pay tax on the excess.
There are a few caveats: any depreciation you claimed (for example, if you had a home office or rented out the home for a period) cannot be excluded and must be recaptured at a 25% rate. Additionally, if the home was not your primary residence for the entire time you owned it (such as converting a rental to personal use), part of the gain may not qualify for exclusion.
However, there are also exceptions that allow a partial exclusion if you sold early due to certain unforeseen circumstances (like a job relocation, change in health, or other hardships) — in such cases, the $250K/$500K amount is prorated based on the time of use. For instance, if you only lived in the home for one out of the two years, and sold due to a qualified job relocation, you could exclude roughly half the normal amount (e.g. $125,000 instead of $250,000 for a single filer).
Overall, the Section 121 exclusion is a powerful tool for homeowners to avoid capital gains tax entirely on a sale, especially when combined with deducting selling expenses to minimize the gain.
Rental & Investment Property Sales (Capital Gains and Depreciation Recapture)
If you’re selling a rental property or other investment real estate, the tax treatment differs from a primary home. You cannot use the $250K/$500K home sale exclusion on an investment or second home, so any gain is generally taxable. However, the same principle of deducting selling expenses (including realtor fees) applies – those costs will reduce your taxable gain just as with a personal residence.
A major factor for investment properties is depreciation recapture. While you owned the property, you likely took depreciation deductions (or were allowed to), which reduce your tax basis over time. When you sell, the IRS requires you to “recapture” that depreciation by taxing that portion of the gain at a special 25% rate (for real estate).
For example, if you bought a rental for $250,000 and claimed $50,000 of depreciation over the years, your adjusted basis might be $200,000. If you sell and calculate an $80,000 total gain, the first $50,000 of that gain will be taxed up to 25% (because it’s recaptured depreciation), and the remaining $30,000 would be taxed at the regular long-term capital gains rate (e.g. 15%).
Realtor commissions and other selling expenses still help here: by reducing the overall gain, they reduce both the amount subject to recapture and the amount subject to capital gains tax.
Notably, if an investment or business property sale actually results in a loss, that loss is deductible for tax purposes. You can use it to offset other capital gains, and up to $3,000 of excess loss can offset ordinary income (or more if it was a Section 1231 business loss, which may be fully deductible). This is different from a personal residence loss, which is not deductible.
It means that if market conditions forced you to sell a rental at a loss (including the burden of closing costs and commissions), you get some tax benefit from that loss. These rules fall under Section 1231 of the tax code, which effectively gives favorable treatment: net gains from business property sales get capital gains rates, while net losses can often be deducted fully against ordinary income.
Investors also have special opportunities to defer or minimize tax on gains. A popular strategy is the Section 1031 like-kind exchange, which allows you to reinvest the proceeds into another investment property and defer recognizing the capital gain (thus no tax due at sale). In a 1031 exchange, realtor fees and other closing costs can be paid out of the sale proceeds as part of the exchange transaction, effectively reducing the amount you need to reinvest.
Another strategy is the installment sale, where you finance the sale and receive payments over time. This lets you recognize the gain gradually each year, potentially keeping you in lower tax brackets. Always plan carefully and consult a tax advisor when using these strategies, as they come with strict rules and timelines (for example, 1031 exchanges have identification and purchase deadlines).
Other advanced tactics include investing your sales proceeds into a Qualified Opportunity Fund (to defer and partially reduce gain until 2026) or even holding onto property until death so that heirs receive a stepped-up basis (eliminating the capital gain for income tax purposes). These approaches have specific rules and trade-offs, but they highlight that, with strategic planning, you can significantly reduce or even eliminate real estate capital gains taxes.
State Taxes on Real Estate Capital Gains
Beyond federal capital gains tax, your profits from a property sale may also be subject to state income taxes (depending on where you live or where the property is located). Each state has its own tax rules, but most treat capital gains as income and tax them at the same rate as your other income. A handful of states have no income tax at all, meaning no state tax on capital gains, while others have high tax rates or special deductions for long-term gains.
Importantly, states generally follow the federal calculation of gain: you still subtract your realtor fees, closing costs, and basis to determine the taxable gain at the state level. However, the tax you pay on that gain will vary. If you sell property in a state where you’re not a resident, you will typically owe tax to that state on the gain (with a credit in your home state to avoid double taxation).
Some states even require a withholding at closing for nonresident sellers to ensure taxes are paid. The difference in tax impact can be dramatic: For instance, a large gain in California could incur up to 13% state tax, whereas the same sale in Florida would face no state tax.
