What Expenses Can I Claim When Selling Investment Property?

When you sell an investment property, the expenses you can claim fall into two buckets that both shrink your taxable gain: selling expenses that reduce the sales price the IRS treats you as receiving, and capital improvements that raise your adjusted basis in the property. Commissions, legal and title fees, transfer taxes, seller-paid concessions, and marketing costs come off the top. Improvements you made during ownership — a new roof, an addition, a full kitchen remodel — go on the bottom. For a rental, two more items matter: suspended passive activity losses released at sale, and the option to defer everything through a 1031 exchange. These are the expenses you can claim when selling investment property, and getting them all on paper is what keeps depreciation recapture and the net investment income tax from taking a larger bite than they have to.

The Gain Formula

The IRS starts with your gross sales price, subtracts your selling expenses to arrive at the “amount realized,” and then subtracts your adjusted basis to reach the taxable gain.¹ Your adjusted basis is the original purchase price plus capital improvements, minus depreciation you claimed or should have claimed while renting it out.² Every dollar of legitimate selling expense reduces the amount realized dollar-for-dollar, and every dollar of documented improvement raises basis the same way. Both directly shrink the gain.

Selling Expenses That Come Off the Sales Price

Real Estate Commissions and Marketing Costs

Agent commissions are usually the largest single selling expense. Total commissions typically run about 5% to 6% of the sale price, split between the listing agent and the buyer’s agent, though the split is negotiable. The full commission you pay reduces your amount realized.³

Marketing costs you paid to attract a buyer also count. Professional photography, home staging (including stager-arranged furniture rental), signage, digital ads, and printed brochures all qualify. Staging costs generally reduce your gain only if the staging was done to facilitate the sale; if you stage and then take the property off the market, those costs lose their deductibility. Keep vendor invoices, because these costs are only recognized if you can document them.

Legal, Title, and Closing Fees

Several closing-table costs reduce your amount realized:

Attorney fees for drafting or reviewing the contract, handling closing, and resolving title issues.
Escrow fees paid to the neutral third party that holds funds and documents until conditions are met. These scale with the sale price and vary by region.
Title search fees and, where the seller pays it, the owner’s title insurance premium.
Notary fees for signatures on the deed and closing documents.

Every one of these appears as a line item on the closing statement, which is what makes them straightforward to claim.

Transfer Taxes and Recording Fees

State and local governments commonly charge a transfer tax when property changes hands, usually calculated as a percentage of the sale price. Rates vary widely by jurisdiction. Seller-paid transfer taxes reduce the amount realized.⁴ Recording fees paid to the local clerk to log the deed are a separate, typically flat charge that also comes off the top. Both are distinct from the annual property taxes you paid while owning the property.

Seller-Paid Concessions and Points

In many transactions the seller agrees to cover part of the buyer’s closing costs, such as buyer’s title fees, a portion of the buyer’s loan origination charges, or a repair credit. These concessions reduce the net proceeds you receive and are reflected on the closing statement, so they flow naturally into your gain calculation.

Seller-paid loan discount points — points you pay to help the buyer obtain financing — are treated as a selling expense that reduces your amount realized, not as deductible interest.⁵ A mortgage prepayment penalty charged by your lender when you pay off the balance at closing is handled differently: it is generally deductible as mortgage interest on Schedule A rather than subtracted from the sales price, as long as the charge is not for a specific service the lender performed.⁶

Capital Improvements That Raise Your Basis

Capital improvements are not selling expenses in the technical sense, but they cut your taxable gain the same way. An improvement is any project that makes the property better, restores it, or adapts it to a new use.⁴ Common examples:

Structural additions such as a room, garage, deck, or second story.
Major system replacements: a new roof, HVAC, plumbing, or electrical wiring.
Kitchen or bathroom remodels involving cabinets, countertops, flooring, and fixtures.
Accessibility modifications like ramps, widened doorways, or grab bars.
Landscaping and paving such as a driveway, walkway, retaining wall, or permanent landscaping.

Routine repairs do not qualify. Fixing a leaky faucet, patching drywall, or repainting a room is maintenance, and for a rental those costs were typically deducted as operating expenses in the year you paid them rather than added to basis.⁴ The line is whether the work made the property fundamentally better or simply maintained its condition.

One adjustment often gets missed. If you claimed a residential energy credit on an improvement, the credit amount reduces the basis increase for that improvement.⁷ Spend $20,000 on solar panels and receive a $6,000 credit, and only $14,000 gets added to basis.

Depreciation Recapture Eats Into the Savings

While you owned the rental, you were required to depreciate the building (not the land) over 27.5 years for residential property. Each year of depreciation reduced your adjusted basis. When you sell, the IRS recaptures that depreciation and taxes it at your ordinary income rate, capped at 25%.⁸ This is called “unrecaptured Section 1250 gain,” and it applies to the total depreciation you claimed or were entitled to claim during ownership.

Recapture is reported on Part III of Form 4797, which calculates the ordinary-income portion of the gain.⁹ Any remaining gain above the recaptured amount is taxed at the applicable long-term capital gains rate of 0%, 15%, or 20% depending on your income. You cannot avoid recapture by choosing not to claim depreciation; the IRS calculates it on the greater of the depreciation “allowed or allowable.”

