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Frequently Asked Tax Questions

Capital Gains, Losses/Sale of Home - Property (Basis, Sale of Home, etc.)

  1. What is the basis of property received as a gift?
  2. I have investment property. Can you explain the term basis of assets?
  3. I sold my principal residence this year. What form do I need to file?
  4. If I sell my home and use the money I receive to pay off the mortgage, do I have to pay taxes on that money?
  5. If I exclude the gain on the sale of my former principal residence this year, can I take the exclusion again if I sell my new principal residence in the future?
  6. A property was my principal residence for the first 2 of the 5 years ending on the date of the sale of the property. For the last 3 years before the date of the sale, I held the property as a rental property. Can I still take an exclusion, and, if so, how should I account for the depreciatiuon I took while the property was rented?
  7. How do you report the sale of a second residence?

Rev. date: 1/1/2011

What is the basis of property received as a gift?

To figure the basis of property you receive as a gift, you must know 3 amounts:

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.

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: 1/1/2011

I have investment property. Can you explain the term basis of assets?

Basis is your investment in property for tax purposes. There are 2 major uses of basis.
Increases to basis include but are not limited to:
Decreases to basis include but are not limited to:

Rev. date: 1/1/2011

I sold my principal residence this year. What form do I need to file?

Generally, you need only report the sale of your principal residence if you realized a gain on the sale. To determine if you may exclude up to $250,000 of gain on the sale of your principal residence (up to $500,000 for a joint return or a return by a surviving spouse), refer to Publication 523, Selling Your Home.

You may be entitled to exclude from income all or a portion of the gain realized on the sale of your principal residence if during the 5-year period ending on the date of the sale:

• 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  1040, Schedule D, Capital Gains and Losses.

NOTE:  If you (or your spouse) were on qualified official extended duty as a member of  the U.S. Armed Services or U.S. Foreign Service, or as an employee of the intelligence community, 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,  if the duty lasts for more than 90 days or for an indefinite period.
 

Rev. date: 1/1/2011

If I sell my home and use the money I receive to pay off the mortgage, do I have to pay taxes on that money?

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.  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 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 can exclude all of the gain, you do not need to report the sale on your tax return.  To determine the amount of the gain you can exclude from income or for additional information on selling your home, refer to Publication 523, Selling Your Home.  Any gain that you cannot exclude must be reported as income on your return.
 

Rev. date: 1/1/2011

If I exclude the gain on the sale of my former principal residence this year, can I take the exclusion again if I sell my new principal residence in the future?

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: 1/1/2011

A property was my principal residence for the first 2 of the 5 years ending on the date of the sale of the property. For the last 3 years before the date of the sale, I held the property as a rental property. Can I still take an exclusion, and, if so, how should I account for the depreciatiuon I took while the property was rented?

You may be able to exclude gain from the sale of the property. If you used and owned the property as your principal residence for 2 years of the 5- year period ending on the date of sale, you have met the ownership and use tests for the exclusion, even though the property was rental property for the last 3 years before the date of the sale.  To exclude gain from the sale of this property, you must not have excluded gain from the sale of another principal residence during the two-year period that ends on the date of the sale of the property.  Also,   you cannot exclude an amount equal to the depreciation deductions claimed, or that could have been claimed, on your tax returns. However, if you have adequate records or other evidence that the amount of the depreciation deductions claimed on your returns  was less than the amount allowable, the amount of the gain realized on the sale that will not qualify for exclusion from income will be equal to the amount of the depreciation deductions claimed on your tax returns. 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.

Rev. date: 1/1/2011

How do you report the sale of a second residence?

Your second home is considered a capital asset. Use Form 1040, Schedule D (PDF) to report sales, exchanges, and other dispositions of capital assets.