Below is an overview of how each U.S. state treats capital gains from real estate sales (assuming long-term gain treatment in most cases):
| State | Capital Gains Tax Treatment |
|---|---|
| Alabama | Taxed as ordinary income (up to ~5%). Follows federal exclusions (e.g. home sale). |
| Alaska | No state income tax – no state capital gains tax. |
| Arizona | Taxed as ordinary income at a flat 2.5% state tax rate. |
| Arkansas | Taxed as ordinary income (up to 4.9%). 50% of long-term capital gains are excluded, effectively halving the tax. |
| California | Taxed as ordinary income (1%–13.3% depending on income, highest in U.S.). No special rate for capital gains. |
| Colorado | Taxed as ordinary income at a flat 4.4% (state income tax). |
| Connecticut | Taxed as ordinary income at a flat 6.99% (state income tax). |
| Delaware | Taxed as ordinary income (up to 6.6%). |
| Florida | No state income tax – no state tax on capital gains. |
| Georgia | Taxed as ordinary income (up to 5.75%). |
| Hawaii | Long-term capital gains taxed at 7.25% maximum, which is lower than Hawaii’s top ordinary rate (11%). |
| Idaho | Taxed as ordinary income (flat 5.8%). |
| Illinois | Taxed as ordinary income (flat 4.95%). |
| Indiana | Taxed as ordinary income (flat 3.15%). |
| Iowa | Taxed as ordinary income (flat 3.9%). |
| Kansas | Taxed as ordinary income (up to 5.7%). |
| Kentucky | Taxed as ordinary income (flat 4.5%). |
| Louisiana | Taxed as ordinary income (rates up to 4.25%). |
| Maine | Taxed as ordinary income (up to 7.15%). |
| Maryland | Taxed as ordinary income (up to 5.75%). |
| Massachusetts | Long-term gains taxed at 5% (same as state income rate); short-term gains taxed at 12%. |
| Michigan | Taxed as ordinary income (flat 4.05%). |
| Minnesota | Taxed as ordinary income (up to 9.85%). |
| Mississippi | Taxed as ordinary income (flat 5%). |
| Missouri | Taxed as ordinary income (up to 4.95%). |
| Montana | Taxes capital gains with a 2% credit (effective top rate ~4.1%). |
| Nebraska | Taxed as ordinary income (up to 6.64%). |
| Nevada | No state income tax – no state capital gains tax. |
| New Hampshire | No general income tax on wages or capital gains. (Taxes only interest/dividends; being phased out by 2027.) |
| New Jersey | Taxed as ordinary income (up to 10.75%, high for top earners). |
| New Mexico | Taxed as ordinary income (up to 5.9%). 40% of capital gains (or $1,000, whichever is greater) can be deducted, reducing the taxable amount. |
| New York | Taxed as ordinary income (up to 10.9% for top bracket in NY state). NYC and some localities impose additional taxes. |
| North Carolina | Taxed as ordinary income (flat 4.75%). |
| North Dakota | Taxed as ordinary income (up to 2.5%). 40% of long-term capital gains can be excluded, so only 60% is taxed. |
| Ohio | Taxed as ordinary income (rates up to ~3.99%). |
| Oklahoma | Taxed as ordinary income (up to 4.75%). 100% of gains on Oklahoma real estate held >5 years are exempt from state tax. |
| Oregon | Taxed as ordinary income (up to 9.9%). |
| Pennsylvania | Taxed as income at a flat 3.07%. |
| Rhode Island | Taxed as ordinary income (up to 5.99%). |
| South Carolina | Taxed as ordinary income (up to 7%). 44% exclusion for long-term capital gains (effectively only 56% of gain is taxed). |
| South Dakota | No state income tax – no state tax on capital gains. |
| Tennessee | No state income tax – no tax on capital gains (tax on interest/dividends repealed in 2021). |
| Texas | No state income tax – no state capital gains tax. |
| Utah | Taxed as ordinary income (flat 4.65%). |
| Vermont | Taxed as ordinary income (up to 8.75%). 40% exclusion for gains on assets held >3 years (maximum exclusion $350,000). |
| Virginia | Taxed as ordinary income (flat 5.75%). |
| Washington | No general income tax. A 7% tax applies to certain capital gains above $250K, but real estate sales are exempt. |
| West Virginia | Taxed as ordinary income (up to 6.5%). |
| Wisconsin | Taxed as ordinary income (up to 7.65%). 30% exclusion for long-term capital gains (60% for farm assets). |
| Wyoming | No state income tax – no state capital gains tax. |
Note: Tax rates are as of 2025 and apply to individuals (for state residents; non-residents are typically taxed by the state where the property is located). Many states allow the same $250K/$500K home sale exclusion for primary residences since that gain isn’t included in federal taxable income. The District of Columbia (not a state) taxes capital gains as ordinary income (with top rates around 10.75%). Always check your state’s latest tax rules, as rates and laws can change.
