Frequently Asked Tax Questions
Capital Gains, Losses, Sale of Home - Property (Basis, Sale of Home,
etc.)
Rev. date: 12/21/2012
To figure the basis of property you receive as a gift, you must know 3
amounts:
- The
adjusted basis to the donor just before it was given to you.
- The
fair market value (FMV) at the time it was given to you.
- The amount of any
gift tax 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 a
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.
Note: 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. If you received a gift after 1976, increase your basis by
the part of the gift tax paid on it that is due to the net increase in value of
the gift. To figure the net increase in value or for more information on
gifts received before 1977, see
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.
Rev. date: 12/21/2012
Basis is your investment in property for tax purposes. There are 2 major uses of
basis:
- Determining gain or loss (gain or loss on the disposition of an asset is the difference between the selling price and the adjusted basis in the asset);
and
- Determining depreciation (the adjusted basis of depreciable property is used to compute allowable depreciation
deductions).
Before figuring gain or loss on a sale, exchange or other disposition of property, or figuring allowable depreciation, depletion or amortization, you must usually make certain adjustments to the basis of the property. The result of these adjustments to the basis is the adjusted
basis.
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 incurred in defending or perfecting title to property
- Costs of obtaining a zoning change for property
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
Rev. date: 12/21/2012
You may qualify to exclude from your income all or part of any gain from the sale of your main home if during the 5-year period ending on the date of the sale you meet the ownership and use tests described below and
in
Publication 523,
Selling Your Home.
- You owned the property for at least 2 years; the 2- year period need not be continuous (the ownership
test).
- You must have lived in the property as your principal residence for at least 2 years; the 2- year period need not be continuous (the use
test).
- During the 2-year period ending on the date of sale, you did not exclude gain from the sale of another principal
residence.
If you owned and lived in the property as your principal residence for less than 2 years, you may still be able to claim a reduced exclusion. See Publication
523,
Selling Your Home, for more information.
If you are required to report or choose to report a gain on the sale of your principal residence, use
Form 8949 (PDF),
Sales and Other Dispositions of Capital Assets, and
Schedule D (Form 1040) (PDF),
Capital Gains and Losses.
Note:
If you (or your spouse) were on qualified official extended duty as a
member of the U.S. uniformed services or U.S. Foreign Service, as an employee of
the U.S. intelligence community, or as an employee or volunteer of the Peace
Corps, you may elect to suspend the five-year test period for up to 10 years.
You may use this provision for only one property at a time. Qualified
official extended duty is any extended duty while serving at a duty station at
least 50 miles from the property or while residing under Government orders in
Government quarters. Extended duty is any period of active duty following
a call or order to duty for a period of more than 90 days or for an indefinite
period.
Rev. date: 12/21/2012
The money you receive from the sale of your home is part of your amount realized on the sale, even if the money is used to pay off the mortgage. However, the money may not be subject to
tax.
If your amount realized, which generally includes any cash or other property you receive, plus any indebtedness assumed or paid off by the buyer, minus your selling expenses, exceeds your adjusted basis in your home, you have a capital gain on the sale.
Your adjusted basis is generally your home’s cost plus any capital improvements (if you financed the purchase of the house by obtaining a mortgage, the mortgage proceeds are included in determining your cost basis in your
residence).
You may be able to exclude from income all or a portion of the gain on your home sale. If you may exclude all of the gain, you do not need to report the sale on your tax return, unless you are required to otherwise file a return and you received a
Form 1099-S (PDF),
Proceeds From Real Estate Transactions. To determine the amount of the gain you may exclude from income or for additional information on the tax rules that apply when you sell your home, refer to
Publication 523,
Selling Your Home. Any gain that you may not exclude must be reported as income on your
return.
Rev. date: 12/21/2012
As long as you satisfy the ownership and use tests and have not excluded gain from the sale of a principal residence within the two- year period ending on the date of the sale, you can exclude gain from the future sale of your principal residence within the limits of the exclusion. As long as you meet the requirements of the exclusion, the number of times you claim the exclusion is not
limited.
Rev. date: 12/21/2012
You may be able to exclude gain from the sale of the property. The capital gain exclusion associated with the sale of the principal residences requires that
you:
- meet the ownership and use tests, and
- cannot have used this exclusion on any other residence during the 2 year period that ends on the date of
sale.
If you used and owned the property as your principal residence for 2 years out of the 5 year period ending on the date of sale, you have met the ownership and use tests for the exclusion. This is true even though the property was rental property for the last 3 years before the date of the
sale.
For rental property, the law has additional limits on the amount you may exclude; you may not exclude the part of your gain equal to any depreciation deduction allowed or allowable for periods after May 6,
1997.
Generally, you are allowed an annual depreciation deduction on your rental property and must reduce the basis of the property by the amount of your depreciation deductions. If you do not claim some or all of the depreciation deductions allowable under the law, you must still reduce the basis of the property by the amount allowable before determining your gain on the sale of the property.
The gain attributable to the depreciation may be subject to the 25% unrecaptured Section 1250 gain tax rate. Refer to
Publication 523,
Selling Your Home, and
Form 4797 (PDF),
Sales of Business Property, for specifics on how to calculate and report the amount of
gain.
Rev. date: 12/21/2012
Your second home (such as a vacation home) is considered a personal capital asset. Use
Schedule D (Form 1040) (PDF),
Capital Gains and Losses, and
Form 8949 (PDF),
Sales and Other Dispositions of Capital Assets, to report sales, exchanges, and other dispositions of capital
assets.