You need to know your basis in your home to figure any gain or loss when you sell it. Your basis in your home is determined by how you got the home. Your basis is its cost if you bought it or built it. If you got it in some other way (inheritance, gift, etc.), your basis is either its fair market value when you received it or the adjusted basis of the previous owner.
While you owned your home, you may have made adjustments (increases or decreases) to your home's basis. The result of these adjustments is your home's adjusted basis, which is used to figure gain or loss on the sale of your home.
To figure your adjusted basis, you can use Worksheet 1, near the end of this publication. Filled-in examples of that worksheet are included in the Comprehensive Examples
The cost of property is the amount you pay for it in cash, debt obligations, other property, or services. taxmap/pubs/p523-002.htm#en_us_publink100027524
If you buy your home, your basis is its cost to you. This includes the purchase price and certain settlement or closing costs. Generally, your purchase price includes your down payment and any debt, such as a first or second mortgage or notes you gave the seller in payment for the home. If you build, or contract to build, a new home, your purchase price can include costs of construction, as discussed later.taxmap/pubs/p523-002.htm#en_us_publink100027525
If the person who sold you your home paid points on your loan, you may have to reduce your home's basis by the amount of the points, as shown in the following chart.
|IF you bought your home...||THEN reduce your home's basis by the seller-paid points...|
|after 1990 but before April 4, 1994||only if you deducted them as home mortgage interest in the year paid.|
|after April 3, 1994||even if you did not deduct them.|
When you bought your home, you may have paid settlement fees or closing costs in addition to the contract price of the property. You can include in your basis some of the settlement fees and closing costs you paid for buying the home, but not the fees and costs for getting a mortgage loan. A fee paid for buying the home is any fee you would have had to pay even if you paid cash for the home (that is, without the need for financing).
Settlement fees do not include amounts placed in escrow for the future payment of items such as taxes and insurance.
Some of the settlement fees or closing costs that you can include in your basis are:
- Abstract fees (abstract of title fees),
- Charges for installing utility services,
- Legal fees (including fees for the title search and preparing the sales contract and deed),
- Recording fees,
- Survey fees,
- Transfer or stamp taxes,
- Owner's title insurance, and
- Any amounts the seller owes that you agree to pay, such as:
- Certain real estate taxes (discussed later),
- Back interest,
- Recording or mortgage fees,
- Charges for improvements or repairs, and
- Sales commissions.
Some settlement fees and closing costs you cannot include in your basis are:
- Fire insurance premiums,
- Rent for occupancy of the house before closing,
- Charges for utilities or other services related to occupancy of the house before closing,
- Any fee or cost that you deducted as a moving expense (allowed for certain fees and costs before 1994),
- Charges connected with getting a mortgage loan, such as:
- Mortgage insurance premiums (including funding fees connected with loans guaranteed by the Department of Veterans Affairs),
- Loan assumption fees,
- Cost of a credit report,
- Fee for an appraisal required by a lender, and
- Fees for refinancing a mortgage.
Real estate taxes for the year you bought your home may affect your basis, as shown in the following chart.
|IF...||AND...||THEN the taxes...|
|you pay taxes that the seller owed on the home up to the date of sale||the seller does not reimburse you ||are added to the basis of your home.|
|the seller reimburses you||do not affect the basis of your home.|
|the seller pays taxes for you (taxes owed beginning on the date of sale)||you do not reimburse the seller ||are subtracted from the basis of your home.|
|you reimburse the seller||do not affect the basis of your home.|
If you contracted to have your house built on land you own, your basis is:
- The cost of the land, plus
- The amount it cost you to complete the house, including:
- The cost of labor and materials,
- Any amounts paid to a contractor,
- Any architect's fees,
- Building permit charges,
- Utility meter and connection charges, and
- Legal fees directly connected with building the house.
Your cost includes your down payment and any debt such as a first or second mortgage or notes you gave the seller or builder. It also includes certain settlement or closing costs. You may have to reduce your basis by points the seller paid for you. For more information, see Seller-paid points and Settlement fees or closing costs, earlier. taxmap/pubs/p523-002.htm#en_us_publink1000121316
If you built all or part of your house yourself, its basis is the total amount it cost you to complete it. Do not include in the cost of the house:
- The value of your own labor, or
- The value of any other labor you did not pay for.
