Selling Your Home: Capital Gains Taxes

Generally, you must have owned and lived in the property as your main home for at least 2 years in order to exclude from your taxable income the gain made on the sale of your main home. There are other requirements and limitations which will be discussed below.

Figuring the Gain or Loss

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. Subtract the adjusted basis from the amount realized to get your gain or loss.

Step #1 Selling Price – Selling Expenses = Amount Realized

Step #2 Amount Realized - Adjusted Basis = Gain or Loss

Definitions

Selling Price: the selling price is the total amount you receive for your home. The selling price of your home does not include amounts you received for personal property sold with your home.

Amount Realized: the amount realized is the selling price minus selling expenses.

Selling Expenses: these include real estate brokerage commissions, advertising fees, title charges, legal fees and loan charges paid by the seller, if any.

Adjusted Basis: while you owned your home, you may have made adjustments (increases or decreases) to the “basis”. See below for more information.

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.

Determining Your 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 (inheritance) or the adjusted basis of the person you got it from (gift).

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.

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 some of the settlement fees and closing costs you paid for buying the home.  Some of the settlement fees or closing costs that you can include in your basis are: title company/abstract fees, charges for installing utility services, legal fees, recording fees, survey fees, transfer or stamp taxes, title insurance, etc.

If you contracted to have your house built on land you own, your basis is: the cost of the land, plus the amount it cost you to complete the house, including: the cost of labor and materials, any amounts paid to a contractor, any architect's fees, building permit charges, utility meter and connection charges, and legal fees directly connected with building the house.

If you built all or part of your house yourself, its basis is the total amount it cost you to complete it. Do not include in the cost of the house the value of your own labor or the value of any other labor you did not pay for.

If you are a tenant-stockholder in a cooperative housing corporation, your basis in the cooperative apartment used as your home is usually the cost of your stock in the corporation. This may include your share of a mortgage on the apartment building.

To determine your basis in a condominium apartment used as your home, use the same rules as for any other home.

If you inherited your home, your basis is its fair market value on the date of the decedent's death or the later alternate valuation date if that date was chosen by the personal representative for the estate.

If you are a surviving spouse and you owned your home jointly, your basis in the home will change. The new basis for the half interest that your spouse owned will be one-half of the fair market value on the date of death (or alternate valuation date). The basis in your half will remain one-half of the adjusted basis determined previously. Your new basis in the home is the total of these two amounts.

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. Your home's adjusted basis does not include the cost of any improvements that are replaced and are no longer part of the home nor does it include repairs. Examples of additions and other improvements:

Additions
Bedroom
Bathroom
Deck
Garage
Porch
Patio

Heating & Air Conditioning
Heating system
Central air conditioning
Furnace
Duct work
Central humidifier
Filtration system

Lawn & Grounds
Landscaping
Driveway
Walkway
Fence
Retaining wall
Sprinkler system
Swimming pool

Miscellaneous
Storm windows, doors
New roof
Central vacuum
Wiring upgrades
Satellite dish
Security system


Plumbing
Septic system
Water heater
Soft water system
Filtration system

Interior Improvements
Built-in appliances
Kitchen modernization
Flooring
Wall-to-wall carpeting

Insulation
Attic
Walls
Floors
Pipes and duct work

Decreases to basis:   These include, for example, any gain you postponed from the sale of a previous home before May 7, 1997, deductible casualty losses, depreciation allowed or allowable if you used your home for business or rental purposes, etc.

 

Excluding the Gain

 

You may qualify to exclude from your income all or part of any gain from the sale of your main home. This means that, if you qualify, you will not have to pay tax on the gain up to the Maximum Exclusion amount. To qualify, you must meet the ownership and use tests described below.

 

Maximum Exclusion: You can exclude up to $250,000 of the gain on the sale of your main home if all of the following are true: you meet the ownership test, you meet the use test and during the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home.

 

If you and another person owned the home jointly but file separate returns, each of you can exclude up to $250,000 of gain from the sale of your interest in the home if each of you meets the three conditions just listed.

 

You may be able to exclude up to $500,000 of the gain on the sale of your main home if you are married and file a joint return.

 

Ownership and Use Tests: To claim the exclusion, you must meet the ownership and use tests. This means that during the 5-year period ending on the date of the sale, you must 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 can still claim an exclusion in some cases. The maximum amount you may be able to exclude will be reduced.

 

The required 2 years of ownership and use during the 5-year period ending on the date of the sale do not have to be continuous.

 

Material primarily from the Internal Revenue Service, Publication 523 (2007) Selling Your Home.

 

This Memorandum is based on current law and is for informational purposes only. It is important that you discuss all legal options and consequences with a qualified elder law attorney prior to any action. Should you wish to discuss your situation with us, please call (631) 424-2800 for a consultation. For additional Memoranda, please call or visit our website at www.elderlaw.pro.