Basis is your starting point for figuring a gain or loss if you later sell your home, or for figuring depreciation if you later use part of your home for business purposes or for rent.
While you own your home, you may add certain items to your basis. You may subtract certain other items from your basis. These items are called adjustments to basis and are explained later under Adjusted Basis.
It is important that you understand these terms when you first acquire your home because you must keep track of your basis and adjusted basis during the period you own your home. You also must keep records of the events that affect basis or adjusted basis. See Keeping Records, later.taxmap/pubs/p530-003.htm#en_us_publink100011930
How you figure your basis depends on how you acquire your home. If you buy or build your home, your cost is your basis. If you receive your home as a gift, your basis is usually the same as the adjusted basis of the person who gave you the property. If you inherit your home from a decedent, the fair market value at the date of the decedent's death is generally your basis. Each of these topics is discussed later. taxmap/pubs/p530-003.htm#en_us_publink100011931
This is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and who both have a reasonable knowledge of all the necessary facts. taxmap/pubs/p530-003.htm#en_us_publink100011932
If your home is transferred to you from your spouse, or from your former spouse as a result of a divorce, your basis is the same as your spouse's (or former spouse's) adjusted basis just before the transfer. Publication 504, Divorced or Separated Individuals, fully discusses transfers between spouses. taxmap/pubs/p530-003.htm#en_us_publink100011933
The cost of your home, whether you purchased it or constructed it, is the amount you paid for it, including any debt you assumed.
The cost of your home includes most settlement or closing costs you paid when you bought the home. If you built your home, your cost includes most closing costs paid when you bought the land or settled on your mortgage.
If you elect to deduct the sales taxes on the purchase or construction of your home as an itemized deduction on Schedule A (Form 1040), you cannot include the sales taxes as part of your cost basis in the home.
The basis of a home you bought is the amount you paid for it. This usually includes your down payment and any debt you assumed. The basis of a cooperative apartment is the amount you paid for your shares in the corporation that owns or controls the property. This amount includes any purchase commissions or other costs of acquiring the shares. taxmap/pubs/p530-003.htm#en_us_publink100011935
If you contracted to have your home built on land that you own, your basis in the home is your basis in the land plus the amount you paid to have the home built. This includes the cost of labor and materials, the amount you paid the contractor, any architect's fees, building permit charges, utility meter and connection charges, and legal fees that are directly connected with building your home. If you built all or part of your home yourself, your basis is the total amount it cost you to build it. You cannot include the value of your own labor or any other labor for which you did not pay. taxmap/pubs/p530-003.htm#en_us_publink100011936
Real estate taxes are usually divided so that you and the seller each pay taxes for the part of the property tax year that each owned the home. See the earlier discussion of Real estate taxes paid at settlement or closing, under Real Estate Taxes, to figure the real estate taxes you paid or are considered to have paid.
If you pay any part of the seller's share of the real estate taxes (the taxes up to the date of sale), and the seller did not reimburse you, add those taxes to your basis in the home. You cannot deduct them as taxes paid.
If the seller paid any of your share of the real estate taxes (the taxes beginning with the date of sale), you can still deduct those taxes. Do not include those taxes in your basis. If you did not reimburse the seller, you must reduce your basis by the amount of those taxes.
Table 3. Adjusted Basis This table lists examples of some items that generally will increase or decrease your basis in your home. It is not intended to be all-inclusive.
|Increases to Basis||Decreases to Basis|
- Putting an addition on your home
- Replacing an entire roof
- Paving your driveway
- Installing central air conditioning
- Rewiring your home
Assessments for local improvements
(see Assessments for local benefits, under What You Can and Cannot Deduct)
Amounts spent to restore damaged property
- Insurance or other reimbursement for casualty losses
- Deductible casualty loss not covered by insurance
- Payments received for easement or right-of-way granted
- Depreciation allowed or allowable if home is used for business or rental purposes
- Value of subsidy for energy conservation measure excluded from income
You bought your home on September 1. The property tax year in your area is the calendar year, and the tax is due on August 15. The real estate taxes on the home you bought were $1,275 for the year and had been paid by the seller on August 15. You did not reimburse the seller for your share of the real estate taxes from September 1 through December 31. You must reduce the basis of your home by the $425 [(122 ÷ 366) × $1,275] the seller paid for you. You can deduct your $425 share of real estate taxes on your return for the year you purchased your home. taxmap/pubs/p530-003.htm#en_us_publink100011938
You bought your home on May 3, 2008. The property tax year in your area is the calendar year. The taxes for the previous year are assessed on January 2 and are due on May 31 and November 30. Under state law, the taxes become a lien on May 31. You agreed to pay all taxes due after the date of sale. The taxes due in 2008 for 2007 were $1,375. The taxes due in 2009 for 2008 will be $1,425.
You cannot deduct any of the taxes paid in 2008 because they relate to the 2007 property tax year and you did not own the home until 2008. Instead, you add the $1,375 to the cost (basis) of your home.
You owned the home in 2008 for 243 days (May 3 to December 31), so you can take a tax deduction on your 2009 return of $946 [(243 ÷ 366) × $1,425] paid in 2009 for 2008. You add the remaining $479 ($1,425 − $946) of taxes paid in 2009 to the cost (basis) of your home. taxmap/pubs/p530-003.htm#en_us_publink100011939
If you bought your home, you probably paid settlement or closing costs in addition to the contract price. These costs are divided between you and the seller according to the sales contract, local custom, or understanding of the parties. If you built your home, you probably paid these costs when you bought the land or settled on your mortgage.
