Are Closing Gifts Tax Deductible? The IRS $25 Rule, Explained for Agents
How the IRS business-gift limit applies to realtor closing gifts, what counts toward the $25, what doesn't, how cards and postcards differ from gifts, and the records to keep.
By the Mailbox Engine team · · 4 min read
Key takeaways
- You can deduct no more than $25 per recipient per tax year for business gifts, per IRS Publication 463.
- Engraving, packaging, insuring, and mailing are generally excluded from the $25, unless the packaging adds substantial value.
- A gift to a client's family member is generally an indirect gift to the client, and spouses are treated as one taxpayer.
- Marketing mail such as farm postcards is typically an advertising expense, not a gift. Keep the two categories separate in your books.
Every agent eventually asks the same question while ordering closing gifts: how much of this can I write off? The short answer is $25 per person per year. The useful answer is knowing what counts toward that $25, what doesn't, and how to structure a client-appreciation budget so more of it works for you.
The rule in one sentence
IRS Publication 463 says: "You can deduct no more than $25 for business gifts you give directly or indirectly to each person during your tax year." That limit has been in place for decades, and it applies to closing gifts, holiday gifts, and home-anniversary gifts alike. Add up everything you give one client in a year; the deductible portion tops out at $25.
What counts toward the $25 (and what doesn't)
| Usually excluded from the $25 | Usually counted toward the $25 |
|---|---|
| Engraving, gift wrap, and ordinary packaging | The gift itself (wine, cutting board, gift card) |
| Shipping, mailing, and insurance | Packaging with substantial value of its own, like an ornamental basket |
| Items of $4 or less with your name imprinted and widely distributed (pens, notepads) | A second gift to the same client in the same year |
| Signs or display materials used on the recipient's business premises | Gifts to a client's spouse or family (treated as indirect gifts to the client) |
The IRS gives a specific example: gift wrapping is incidental, but an ornamental basket for packaging fruit isn't if the basket's value is substantial compared with the fruit.
Family members and couples
Two rules matter for agents, who almost always sell to couples and families:
- Gifts to family are indirect gifts. A gift to a client's family member is generally considered an indirect gift to the client, unless you have an independent business connection with that person.
- Spouses are one taxpayer. If you and your spouse both give gifts, the IRS treats you as one taxpayer, even with separate businesses.
- Gifts to a company for a person's use count for that person. A gift sent to a business but intended for a particular individual is an indirect gift to that individual.
Gifts vs. entertainment vs. advertising
This is where good bookkeeping pays off. Three categories look similar but are treated differently:
Gifts
Closing gifts, anniversary gifts, and holiday gifts to specific clients. Limited to $25 per person per year.
Entertainment
Pub. 463 says an item that could be either a gift or entertainment is generally treated as entertainment, and entertainment expenses are generally nondeductible. Tickets you give a client to attend an event are a common trap. The exception: packaged food or beverages the client will use later are treated as gifts.
Advertising
Postcards to a farm area, just-sold mailers, and branded marketing generally are advertising, reported on its own line in the Schedule C instructions. That matters because your marketing mail isn't capped by the $25 gift rule.
Talk with your tax professional about how to categorize each item. Some agents find that cards and smaller, more frequent touches let them stay in front of clients more often for the same total spend, even though only $25 of gifts per person is deductible.
The records to keep
Pub. 463 Table 5-1 lists what you need for each gift: the cost, the date, and a description. You don't always need each recipient's name if a general listing makes it clear you aren't trying to avoid the $25 limit, but for closing gifts, a per-client record is the simplest way to prove it.
Don't confuse tax rules with RESPA
The $25 limit is a tax rule. It doesn't make a gift legal or illegal. The CFPB's RESPA FAQs say there is no RESPA exception based on how small a gift is. What matters for RESPA is whether the gift is tied to referrals of settlement-service business. Read RESPA gift rules for realtors for the full picture.
Next steps
Pick your closing-gift tiers with the $25 rule in mind, then build the rest of the year around cards and timely touches. Our guides to real estate closing gifts and real estate client appreciation ideas show how.
Sources & further reading
Frequently asked questions
Is a realtor closing gift tax deductible?
Yes, up to $25 per recipient per tax year as a business gift under IRS Publication 463. Costs above $25 per person generally are not deductible as a gift. Incidental costs like wrapping and shipping usually don't count toward the limit.
Does shipping count toward the $25 gift limit?
Generally no. IRS Publication 463 says incidental costs such as engraving, packaging, insuring, and mailing are generally not included in the $25, as long as they don't add substantial value to the gift.
If I give a closing gift to a married couple, is the limit $25 or $50?
A gift to a client's family member is generally treated as an indirect gift to the client. Many agents treat a gift to a couple as one gift for the $25 limit. Ask your tax professional how it applies to your situation.
Are tickets to a game a gift or entertainment?
IRS Publication 463 says an item that could be either a gift or entertainment is generally considered entertainment, and entertainment expenses are generally nondeductible. Packaged food or beverages meant for later use are treated as gifts.
Are postcards to my farm area deductible?
Marketing mail sent to promote your business is generally an advertising expense rather than a gift. Advertising is reported separately from gifts on Schedule C. Confirm categorization with your tax professional.
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