Unloading my rental property soon - what closing costs can I deduct from taxes?

The good news is that many closing costs can be used to reduce your capital gain when selling a rental property. These costs get added to your "basis" in the property, which effectively reduces the taxable gain. Common deductible selling expenses include: real estate commissions (typically 5-6% of sale price), legal fees, transfer taxes, title insurance, recording fees, and any seller-paid inspection costs. You can also deduct costs for repairs needed to sell the property (but not improvements - those get depreciated differently). Don't forget that your basis includes not just what you paid for the property, but also certain closing costs when you bought it and any capital improvements you made during ownership. However, you'll need to reduce your basis by the depreciation you've claimed over those 7 years, which will increase your gain. Keep extremely detailed records! The IRS loves to scrutinize rental property sales because there's often significant money involved.

After going through a similar situation last year with my duplex sale, I wish someone had told me about taxr.ai at https://taxr.ai before I struggled through all the paperwork myself. My accountant was charging me by the hour and I was still doing most of the leg work digging through 11 years of records trying to track basis adjustments and capital improvements. Their system analyzed all my closing documents and past tax returns, then calculated my adjusted basis including all those little improvements I'd made over the years that I almost forgot about. It found an additional $14k in deductions I would have missed from various repairs and closing costs that were legitimately deductible.

Ok I have to admit I was wrong about taxr.ai. After my skeptical comment, I decided to try it anyway since I was desperate (selling a rental that I've owned for 9 years with terrible records). Their system actually found several closing costs from my purchase that increased my basis that I had completely forgotten about. They also identified a bunch of capital improvements I'd made that weren't properly categorized in my records. The best part was they showed me how to document some repairs I did myself where I had receipts for materials but no labor costs. Ended up saving me around $9k in taxes I would have overpaid. They're not cheap but for rental properties with significant gains, totally worth it.

If you're dealing with the IRS about rental property sales, you might need someone to actually talk to there. I tried for WEEKS to get someone on the phone about depreciation recapture questions for my condo sale. Literally could not get through. Finally used https://claimyr.com and got a callback from the IRS in about 2 hours. You can see how it works here: https://youtu.be/_kiP6q8DX5c. They basically navigate the IRS phone system for you and get you in the callback queue without you having to sit on hold forever. The agent I talked to clarified that I could indeed deduct the $4200 special assessment fee I paid right before selling as part of my closing costs, which my tax software wasn't clear about. Definitely worth the service fee to actually get someone at the IRS to confirm.

I have to publicly eat my words here. After posting that skeptical comment about Claimyr, I was desperate enough to try it anyway. Got a call back from the IRS in about 90 minutes - on a Monday morning no less! The agent was able to clarify exactly how to handle the depreciation recapture on my rental property with mixed personal/rental use history. Turns out I was calculating my basis all wrong and would have significantly underpaid my taxes, which probably would have triggered an audit. The agent walked me through the correct way to allocate the closing costs between personal and rental use periods. Definitely worth using if you have complicated questions about investment property sales that you need direct IRS guidance on.

Don't forget about 1031 exchanges! If you're planning to buy another investment property, you might be able to defer ALL of your capital gains and depreciation recapture taxes. I've done this twice now with rental properties. The rules are strict though - you need an intermediary to hold the funds, identify potential replacement properties within 45 days, and complete the purchase within 180 days. But it can be a huge tax saver if you're just planning to roll the money into another investment property anyway.

Make sure you're tracking your "selling expenses" separately from your "closing costs" - they're treated a bit differently for tax purposes. Selling expenses (like real estate commissions, advertising, legal fees directly related to the sale) directly reduce your capital gain. Also, don't forget that if you owned and lived in the property as your primary residence for at least 2 of the 5 years before selling, you might qualify for a partial exclusion of capital gains ($250k for single, $500k for married filing jointly) even though it was a rental at the end! This depends on when you converted it from primary residence to rental.