The only settlement or closing costs you can deduct are home mortgage interest and certain real estate taxes. You deduct them in the year you buy your home if you itemize your deductions. You can add certain other settlement or closing costs to the basis of your home. taxmap/pubs/p530-003.htm#en_us_publink100011940
You can include in your basis the settlement fees and closing costs you paid for buying your home. A fee is for buying the home if you would have had to pay it even if you paid cash for the home.
The following are some of the settlement fees and closing costs that you can include in the original basis of your home.
- Abstract fees (abstract of title fees).
- Charges for installing utility services.
- Legal fees (including fees for the title search and preparation of the sales contract and deed).
- Recording fees.
- Transfer taxes.
- Owner's title insurance.
- Any amount the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, cost for improvements or repairs, and sales commissions.
If the seller actually paid for any item for which you are liable and for which you can take a deduction (such as your share of the real estate taxes for the year of sale), you must reduce your basis by that amount unless you are charged for it in the settlement.taxmap/pubs/p530-003.htm#en_us_publink100011941
Here are some settlement and closing costs that you cannot deduct or
add to your basis.
- Fire insurance premiums.
- Charges for using utilities or other services related to occupancy of the home before closing.
- Rent for occupying the home before closing.
- Charges connected with getting or refinancing a mortgage loan, such as:
- Loan assumption fees,
- Cost of a credit report, and
- Fee for an appraisal required by a lender.
If you bought your home after April 3, 1994, you must reduce your basis by any points paid for your mortgage by the person who sold you your home.
If you bought your home after 1990 but before April 4, 1994, you must reduce your basis by seller-paid points only if you deducted them. See Points, earlier, for the rules on deducting points. taxmap/pubs/p530-003.htm#en_us_publink100011943
To figure the basis of property you receive as a gift, you must know its adjusted basis (defined later) to the donor just before it was given to you, its FMV at the time it was given to you, and any gift tax paid on it. taxmap/pubs/p530-003.htm#en_us_publink100011944
If someone gave you your home and the donor's adjusted basis, when it was given to you, was more than the fair market value, your basis at the time of receipt is the same as the donor's adjusted basis.taxmap/pubs/p530-003.htm#en_us_publink100011945
If the donor's adjusted basis at the time of the gift is more than the FMV, your basis when you dispose of the property will depend on whether you have a gain or a loss.
- 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 a gain nor a loss.
If someone gave you your home after 1976 and the donor's adjusted basis, when it was given to you, was equal to or less than the fair market value, your basis at the time of receipt is 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.taxmap/pubs/p530-003.htm#en_us_publink100011947
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 (top part) of the fraction is the net increase in the value of the home, and the denominator (bottom part) is the value of the home for gift tax purposes after reduction for 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 adjusted basis of the donor.
Publication 551 gives more information, including examples, on figuring your basis when you receive property as a gift.taxmap/pubs/p530-003.htm#en_us_publink100011948
Your basis in a home you inherited is generally the fair market value of the home on the date of the decedent's death or on the alternate valuation date if the personal representative for the estate chooses to use alternative valuation.
If an estate tax return was filed, your basis is generally the value of the home listed on the estate tax return.
If an estate tax return was not filed, your basis is the appraised value of the home at the decedent's date of death for state inheritance or transmission taxes. Publication 551 and Publication 559, Survivors, Executors, and Administrators, have more information on the basis of inherited property. taxmap/pubs/p530-003.htm#en_us_publink100011949
While you own your home, various events may take place that can change the original basis of your home. These events can increase or decrease your original basis. The result is called adjusted basis. See Table 3, earlier, for a list of some of the items that can adjust your basis.taxmap/pubs/p530-003.htm#en_us_publink100011950
An improvement materially adds to the value of your home, considerably prolongs its useful life, or adapts it to new uses. You must add the cost of any improvements to the basis of your home. You cannot deduct these costs.
Improvements include putting a recreation room in your unfinished basement, adding another bathroom or bedroom, putting up a fence, putting in new plumbing or wiring, installing a new roof, and paving your driveway.taxmap/pubs/p530-003.htm#en_us_publink100011951
The amount you add to your basis for improvements is your actual cost. This includes all costs for material and labor, except your own labor, and all expenses related to the improvement. For example, if you had your lot surveyed to put up a fence, the cost of the survey is a part of the cost of the fence.
You also must add to your basis state and local assessments for improvements such as streets and sidewalks if they increase the value of the property. These assessments are discussed earlier under Real Estate Taxes. taxmap/pubs/p530-003.htm#en_us_publink100011952
A repair keeps your home in an ordinary, efficient operating condition. It does not add to the value of your home or prolong its life. Repairs include repainting your home inside or outside, fixing your gutters or floors, fixing leaks or plastering, and replacing broken window panes. You cannot deduct repair costs and generally cannot add them to the basis of your home.
However, repairs that are done as part of an extensive remodeling or restoration of your home are considered improvements. You add them to the basis of your home. taxmap/pubs/p530-003.htm#en_us_publink100011953
You can use Table 4 (at the end of the publication) as a guide to help you keep track of improvements to your home. Also see Keeping Records, later.taxmap/pubs/p530-003.htm#en_us_publink100011954
If a public utility gives you (directly or indirectly) a subsidy for the purchase or installation of an energy conservation measure for your home, do not include the value of that subsidy in your income. You must reduce the basis of your home by that value.
An energy conservation measure is an installation or modification primarily designed to reduce consumption of electricity or natural gas or to improve the management of energy demand.