29.5 Figuring Gain or Loss
To figure the gain or loss on the sale of your principal residence, you must determine the selling price, the amount realized, and the adjusted basis. Worksheet 29-3 may be used to figure gain or loss on the sale of a principal residence.
Filing Tip
Gain or loss.
The difference between the amount realized and adjusted basis is your gain or loss. If the amount realized exceeds the adjusted basis, the difference is a gain that may be excluded (29.1). If amount realized is less than adjusted basis, the difference is a loss. A loss on the sale of your main home may not be deducted (29.8).
Foreclosure or repossession.
If your home was foreclosed on or repossessed, you have a sale. See Chapter 31.
Selling price.
This is the total amount received 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 received. The selling price does not include receipts for personal property sold with your home. Personal property is property that is not a permanent part of the home, such as furniture, draperies, and lawn equipment.
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. Include the payment as wages on Line 7 of Form 1040. (Your employer includes the payment with the rest of your wages in Box 1 of your Form W-2.)
If you grant an option to buy your home and the option is exercised, add the amount received for the option to the selling price of your home. If the option is not exercised, you report the amount as ordinary income in the year the option expires. Report the amount on Line 21 of Form 1040.
Filing Tip
Amount realized.
This is the selling price minus selling expenses, including commissions, advertising fees, legal fees, and loan charges paid by the seller (e.g., loan placement fees or “points”).
Adjusted basis.
This is the cost basis of your home increased by the cost of improvements and decreased by deducted casualty losses, if any (29.6). Cost basis is generally what you paid for the residence. If you obtained possession through other means, such as a gift or inheritance, see the special basis rules for gifts and inheritances (5.17).
Seller-paid points.
If the person who sold you your residence paid points on your loan, you may have to reduce your basis in the home by the amount of the points. If you bought your residence after 1990 but before April 4, 1994, you reduce basis by the points only if you chose to deduct them as home mortgage interest in the year paid. If you bought the residence after April 3, 1994, you reduce basis by the points even if you did not deduct the points.
Settlement fees or closing costs.
When buying your home, you may have to pay settlement fees or closing costs in addition to the contract price of the property. You may include in basis fees and closing costs that are for buying the home. You may not include in your basis the fees and costs of getting a mortgage loan. Settlement fees also do not include amounts placed in escrow for the future payment of items such as taxes and insurance.
Examples of the settlement fees or closing costs that you may include in the basis of your property are: (1) abstract fees (sometimes called abstract of title fees), (2) charges for installing utility services, (3) legal fees (including fees for the title search and preparing the sales contract and deed), (4) recording fees, (5) survey fees, (6) transfer taxes, (7) owner’s title insurance, and (8) any amounts the seller owes that you agree to pay, such as certain real estate taxes, back interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions.
Examples of settlement fees and closing costs not included in your basis are: (1) fire insurance premiums, (2) rent for occupancy of the home before closing, (3) charges for utilities or other services relating to occupancy of the home before closing, (4) any fee or cost that you deducted as a moving expense before 1994, (5) charges connected with getting a mortgage loan, such as mortgage insurance premiums (including VA funding fees), loan assumption fees, cost of a credit report, and fee for an appraisal required by a lender, and (6) fees for refinancing a mortgage.
Construction.
If you contracted to have your residence built on land you own, your basis is the cost of the land plus the cost of building the home, including the cost of labor and materials, payments to a contractor, architect’s fees, building permit charges, utility meter and connection charges, and legal fees directly connected with building the home.
Caution
Cooperative apartment.
Your basis in the apartment is usually the cost of your stock in the co-op housing corporation, which may include your share of a mortgage on the apartment building.