The Net Investment Income Tax

On top of capital gains tax and depreciation recapture, many investment property sellers owe an additional 3.8% Net Investment Income Tax. It applies when modified adjusted gross income exceeds:¹⁰

$250,000 for married couples filing jointly or qualifying surviving spouses.
$200,000 for single filers or heads of household.
$125,000 for married individuals filing separately.

Net gains from the sale of real estate held for investment are included in net investment income. The 3.8% is calculated on the lesser of your net investment income or the amount your income exceeds the threshold. A large gain can easily push you above the limit for the year even if your regular income normally sits below it.

Suspended Passive Losses Released at Sale

If you owned a rental and your passive losses exceeded the amount you were allowed to deduct in prior years, those losses did not disappear. When you sell your entire interest in the rental in a fully taxable transaction to an unrelated buyer, all previously suspended passive activity losses are released and deductible in full in the year of sale.¹¹

This can meaningfully offset the gain. Accumulated $30,000 in suspended losses against a $130,000 gain drops the net taxable amount to $100,000. You report passive activity losses on Form 8582 and carry the results through to Schedule D and Form 4797 as applicable.¹¹ If the sale produces a net capital loss after applying the suspended losses, standard capital loss rules apply: up to $3,000 per year against other income ($1,500 if married filing separately), with the excess carried forward.

Deferring the Whole Gain With a 1031 Exchange

A Section 1031 like-kind exchange lets you defer the entire capital gain, including depreciation recapture, by reinvesting into another qualifying investment property. Both the property you sell and the replacement must have been held for investment or use in a trade or business. Personal residences do not qualify.¹²

Two deadlines govern a deferred exchange. You have 45 days from closing on the sale to identify potential replacement properties in writing. You must close on the replacement within 180 days of the sale, or by the due date (with extensions) of your return for that year, whichever comes first.¹² Miss either deadline and the entire gain becomes taxable.

Exchange expenses such as brokerage commissions, attorney fees, and deed preparation fees paid in connection with the exchange reduce the amount of cash or non-like-kind property that would otherwise be taxable as “boot.”¹³ Qualified intermediary fees are an additional cost specific to 1031 exchanges. Set the exchange structure up before closing; a completed sale cannot be retroactively converted.

Forms You File to Claim Everything

Several forms work together when you report the sale of an investment property:

Form 8949 lists the details of the sale — dates, gross sales price, adjusted basis, and selling expenses — and flows to Schedule D.¹⁴
Schedule D (Form 1040) combines short- and long-term capital gains and losses into the figure that transfers to your Form 1040.¹⁵
Form 4797 is required for depreciable rental or business property. Part III handles depreciation recapture, and the ordinary-income portion is reported here before the remaining capital gain moves to Schedule D.⁹
Form 8582 reports and releases suspended passive activity losses in the year of a complete disposition.¹¹

The gross proceeds get reported to you and to the IRS on Form 1099-S, which shows the full sales price before any expense reductions.¹⁶ Because that number does not reflect your selling expenses or basis, reconcile it carefully on Form 8949 so the IRS can see how you arrived at the gain you report.

Records to Keep

The Closing Disclosure (or, for transactions originated before October 2015, the HUD-1 settlement statement) is your primary proof of selling expenses.¹⁷ It breaks down every fee paid at closing, from commissions and title charges to transfer taxes, concessions, and recording fees.

Keep receipts and invoices for every capital improvement made during ownership. Each should show the date, a description of the work, and the total cost. Digital copies are acceptable; the IRS holds electronic records to the same standards as paper originals, and the storage system must be able to index, retain, and reproduce them legibly.¹⁸

Keep all property-related records until the statute of limitations expires for the year of sale. In most cases that means at least three years after filing the return reporting the sale, or six years if you underreport income by more than 25%.¹⁹ If you complete a 1031 exchange, the clock does not start until you eventually sell the replacement property in a taxable transaction, so plan to hold those records indefinitely.

1
Office of the Law Revision Counsel. 26 U.S. Code 1001 – Determination of Amount of and Recognition of Gain or Loss
2
Internal Revenue Service. Publication 551, Basis of Assets
3
Internal Revenue Service. Publication 544, Sales and Other Dispositions of Assets
4
Internal Revenue Service. Publication 527, Residential Rental Property
5
Internal Revenue Service. Topic No. 504, Home Mortgage Points
6
Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction
7
Internal Revenue Service. Instructions for Form 5695
8
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
9
Internal Revenue Service. Instructions for Form 4797 (2025)
10
Internal Revenue Service. Topic No. 559, Net Investment Income Tax
11
Internal Revenue Service. Publication 925, Passive Activity and At-Risk Rules
12
Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031
13
Internal Revenue Service. Instructions for Form 8824 (2025)
14
Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets
15
Internal Revenue Service. 2025 Instructions for Schedule D (Form 1040)
16
Internal Revenue Service. Form 1099-S, Proceeds From Real Estate Transactions
17
Consumer Financial Protection Bureau. What Is a HUD-1 Settlement Statement?
18
Internal Revenue Service. Publication 583, Starting a Business and Keeping Records
19
Internal Revenue Service. Topic No. 305, Recordkeeping