Is the money received from the sale of inherited property considered
To determine if the sale of inherited property is taxable, you must first
determine your basis in the property. The basis of inherited property is generally
one of the following:
(1) The fair market value (FMV) of the property on the date of the decedent's
(2) The FMV of the property on the alternate valuation date if the executor
of the estate chooses to use alternate valuation. See the Form 706 Instructions, United States Estate (and Generation-Skipping Transfer) Tax
(3) The special use valuation for estate tax purposes of qualified real
property used for farming purposes or in a trade or business other than farming.
However, if an interest in such property is disposed of or ceases to be used
in a qualified use during the 10 year period following the decedent's death,
additional estate tax is imposed. If the qualified heir elects to pay interest
on the additional estate tax, the adjusted basis of the property will be deemed
to have been increased, immediately before disposition, by an amount equal
to the excess of its fair market value on the date of the decedent's death
over its special use value. See Form 706 (PDF), U.S.
Estate (and Generation-Skipping Transfer) Tax Return and section 2032A
of Internal Revenue Code.
(4) If an election is made to exclude a portion of the value of land from
a decedent's gross estate section 2031 (c) (regarding the transfer of qualified
conservation easement), the decedent's adjusted basis in the land to the extent
the value of the land was excluded from the decedent's gross estate under
2031(c) by reason of the transfer of a qualified conservation easement plus
the fair market value of the land to the extent the value of the land was
included in the gross estate. For more information on qualified conservation
easement see the Form 706 Instructions, U. S. Estate
(and Generation-Skipping Transfer) Tax Return and section 2031(c) of
the Internal Revenue Code.
If you or your spouse gave the property to the descendent within one year
of their death, see Publication 551, Basis of Assets.
Report the sale on Form 1040, Schedule D (PDF), Capital
Gain and Losses. If you sell the property for more than your basis, you
have a taxable gain. For information on how to report the sale on Schedule
D, please see Publication 550, Investment Income and Expenses.
I sold my principal residence this year. What form do I need to
If you meet the ownership and use tests, you will generally only need to
report the sale of your home if your gain exceeds a certain dollar amount
prescribed by law. To determine the amount of gain that can be excluded from
income refer to Publication 523, Selling Your Home.
You may be entitled to exclude gain from income if during the 5-year period
ending on the date of the sale, you have:
- Owned the home for at least 2 years (the ownership test), and
- Lived in the home as your main home for at least 2 years (the use test).
If you owned and lived in the property as your main home for less than
2 years, you may still be able to claim an exclusion in some cases. If you
are required or choose to report a gain, it is reported on Form 1040, Schedule D
(PDF), Capital Gains and Losses
If you were on qualified extended duty in the U.S. Armed Services or the
Foreign Service you may suspend the five-year test period for up to 10 years.
You are on qualified extended duty when the extended duty lasts for more than
90 days or for an indefinite period AND:
- At a duty station that is at least 50 miles from the residence sold, or
- When residing under orders in government housing.
This change applies to home sales after May 6, 1997. You may use this provision
for only one property at a time and one sale every two years.
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?
It is not the money you receive for the sale of your home, but the amount
of gain on the sale over your cost, or basis, that determines whether you
will have to include any proceeds as taxable income on your return. You may
be able to exclude this gain from income up to a maximum dollar limit. If
you can exclude all of the gain, you do not need to report the sale on your
tax return. To determine the maximum dollar limit you can exclude or for additional
information on selling your home, refer to Publication 523, Selling
If I take the exclusion of capital gain tax on the sale of my old
home this year, can I also take the exclusion again if I sell my new home
in the future?
You cannot exclude gain on the sale of your home if, during the 2-year
period ending on the date of the sale, you sold another home at a gain and
excluded all or part of that gain. If you cannot exclude the gain, you must
include it in your income.
Exception. You still can claim an exclusion, but the maximum amount of
gain you can exclude will be reduced, if the reason you sold the home was:
- A change in place of employment
- Health, or
- Unforeseen circumstances (as defined earlier)
With the exception of the 2-year waiting period, there is no limit on the
number of times you can exclude the gain on the sale of your principle residence
so long as you meet the ownership and use tests.
I lived in a home as my principal residence for the first 2 of the
last 5 years. For the last 3 years, the home was a rental property before
selling it. Can I still avoid the capital gains tax and, if so, how should
I deal with the depreciation I took while it was rented out?
If, during the 5-year period ending on the date of sale, you owned the
home for at least 2 years and lived in it as your main home for at least 2
years, you can exclude up to the maximum dollar limit. However, you cannot
exclude the portion of the gain equal to depreciation allowed or allowable
for periods after May 6, 1997. This gain is reported on Form 4797 (PDF), Sale of Business Property. 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.
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. If you have a qualified home office or rent your second
home, see Publication 587, Business Use of Your Home, or Publication 527 Residential Rental Property for more details
on reporting the sale of your second residence.
Is the loss on the sale of your home deductible?
The loss on the sale of a personal residence is a nondeductible personal
I have a home office. Can I deduct expenses like mortgage, utilities,
etc., but not deduct depreciation so that when I sell this house, the basis
won't be affected?
If you qualify to deduct expenses for the business use of your home, you
can claim depreciation for the part of your home that is a home office. Generally,
the part of your home that is a home office is depreciated over a recovery
period of 39 years using the straight line method of depreciation and a mid-month
convention. If you do not claim depreciation on that part of your home that
is a home office, you are still required to reduce the basis of your home
for the allowable depreciation of that part of your home that is a home office
when reporting the sale of your home. For more information, refer to Publication 587, Business Use of Your Home.
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