Wiley Tax Preparer: A Guide to Form 1040

CHAPTER 14

Sale of Home

The sale of a home may generate gain or loss. To figure gain or loss, you need to determine the taxpayer's basis in the home, which may be adjusted upward or downward for certain items.

Special rules apply to exclude some or all of the gain from the sale of a principal residence. No loss can be recognized on the sale of a principal residence or any other home used for personal purposes (e.g., a vacation home that is not rented out).

If a home is foreclosed on, the taxpayer is considered to have sold the property to the lender even though the action is involuntary on the part of the taxpayer.

Taxpayers who claimed a first-time homebuyer credit may have to repay a portion of the credit if the home is sold.

Determining Basis

To determine whether there is a gain or a loss on the sale of a home, the homeowner's basis first must be calculated. Generally, this is the homeowner's cost basis, which is what the taxpayer paid to buy the home (cash and property plus any mortgage obtained to close the sale). Adjustments to basis, such as those described in this chapter, must also be considered. If the home is acquired other than by purchase (e.g., by gift or inheritance), special basis rules apply. See Chapter 12 for determining basis.

Settlement Costs

Basis also includes settlement (closing) costs that are not deductible, such as:

• Abstract fees
• Legal fees
• Recording fees
• Surveys
• Title insurance for the owner
• Transfer or stamp taxes

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