To figure the gain or loss on the sale of your main home, you must know the selling price, the amount realized, and the
adjusted basis.
Selling price.
The selling price is the total amount you receive for your home. It includes money, all notes, mortgages, or other debts assumed by the buyer as
part of the sale, and the fair market value of any other property or any services you receive.
Payment by employer.
You may have to sell your home because of a job transfer. If your employer pays you for a loss on the sale or for your selling expenses, do
not include the payment as part of the selling price. Your employer will include it in box 1 of your Form W-2 and you will include it
in your gross income as wages on line 7 of Form 1040.
Option to buy.
If you grant an option to buy your home and the option is exercised, add the amount you receive for the option to the selling price of your home.
If the option is not exercised, you must report the amount as ordinary income in the year the option expires. Report this amount on line 21 of Form
1040.
Form 1099-S.
If you received Form 1099-S, Proceeds From Real Estate Transactions, box 2 (gross proceeds) should show the total amount you
received for your home.
However, box 2 will not include the fair market value of any property other than cash or notes, or any services, you received or will receive.
Instead, box 4 will be checked.
If you can exclude the entire gain, the person responsible for closing the sale generally will not have to report it on Form 1099-S. You will
use sale documents and other records to figure the total amount you received for your home.
Amount realized.
The amount realized is the selling price minus selling expenses.
Selling expenses.
Selling expenses include:
- Commissions,
- Advertising fees,
- Legal fees, and
- Loan charges paid by the seller, such as loan placement fees or "points."
Adjusted basis.
While you owned your home, you may have made adjustments (increases or decreases) to the basis. This adjusted basis is used to figure gain or loss
on the sale of your home. For information on how to figure your home's adjusted basis, see Basis later.
Amount of gain or loss.
To figure the amount of gain or loss, compare the amount realized to the adjusted basis.
Gain on sale.
If the amount realized is more than the adjusted basis, the difference is a gain and, except for any part you can exclude, generally is taxable.
Loss on sale.
If the amount realized is less than the adjusted basis, the difference is a loss. A loss on the sale of your main home cannot be deducted.
Jointly owned home.
If you and your spouse sell your jointly owned home and file a joint return, you figure your gain or loss as one taxpayer.
Separate returns.
If you file separate returns, each of you must figure your own gain or loss according to your ownership interest in the home. Your ownership
interest is determined by state law.
Joint owners not married.
If you and a joint owner other than your spouse sell your jointly owned home, each of you must figure your own gain or loss according to your
ownership interest in the home. Each of you applies the rules discussed in this chapter on an individual basis.
Trading homes.
If you trade your old home for another home, treat the trade as a sale and a purchase.
Example.
You owned and lived in a home that had an adjusted basis of $41,000. A real estate dealer accepted your old home as a trade-in and allowed you
$50,000 toward a new home priced at $80,000. This is treated as a sale of your old home for $50,000 with a gain of $9,000 ($50,000 - $41,000).
If the dealer had allowed you $27,000 and assumed your unpaid mortgage of $23,000 on your old home, your sales price would still be $50,000 (the
$27,000 trade-in allowed plus the $23,000 mortgage assumed).
Foreclosure or repossession.
If your home was foreclosed on or repossessed, you have a sale.
You figure the gain or loss from the sale in generally the same way as gain or loss from any sale. But the amount of your gain or loss depends, in
part, on whether you were personally liable for repaying the debt secured by the home. Get Publication 523
for more information.
Form 1099-A and Form 1099-C.
Generally, you will receive Form 1099-A, Acquisition or Abandonment of Secured Property, from your lender. This form will have the
information you need to determine the amount of your gain or loss and any ordinary income from cancellation of debt. If your debt is canceled, you may
receive Form 1099-C, Cancellation of Debt.
Abandonment.
If you abandon your home, you may have ordinary income. If the abandoned home secures a debt for which you are personally liable and the debt is
canceled, you have ordinary income equal to the amount of the canceled debt. Get Publication 523
for more information.
Transfer to spouse.
If you transfer your home to your spouse, or to your former spouse incident to your divorce, you generally have no gain or loss. This is true even
if you receive cash or other consideration for the home. Therefore, the rules in this chapter do not apply.
More information.
