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
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.