Publication Date: Friday Aug 8, 1997
Sales commission is not tax-deductibleBut this and other sales costs can be subtracted from the sales price
QOur home is currently listed for sale. The real estate sales commission will be about $9,000. Can we take a deduction for this expense on our income tax returns? ANo. Technically, a real estate sales commission is not tax deductible. However, it can be subtracted from your home's gross sales price as a selling expense. For example, suppose your home sells for $150,000 and you pay a typical 6 percent real estate sales commission of $9,000. Subtracting (not deducting) the commission expense produces a $141,000 net or adjusted sales price.
Other sales costs, such as a transfer tax, can also be subtracted. To calculate your sale profit, subtract your adjusted cost basis from the adjusted sales price. Ask your tax advisor for full details.
QNext year my mother will retire after 32 years of teaching school. She will have Social Security plus a good pension. We want her to move closer to us so she can be near our family and her grandchildren. My plan is to buy her a small house or condominium. Since she won't have much taxable income, and I am in the highest income tax bracket, I think I should buy the residence in my name so I can get the tax deductions. But a friend tells me if I don't charge my mother a fair market rent, I can't claim any tax deductions for the residence. If this is true, should I buy a home for my mother or give her the money to buy it in her name?
AIt sounds like you are the perfect son, looking out for your mother. If you pay cash for the residence, you can only deduct the property taxes if you don't charge your mother fair market rent. However, if she pays market rent, then you can also depreciate the residence you rent to your mother. If you obtain a mortgage, then the mortgage interest and property taxes are deductible even if your mother doesn't pay rent. But depreciation becomes deductible only if she pays market rent. Of course, any rent you receive must be reported as income on Schedule E of your tax returns. Please consult your tax advisor for details.
QI operate my insurance business out of my house, using one bedroom for my office. In a few months I plan to sell my house and move to a larger one. A friend tells me I will owe tax on the profit from the sale of my office area. Is this true? AYes, under current tax law. When selling your home, including your office at home, it's really two sales. One is your principal residence. The other is the business area of your home. I presume you've been taking home office deductions on your income tax returns, including depreciation deductions. Your profit on the sale of this business area is taxable.
However, under current tax law you can defer tax on the residence portion by purchasing a replacement principal residence of equal or greater cost within two years before or after the sale. If the proposed $500,000 home sale tax exemption is enacted by Congress, it will replace this rollover residence replacement rule. Please consult your tax advisor for details.
QHow long does a typical home purchase take? We've been working with a Realtor over three months, and she hasn't shown us any houses we want to buy. We're not fussy people. Should we switch to a better agent? AFew home buyers find their perfect home the first day of searching. More typically, it takes 30 to 60 days. Some buyers take six months or longer to find the right home. However, if your agent hasn't found any homes you want to buy after three months, I suggest you start working with an additional realty agent. Also, stop by Sunday afternoon open houses to see what's available. Maybe the house you dream of buying doesn't exist.
Robert Bruss is a Bay Area real estate broker and attorney. His column appears the second and fifth Friday of the month. Send questions to Bruss care of Palo Alto Weekly, P.O. Box 1610, Palo Alto, CA 94302. On all tax-related matters, Bruss recommends that you consult your tax advisor for further details.