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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. 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?
  3. 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?
  4. 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 exclude the gain on the sale, and, if so, how should I account for the depreciation I took while the property was rented?
  5. How do you report the sale of a second residence?

Rev. date: 12/16/2013

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: 12/16/2013

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. 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: 12/16/2013

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?

You can exclude gain from the future sale of your principal residence (within the limits of the exclusion) as long as you satisfy the ownership and use tests and have not excluded gain from the sale of a former principal residence within the two-year period ending on the date of the sale.  As long as you otherwise meet the requirements of the exclusion, the number of times you claim the exclusion is not limited.

Rev. date: 12/16/2013

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 exclude the gain on the sale, and, if so, how should I account for the depreciation I took while the property was rented?

You may be able to exclude gain from the sale of the property. The capital gain exclusion associated with the sale of a principal residence requires that you:
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. Additionally, taxable gain on the sale may be subject to a 3.8% Net Investment Income Tax.  For more information, see Net Investment Income Tax FAQs.  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: 12/16/2013

How do you report the sale of a second residence?

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.