Publication 530 |
2001 Tax Year |
Basis
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 must also keep
records of the events that affect basis or adjusted basis. See
Keeping Records, later.
Figuring Your Basis
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.
Fair market value.
Fair market value is the price that property would sell for on the
open market. It is the price that would be agreed on between a willing
buyer and a willing seller, with neither having to buy or sell, and
both having reasonable knowledge of the relevant facts.
Property transferred from a spouse.
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.
Cost as Basis
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.
Purchase.
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.
Construction.
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 you did not pay for.
Real estate taxes.
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.
Example 1.
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 $730 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 $244 [(122
× 365) × $730] the seller paid for you. You can deduct
your $244 share of real estate taxes on your return for the year you
purchased your home.
Example 2.
You bought your home on May 3, 2001. 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 2001 for 2000 were
$520. The taxes due in 2002 for 2001 will be $565.
You cannot deduct any of the taxes paid in 2001 because they relate
to the 2000 property tax year. You did not own the home until 2001.
Instead, you add the $520 to the cost (basis) of your home.
Because you owned the home in 2001 for 243 days (May 3 to December
31), you can take a tax deduction on your 2002 return of $376 [(243
× 365) × $565] paid in 2002 for 2001. You add the
remaining $189 ($565 - $376) of taxes paid in 2002 to the cost
(basis) of your home.
Settlement or closing costs.
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.
Items added to basis.
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.
- Surveys.
- Transfer taxes.
- 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 that you are liable for
and that you can take a deduction for (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.
Items not added to basis and not deductible.
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:
- FHA mortgage insurance premiums and VA funding fees,
- Loan assumption fees,
- Cost of a credit report, and
- Fee for an appraisal required by a lender.
Points paid by seller.
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.
Gift
If someone gave you your home and its fair market value when it was
given to you was equal to or more than that person's adjusted basis
(defined later), your basis is the same as that person's adjusted
basis. If you received your home as a gift after 1976, add to your
basis (the donor's adjusted basis) the part of any federal gift tax
paid that is due to the net increase in the value of the home. Figure
this part by multiplying the gift tax paid on the gift of the home 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 amount of the gift. The net increase in the value of the home
is the fair market value of the home minus the donor's adjusted basis.
The amount of the gift is its value for gift tax purposes after
reduction by any annual exclusion and marital or charitable deduction
that applies to the gift.
If someone gave you your home and its fair market value when it was
given to you was less than that person's adjusted basis, your basis
for figuring gain on its sale is the same as that person's adjusted
basis. However, your basis for figuring a loss on its sale is its fair
market value when it was given to you.
Publication 551 ,
Basis of Assets, gives more information
including examples of figuring your basis when you received property
as a gift.
Inheritance
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 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.
Adjusted Basis
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, for a list of some of the items
that can adjust your basis.
Improvements.
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.
Amount added to basis.
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 must also 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.
Repairs versus improvements.
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.
Records to keep.
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.
Energy conservation subsidy.
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.
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