If a builder gave you temporary housing while your home was being finished, you must reduce your basis by the part of the contract price that was for the temporary housing. To figure the amount of the reduction, multiply the contract price by a fraction. The numerator is the value of the temporary housing, and the denominator is the sum of the value of the temporary housing plus the value of the new home. taxmap/pubs/p523-002.htm#en_us_publink100027531
If you are a tenant-stockholder in a cooperative housing corporation, your basis in the cooperative apartment used as your home is usually the cost of your stock in the corporation. This may include your share of a mortgage on the apartment building. taxmap/pubs/p523-002.htm#en_us_publink100027532
To determine your basis in a condominium apartment used as your home, use the same rules as for any other home. taxmap/pubs/p523-002.htm#en_us_publink100027533
You must use a basis other than cost, such as fair market value, if you received your home from your spouse, as a gift or inheritance, or in a trade. These situations are discussed on the following pages. Also, the instructions for Worksheet 1 (near the end of the publication) address each of these issues.taxmap/pubs/p523-002.htm#en_us_publink100027534
Fair market value is the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts. Sales of similar property, on or about the same date, may be helpful in figuring the fair market value of the property. taxmap/pubs/p523-002.htm#en_us_publink100027535
Use the following chart to find the basis of a home you received as a gift.
|IF the donor's adjusted basis at the time of the gift was...||THEN your basis is...|
|more than the fair market value of the home at that time||the same as the donor's adjusted basis at the time of the gift. |
Exception: If using the donor's adjusted basis results in a loss when you sell the home, you must use the fair market value of the home at the time of the gift as your basis. If using the fair market value results in a gain, you have neither gain nor loss.
|equal to or less than the fair market value at that time, and you received the gift before 1977||the smaller of the:|
• donor's adjusted basis, plus
any federal gift tax paid on
the gift, or
• the home's fair market value
at the time of the gift.
|equal to or less than the fair market value at that time, and you received the gift after 1976||the same as the donor's adjusted basis, plus the part of any federal gift tax paid that is due to the net increase in value of the home (explained next). |
Figure the part of the federal gift tax paid that is due to the net increase in value of the home by multiplying the total federal gift tax paid by a fraction. The numerator of the fraction is the net increase in the value of the home, and the denominator is the value of the home for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. The net increase in the value of the home is its fair market value minus the donor's adjusted basis immediately before the gift. taxmap/pubs/p523-002.htm#en_us_publink100027541
If you inherited your home, your basis is its fair market value on the date of the decedent's death or the later alternate valuation date if that date was chosen by the personal representative for the estate. If an estate tax return was filed, the value listed for the property generally is your basis. If a federal estate tax return did not have to be filed, your basis in the home is the same as its appraised value at the date of death for purposes of state inheritance or transmission taxes. taxmap/pubs/p523-002.htm#en_us_publink100027542
If you are a surviving spouse and you owned your home jointly, your basis in the home will change. The new basis for the half interest that your spouse owned will be one-half of the fair market value on the date of death (or alternate valuation date). The basis in your half will remain one-half of the adjusted basis determined previously. Your new basis in the home is the total of these two amounts. taxmap/pubs/p523-002.htm#en_us_publink100027543
Your jointly owned home had an adjusted basis of $50,000 on the date of your spouse's death, and the fair market value on that date was $100,000. Your new basis in the home is $75,000 ($25,000 for one-half of the adjusted basis plus $50,000 for one-half of the fair market value). taxmap/pubs/p523-002.htm#en_us_publink100027544
In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), each spouse is usually considered to own half of the community property. When either spouse dies, the total fair market value of the community property generally becomes the basis of the entire property, including the part belonging to the surviving spouse. For this to apply, at least half the value of the community property interest must be includible in the decedent's gross estate, whether or not the estate must file a return.
