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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. How do I report the sale of my second residence?

Rev. date: 03/08/2019

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 adjusted 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: 03/08/2019

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 isn't 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're 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 capital 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 adjusted 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 don't need to report the sale on your tax return, unless you received a Form 1099-S, 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 capital gain that you can't exclude.

Rev. date: 03/08/2019

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 haven't 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 even 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's no limit to the number of times you can claim the exclusion.

Rev. date: 03/08/2019

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), Capital Gains and Losses and Form 8949, Sales and Other Dispositions of Capital Assets to report sales, exchanges, and other dispositions of capital assets.