10.1 Capital Gains, Losses/Sale of Home: Property (Basis, Sale of Home, etc.)
To figure the basis of property you receive as a gift, you must know its adjusted basis to the donor just before it was given to you. You also must know its fair market value (FMV) at the time it was given to you and whether any gift tax was paid.
If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or loss when you dispose of the property. Your basis for figuring gain is the same as the donor's adjusted basis, plus or minus any required adjustments to basis while you held the property. Your basis for figuring a loss is the FMV of the property when you received the gift, plus or minus any required adjustments to basis while you held the property.
If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and get a gain, you have neither a gain nor loss on the sale or disposition of the property.
If the FMV is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis at the time you received the gift. Increase your basis by all or part of any gift tax paid, depending on the date of the gift. See Gifts received before 1977 in Publication 551, Basis of Assets. Also, for figuring gain or loss, you must increase or decrease your basis by any required adjustments to basis while you held the property.
For more information on the gift tax, see Publication 950, Introduction to Estate and Gift Taxes.
Basis is your investment in property for tax purposes. The difference between the selling price of your assets and your basis determines whether there is a taxable gain or loss on the disposition of your property. You need to determine your basis to figure allowable depreciation deductions as well. Your original basis is usually your cost to acquire the asset. Your adjusted basis (which is the basis you use to determine gain or loss or depreciation amounts) is the result of increasing or decreasing your original basis according to certain events.
Increases to basis include but are not limited to:
. The cost of improvements having a useful life of more than a year
. Assessments for local improvements
. Sales tax that is not deducted
. The cost of extending utilities lines to your property
. Legal fees such as the cost of defending or perfecting title
. Zoning costs
Decreases to basis include but are not limited to:
. Depreciation amortization and depletion deductions
. Nontaxable corporate distributions
. Insurance reimbursements for casualty and theft losses
. Easements
. Rebates from the manufacturer or seller
Additional information on basis can be found in Publication 551, Basis of Assets, or Tax Topic 703, Basis of Assets.
For home sales after May 6, 1997, if you meet the ownership and use tests, you will generally only need to report the sale of your home if your gain exceeds a certain dollar amount prescribed by law. To determine the amount of gain that can be excluded from income refer to Publication 523, Selling Your Home. You may be entitled to exclude gain from income if during the 5-year period ending on the date of the sale, you have:
- Owned the home for at least 2 years (the ownership test),
- Lived in the home as your main home for at least 2 years (the use test), and
- During the 2-year period ending on the date of sale, you did not exclude gain from the sale of another home.
If you were on qualified extended duty in the U.S. Armed Services or the intelligence community (sales or exchanges after December 20, 2006, and before 2011) you may suspend the five-year test period for up to 10 years. You may use this provision for only one property at a time. You are on qualified extended duty when the extended duty lasts for more than 90 days or for an indefinite period AND:
- At a duty station that is at least 50 miles from the residence sold, or
- When residing under orders in government housing.
References:
- Publication 523, Selling Your Home
- Tax Topic 701, Sale of your Home - after May 6, 1997
- Tax Topic 703, Basis of Assets
The amount of gain on the sale over your cost, or basis, determines whether you will have to include any proceeds as taxable income on your return. You may be able to exclude this gain from income up to a maximum dollar limit. If you can exclude all of the gain, you do not need to report the sale on your tax return. To determine the maximum dollar limit you can exclude or for additional information on selling your home, refer to Publication 523, Selling Your Home.
References:
- Publication 523, Selling Your Home
- Tax Topic 701, Sale of your Home - after May 6, 1997
- Tax Topic 703, Basis of Assets
With the exception of the 2-year waiting period, there is no limit on the number of times you can exclude the gain on the sale of your principal residence so long as you meet the ownership and use tests.
References:
- Publication 523, Selling Your Home
- Tax Topic 701, Sale of Your Home - after May 6, 1997
- Tax Topic 703, Basis of Assets
If, during the 5-year period ending on the date of sale, you owned the home for at least 2 years and lived in it as your main home for at least 2 years, you can exclude up to the maximum dollar limit. However, you cannot exclude the portion of the gain equal to depreciation allowed or allowable for periods after May 6, 1997. This gain is reported on Form 4797 (PDF), Sale of Business Property. If you can show by adequate records or other evidence that the depreciation allowed was less that the amount allowable, the amount you cannot exclude is the amount allowed. Refer to Publication 523, Selling Your Home, and Form 4797 (PDF), Sale of Business Property, for specifics on calculating and reporting the amount of gain.
References:
- Publication 527, Residential Rental Property
Your second home is considered a capital asset. Use Form 1040, Schedule D (PDF) to report sales, exchanges, and other dispositions of capital assets.
References:
- Publication 527, Residential Rental Property
- Publication 544,Sales and Other Dispositions of Assets
- Publication 587, Business Use of Your Home
- Tax Topic 703, Basis of Assets
- Tax Topic 409, Capital Gains and Losses