For more information about community property, see Publication 555, Community Property.taxmap/pubs/p523-002.htm#en_us_publink100049583
At the time this publication went to print, these basis rules for inherited property will no longer apply with respect to decedents dying after December 31, 2009. taxmap/pubs/p523-002.htm#en_us_publink100027545
If you acquired your home as a trade for other property, the basis of your home is generally the fair market value (at the time of the trade) of the property you gave up. If you traded one home for another, you have made a sale and purchase. In that case, you may have a gain. See Trading (exchanging) homes
under Dispositions Other Than Sales
, earlier, for an example of figuring the gain.
If you received your home from your spouse or from your former spouse incident to your divorce, your basis in the home depends on the date of the transfer.taxmap/pubs/p523-002.htm#en_us_publink100093068
If you received the home after July 18, 1984, there was no gain or loss on the transfer. Your basis in this home is generally the same as your spouse's (or former spouse's) adjusted basis just before you received it. This rule applies even if you received the home in exchange for cash, the release of marital rights, the assumption of liabilities, or other considerations.
If you owned a home jointly with your spouse and your spouse transferred his or her interest in the home to you, your basis in the half interest received from your spouse is generally the same as your spouse's adjusted basis just before the transfer. This also applies if your former spouse transferred his or her interest in the home to you incident to your divorce. Your basis in the half interest you already owned does not change. Your new basis in the home is the total of these two amounts.taxmap/pubs/p523-002.htm#en_us_publink100093069
If you received your home before July 19, 1984, in exchange for your release of marital rights, your basis in the home is generally its fair market value at the time you received it.taxmap/pubs/p523-002.htm#en_us_publink100093070
For more information on property received from a spouse or former spouse, see Property Settlements in Publication 504. taxmap/pubs/p523-002.htm#en_us_publink100027546
If your home is destroyed or condemned, you may receive insurance proceeds or a condemnation award. If you acquired a replacement home with these proceeds, the basis is its cost decreased by any gain not recognized on the conversion under the rules explained in:
- Publication 547, in the case of a home that was destroyed, or
- Chapter 1 of Publication 544, in the case of a home that was condemned.
A fire destroyed your home that you owned and used for only 6 months. The home had an adjusted basis of $80,000 and the insurance company paid you $130,000 for the loss. Your gain is $50,000 ($130,000 − $80,000). You bought a replacement home for $100,000. The part of your gain that is taxable is $30,000 ($130,000 − $100,000), the unspent part of the payment from the insurance company. The rest of the gain ($20,000) is not taxable, so that amount reduces your basis in the new home The basis of the new home is figured as follows.
|Cost of replacement home||$100,000|
|Minus: Gain not recognized||20,000|
|Basis of the replacement home||$ 80,000|
For more information about basis, see Publication 551.taxmap/pubs/p523-002.htm#en_us_publink100027549
Adjusted basis is your cost or other basis increased or decreased by certain amounts.
To figure your adjusted basis, you can use Worksheet 1, found toward the end of this publication. Filled-in examples of that worksheet are included in Comprehensive Examples
Recordkeeping. You should keep records to prove your home's adjusted basis. Ordinarily, you must keep records for 3 years after the due date for filing your return for the tax year in which you sold your home. But if you sold a home before May 7, 1997, and postponed tax on any gain, the basis of that home affects the basis of the new home you bought. Keep records proving the basis of both homes as long as they are needed for tax purposes.
The records you should keep include:
- Proof of the home's purchase price and purchase expenses,
- Receipts and other records for all improvements, additions, and other items that affect the home's adjusted basis,
- Any worksheets or other computations you used to figure the adjusted basis of the home you sold, the gain or loss on the sale, the exclusion, and the taxable gain,
- Any Form 982 that you filed to exclude any discharge of qualified principal residence indebtedness,
- Any Form 2119, Sale of Your Home, that you filed to postpone gain from the sale of a previous home before May 7, 1997, and
- Any worksheets you used to prepare Form 2119, such as the Adjusted Basis of Home Sold Worksheet or the Capital Improvements Worksheet from the Form 2119 instructions, or other source of computations.
These include the following.
- Additions and other improvements that have a useful life of more than 1 year.
- Special assessments for local improvements.