Common Pitfalls When Deducting Selling Expenses
- Assuming commissions are an extra deduction: Remember that realtor fees reduce your gain but aren’t a separate write-off. Don’t try to claim them twice or on Schedule A – they only count through the capital gain calculation.
- Failing to track improvements and expenses: If you don’t keep good records of your purchase costs, improvements, and selling expenses, you could miss out on basis increases or deductions, ending up paying more tax. Always document everything.
- Missing the home sale exclusion criteria: Some sellers assume their gain is tax-free without realizing they didn’t meet the 2-year residency rule or they used the exclusion recently. Confirm you qualify for Section 121 before forgoing tax planning.
- Ignoring depreciation recapture: Rental property owners sometimes forget that past depreciation deductions will be taxed upon sale. This can lead to an unexpected tax bill even after deducting selling costs – plan for that 25% recapture.
- Counting personal repairs or fix-ups as selling costs: General maintenance or repairs done before a sale (new paint, fixing a roof leak, etc.) aren’t selling expenses (though improvements can add to basis). Don’t mistakenly deduct these as selling costs.
- State tax surprises: Don’t forget state taxes. You might have no federal tax (thanks to an exclusion) but still owe state tax on a large gain. Also, if you moved states or sold an out-of-state property, be prepared to file a nonresident state tax return.
- Spending sale proceeds without reserving for taxes: Don’t forget that capital gains tax (and state tax) might be due the following April. Often, nothing is withheld from a real estate sale, so you may need to make an estimated tax payment. Plan ahead so you’re not caught short by a tax bill months after celebrating your home sale.
- Frequent flipping treated as ordinary income: If you habitually buy and sell houses in short time frames, the IRS may treat you as a dealer – meaning profits are ordinary income (and subject to self-employment tax) rather than capital gains. Realtor fees in that case become business expenses, not capital gain reductions.
Frequently Asked Questions (FAQs)
Q: Are realtor fees deductible when selling a house?
A: Yes. Real estate agent commissions are considered a selling expense that reduces your home’s sales proceeds (and thus your taxable gain). They are not separately deductible on your tax return.
Q: Do closing costs reduce capital gains tax on a sale?
A: Yes. Most closing costs paid by the seller (like title fees, escrow, transfer taxes) are deductible from the sales price as selling expenses, thereby lowering your net capital gain and tax liability.
Q: Can I deduct a realtor’s commission on an investment or rental property?
A: Yes. The commission paid on selling investment or rental property is deducted from the selling price when calculating capital gain. It lowers the taxable gain just as it does for a personal residence sale.
Q: Do I add realtor fees to my property’s cost basis?
A: No. Realtor fees are subtracted from the selling price (reducing amount realized), not added to basis. The effect is similar in reducing gain, but you don’t adjust the basis for selling costs.
Q: If I sold my home at a loss, can I deduct that loss (including fees)?
A: No. Losses on the sale of personal-use property (like your residence) are not tax-deductible. Realtor fees would increase the loss, but tax law doesn’t allow you to claim a deduction for it.
Q: Will I owe state tax on capital gains if I avoid federal tax?
A: Possibly. States often follow federal rules, but if you exclude your entire gain under federal law, most states also exclude it. However, high-tax states might still tax gains above federal exclusions.
Q: Can I avoid capital gains tax on real estate altogether?
A: Yes. By qualifying for the primary home exclusion (up to $250K/$500K) or using strategies like a 1031 exchange (for investments). Otherwise, you can only minimize it by subtracting expenses or offsetting gains with losses.
Q: How do I report realtor fees on my tax forms?
A: You don’t list them separately. Include them in your sale’s cost basis or adjustments on Form 8949 so that only the net gain (after fees) appears on Schedule D.
Q: Are home staging or advertising costs deductible from my gain?
A: Yes. Costs like staging or advertising are selling expenses. As long as they’re directly related to the sale (and not permanent improvements), they can be subtracted from your selling price as part of the expenses.
Q: What documents should I keep to prove my selling expenses?
A: Keep a copy of your closing statement (settlement sheet) and any invoices for selling costs. The IRS may ask for these to verify your adjusted basis and selling expense deductions.
Q: Can I move into my rental property to avoid capital gains tax?
A: Partially. If you convert a rental to your primary residence and live there 2+ years, you can use the home sale exclusion. But any gain from the rental period (after 2008) and any depreciation taken remain taxable.
Q: I claimed a home office deduction – will I owe tax on that when I sell?
A: Yes. Any depreciation taken for a home office is recaptured at 25% tax when you sell. Only the non-depreciation portion of the gain can be excluded under the home sale rules.