What expense category is Real Estate Commissions?

When a business sells a property, the real estate commission paid to an agent or broker is often one of the largest transaction costs associated with the sale. A common and significant tax mistake is treating this commission as a regular operating expense that can be deducted in the year it is incurred.

The IRS, however, has very specific rules for handling the costs of selling a business asset. These are not current-year deductions but are instead capitalized as part of the property's sale. This guide explains how to categorize real estate commissions accurately, ensuring compliance and the correct calculation of gain or loss.

Real Estate Commissions Category

Real estate commissions paid by the seller of business property are not a currently deductible business expenses. Instead, they are considered a selling expense that must be capitalized.

According to IRS Publication 334, the costs of transferring property to a new owner, such as selling expenses, are added to the adjusted basis of the property for the purpose of calculating the gain or loss on the sale.

Important Considerations When Classifying Real Estate Commissions

The key to handling these costs is to understand that they are part of the property disposition transaction, not a day-to-day operating cost.

Capitalize, Do Not Expense

You cannot deduct the commission paid as a current business expense on your Schedule C in the year of the sale. Doing so is incorrect. The commission is exclusively used to reduce the amount of your taxable gain or increase the amount of your deductible loss from the sale of the property.

How Commissions Affect the Gain or Loss Calculation

The formula for calculating the gain or loss on a property sale is: 

Amount Realized - Adjusted Basis = Gain or Loss

When you pay a commission, it increases your adjusted basis. Therefore, the formula effectively becomes: 

Amount Realized - (Adjusted Basis + Selling Expenses like Commissions) = Gain or Loss

A higher basis directly reduces the amount of your taxable gain.

Applies to All Selling Costs

This capitalization rule applies to all costs of selling the property, not just the commission. This can include other expenses such as settlement fees, legal fees related to the sale, and abstract fees.

Tax Implications and Recordkeeping

Because commissions are a selling expense, they are reported as part of the property sale, not as a separate expense.

How to Report the Transaction

The sale of business property is reported on Form 4797. The real estate commission is factored into the gain or loss calculation on this form. It is not listed separately on Schedule C.

What Records to Keep

To substantiate the sale and its related costs, you must keep all transaction documents. According to IRS recordkeeping rules, this includes:

• The real estate closing statement (e.g., a HUD-1 or similar settlement form), details the commission paid.
• The listing agreement with the real estate broker.
• Proof of payment for the commission and any other selling costs.

How Fyle Can Automate Tracking for Property Sale Costs

Fyle helps you capture and organize the various costs associated with selling a property, providing your accountant with a clean, documented record for calculating the final gain or loss.

• Track by Project: Group all costs related to the sale, commissions, legal fees, etc, under a single project for easy aggregation.
• Centralize All Documents: Attach the closing statement, commission agreement, and proof of payment directly to the expense record in Fyle.
• Create a Clear Audit Trail: Fyle provides a time-stamped, unalterable record of all payments for easy substantiation.
• Automate Your Accounting: Sync the commission cost to the correct asset account in QuickBooks, Xero, NetSuite, or Sage Intacct for proper tax treatment.