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Frequently Asked Tax Questions

Capital Gains, Losses, and 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 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 I report the sale of my second residence?

Rev. date: 12/18/2014

What is the basis of property received as a gift?

To figure out the basis of property you receive as a gift, you must know three 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 out the net increase in value or for other 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: 12/18/2014

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 amount of the proceeds from the sale of your home that you use to pay off the mortgage is not a factor in figuring your taxable amount for the sale. Instead, the amount you realize on the sale of your home and the adjusted basis of your home are important in determining whether you are subject to tax on the sale.
If the amount you realize, which generally includes any cash or other property you receive plus any of your indebtedness the buyer assumes or is otherwise paid off as part of the sale, less your selling expenses, is more than your adjusted basis in your home, you have a gain on the sale.
Your adjusted basis is generally your cost in acquiring your home plus the cost of any capital improvements you made, less casualty loss amounts and other decreases. For more information on basis and adjusted basis, refer to Publication 523, Selling Your Home. If you financed the purchase of the house by obtaining a mortgage, include the mortgage proceeds 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 can exclude all of the gain, you do not need to report the sale on your tax return, unless 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. You must report on your return as taxable income the gain that you cannot exclude.

Rev. date: 12/18/2014

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. Also, if the future sale of your home is due to a change in employment, health, or unforeseen circumstances, you may qualify for a reduced exclusion if you fail to meet the ownership and use tests or you used the exclusion within the two-year period ending on the date of the sale. There is no limit to the number of times you can claim the exclusion.

Rev. date: 12/18/2014

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 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?

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 used as rental property for the 3 years before the date of the sale. In that case, you would qualify to exclude some or all of the gain on the sale of your home if you did not use the exclusion on the sale of another residence during the 2 year period that ends on the date of sale, or you used the exclusion within the last 2 years but this sale of your home is due to a change in employment, health or unforeseen circumstances.
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, the law allows an annual depreciation deduction on your rental property and you 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 Questions and Answers on the Net Investment Income Tax. 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: 12/18/2014

How do I report the sale of my 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.