If you need more information, see Transfer to spouse in Publication 523
and Property Settlements in Publication 504,
Divorced or Separated Individuals.
Basis
You need to know your basis in your home to determine any gain or loss when you sell it. Your basis in your home is determined by how you got the
home. Your basis is its cost if you bought it or built it. If you got it in some other way (inheritance, gift, etc.), its basis is either its fair
market value when you got it or the adjusted basis of the person you got it from.
While you owned your home, you may have made adjustments (increases or decreases) to your home's basis. The result of these adjustments is your
home's adjusted basis, which is used to figure gain or loss on the sale of your home.
You can find more information on basis and adjusted basis in chapter 14 of this publication and in Publication 523.
Settlement fees or closing costs.
When you bought your home, you may have paid settlement fees or closing costs in addition to the contract price of the property. You can include in
your basis the settlement fees and closing costs you paid for buying the home. You cannot include in your basis the fees and costs for getting a
mortgage loan. A fee for buying the home is any fee you would have had to pay even if you paid cash for the home.
Chapter 14 lists some of the settlement fees and closing costs that you can include in the basis of property, including your home. It also lists
some settlement costs that cannot be included in basis.
In addition to the items listed in chapter 14, you cannot include in basis:
- Any fee or cost that you deducted as a moving expense (allowed for certain fees and costs before 1994), and
- VA funding fees.
Adjusted Basis
Adjusted basis is your basis increased or decreased by certain amounts.
Increases to basis.
These include any:
- Additions and other improvements that have a useful life of more than 1 year,
- Special assessments for local improvements, and
- Amounts you spent after a casualty to restore damaged property.
Decreases to basis.
These include any:
- Gain you postponed from the sale of a previous home before May 7, 1997,
- Deductible casualty losses,
- Insurance payments you received or expect to receive for casualty losses,
- Payments you received for granting an easement or right-of-way,
- Depreciation allowed or allowable if you used your home for business or rental purposes,
- Residential energy credit (generally allowed from 1977 through 1987) claimed for the cost of energy improvements that you added to the basis
of your home,
- Adoption credit you claimed for improvements added to the basis of your home,
- Nontaxable payments from an adoption assistance program of your employer that you used for improvements you added to the basis of your home,
- First-time homebuyer credit (allowed to certain first-time buyers of a home in the District of Columbia), and
- Energy conservation subsidy excluded from your gross income because you received it (directly or indirectly) from a public utility after
1992 to buy or install any energy conservation measure. An energy conservation measure is an installation or modification that is primarily designed
either to reduce consumption of electricity or natural gas or to improve the management of energy demand for a home.
Improvements.
These add to the value of your home, prolong its useful life, or adapt it to new uses. You add the cost of additions and other improvements to the
basis of your property.
Examples.
Putting a recreation room or another bathroom in your unfinished basement, putting up a new fence, putting in new plumbing or wiring, putting on a
new roof, or paving your unpaved driveway are improvements. An addition to your house, such as a new deck, a sunroom, or a garage, is also an
improvement.
Repairs.
These maintain your home in good condition but do not add to its value or prolong its life. You do not add their cost to the basis of your
property.
Examples.
Repainting your house inside or outside, fixing your gutters or floors, repairing leaks or plastering, and replacing broken window panes are
examples of repairs.
Recordkeeping.
You should keep records to prove your home's adjusted basis. Ordinarily, you must keep records for 3 years after
the due date for filing your return for the tax year in which you sold your home. But if you sold a home before May 7, 1997, and postponed tax on any
gain, the basis of that home affects the basis of the new home you bought. Keep records proving the basis of both homes as long as they are needed for
tax purposes.
The records you should keep include:
- Proof of the home's purchase price and purchase expenses,
- Receipts and other records for all improvements, additions, and other items that affect the home's adjusted basis,
- Any worksheets you used to figure the adjusted basis of the home you sold, the gain or loss on the sale, the exclusion, and the taxable
gain,
- Any Form 2119 that you filed to postpone gain from the sale of a previous home before May 7, 1997, and
- Any worksheets you used to prepare Form 2119, such as the Adjusted Basis of Home Sold Worksheet or the Capital Improvements
Worksheet from the Form 2119 instructions.
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