- Amounts you spent after a casualty to restore damaged property.
These add to the value of your home, prolong its useful life, or adapt it to new uses. You add the cost of additions and other improvements to the basis of your property.
The following chart lists some other examples of improvements.
|Heating & Air Conditioning|
Central air conditioning
|Lawn & Grounds|
Storm windows, doors
Soft water system
Pipes and duct work
Your home's adjusted basis does not include the cost of any improvements that are replaced and are no longer part of the home.taxmap/pubs/p523-002.htm#en_us_publink100093074
You put wall-to-wall carpeting in your home 15 years ago. Later, you replaced that carpeting with new wall-to-wall carpeting. The cost of the old carpeting you replaced is no longer part of your home's adjusted basis.taxmap/pubs/p523-002.htm#en_us_publink100093075
These maintain your home in good condition but do not add to its value or prolong its life. You do not add their cost to the basis of your property. taxmap/pubs/p523-002.htm#en_us_publink100093076
Repainting your house inside or outside, fixing your gutters or floors, repairing leaks or plastering, and replacing broken window panes are examples of repairs.taxmap/pubs/p523-002.htm#en_us_publink100093077
The entire job is considered an improvement if items that would otherwise be considered repairs are done as part of an extensive remodeling or restoration of your home. For example, if you have a casualty and your home is damaged, increase your basis by the amount you spend on repairs that restore the property to its pre-casualty condition.taxmap/pubs/p523-002.htm#en_us_publink100049857
These include the following.
- Discharge of qualified principal residence indebtedness that was excluded from income (but not below zero).
- Gain you postponed from the sale of a previous home before May 7, 1997.
- Deductible casualty losses.
- Insurance payments you received or expect to receive for casualty losses.
- Payments you received for granting an easement or right-of-way.
- Depreciation allowed or allowable if you used your home for business or rental purposes.
- Residential energy credit (generally allowed from 1977 through 1987) claimed for the cost of energy improvements that you added to the basis of your home.
- Nonbusiness energy property credit (allowed beginning in 2006) claimed for making certain energy saving improvements that you added to the basis of your home.
- Residential energy efficient property credit (allowed beginning in 2006) claimed for making certain energy saving improvements that you added to the basis of your home.
- Adoption credit you claimed for improvements added to the basis of your home.
- Nontaxable payments from an adoption assistance program of your employer that you used for improvements you added to the basis of your home.
- Energy conservation subsidy excluded from your gross income because you received it (directly or indirectly) from a public utility after 1992 to buy or install any energy conservation measure. An energy conservation measure is an installation or modification that is primarily designed either to reduce consumption of electricity or natural gas or to improve the management of energy demand for a home.
- District of Columbia first-time homebuyer credit (allowed on the purchase of a principal residence in the District of Columbia beginning on August 5, 1997).
- General sales taxes claimed as an itemized deduction on Schedule A (Form 1040) that were imposed on the purchase of personal property, such as a houseboat used as your home or a mobile home.
You may be able to exclude from gross income a discharge of qualified principal residence indebtedness. This exclusion applies to discharges made after 2006 and before 2013. If you choose to exclude this income, you must reduce (but not below zero) the basis of your principal residence by the amount excluded from gross income.
File Form 982 with your tax return. See the form's instructions for detailed information.taxmap/pubs/p523-002.htm#en_us_publink100049859
Your principal residence is the home where you ordinarily live most of the time. You can have only one principal residence at any one time. See Main Home, earlier.taxmap/pubs/p523-002.htm#en_us_publink100049860
This is a mortgage you took out to buy, build, or substantially improve your principal residence. It must be secured by your principal residence and it cannot be more than the cost of your principal residence plus improvements.taxmap/pubs/p523-002.htm#en_us_publink100049861
The exclusion applies only to debt discharged after 2006 and before 2013. The maximum amount you can treat as qualified principal residence indebtedness is $2 million ($1 million if married filing separately). You cannot exclude from gross income discharge of qualified principal residence indebtedness if the discharge was for services performed for the lender or on account of any other factor not directly related to a decline in the value of your residence or to your financial condition.