Navigating real estate tax rules can be complex, whether you're buying, selling, or working as a realtor. Understanding how taxes apply to gifts, deductions, capital gains, and business expenses can help minimize liabilities and maximize financial benefits.
By staying informed, buyers can save money, sellers can optimize profits, and realtors can structure their finances efficiently. Let’s dive in!
Tax Implications for Buyers
Are cash and equity gifts taxable?
No, cash gifts and gifts of equity are not taxable to the recipient. However, if a gift exceeds $18,000 (2024 limit), the giver must file Form 709, which reduces their lifetime gift tax exemption (~$13M).
Are discount points tax-deductible?
Yes, discount points are deductible on federal income taxes if the mortgage is for a primary residence and IRS conditions are met.
What is the Mortgage Credit Certificate (MCC)?
The MCC allows first-time homebuyers to claim a tax credit for mortgage interest, reducing federal tax liability.
Can buyers deduct mortgage interest?
Yes, mortgage interest is deductible on a primary and second home. However, HELOC interest is only deductible if used for home improvements.
How do Wisconsin’s disabled veteran property tax benefits impact income taxes?
Eligible veterans receive a property tax credit for their primary residence, reducing state income tax liability.
What documentation is needed for veterans when buying or selling a home?
Veterans must use the prorated property tax amount from the closing statement to claim the credit with the Wisconsin Dept. of Revenue.
Tax Implications for Sellers
How does the capital gains exclusion apply to home sales?
Homeowners can exclude up to $250,000 ($500,000 for married couples) in capital gains if they meet the two-out-of-five-year residency rule.
What is included in a home’s cost basis?
The cost basis includes the original purchase price, improvements, and selling expenses (e.g., realtor and title fees).
Does refinancing affect cost basis?
No, refinancing does not change the cost basis.
How does a seller credit amendment impact taxes?
Increasing the purchase price to offset a seller credit raises the taxable sales price, potentially increasing capital gains liability.
What is a 1031 exchange?
A 1031 exchange allows sellers to defer capital gains taxes by reinvesting proceeds into a like-kind property.
Can capital gains taxes be avoided without a 1031 exchange?
Yes, if the property qualifies for the primary residence capital gains exclusion or through tax strategies like installment sales.
Do 1031 exchange rules differ based on property type?
Yes, primary residences do not qualify. Only investment properties, second homes (with limitations), and commercial properties can use a 1031 exchange.
Does a seller credit impact tax liability?
No, a seller credit reduces net proceeds but does not create additional tax liability.
What document does a veteran need to claim a property tax credit if they don’t directly pay the tax?
They must provide the property tax bill and proof of payment from escrow or closing documents.
Tax Tips & General Advice for Realtors
How can self-employed realtors reduce taxes?
Elect S-Corp status to reduce self-employment tax and increase retirement contributions.
Maximize retirement savings using a SEP IRA, Solo 401(k), or other tax-advantaged accounts.
Separate business and personal finances by using dedicated business accounts and credit cards.
Plan for quarterly estimated taxes to avoid IRS penalties.
How much can a realtor save with an S-Corp?
A realtor earning $100,000 could save $7,000–$10,000 annually in self-employment taxes.
Can W-2 realtors deduct work-related expenses?
No, unless they qualify for unreimbursed business expense deductions under IRS rules.
Can a realtor deduct both a vehicle purchase price and mileage in the same year?
No, they must choose between deducting mileage or vehicle depreciation.
What is the 2025 mileage deduction rate?
The standard mileage deduction for 2025 is $0.70 per mile.
How does mileage deduction work?
Home office realtors: Can deduct all business-related mileage from home to properties, meetings, or other work locations.
Brokerage office realtors: Cannot deduct commuting mileage but can deduct mileage for business trips from the office.
What other deductions should realtors track?
Marketing & Advertising Costs – Website expenses, social media ads, branded materials.
Licensing & Continuing Education Fees – State license renewals, training courses.
Office Expenses – Rent, utilities, internet (if you have a home office).
Business Travel & Meals – Expenses related to networking, conferences, and industry events.
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