FAQ

To figure out the basis of property you receive as a gift, you must know three amounts:

• The adjusted cost basis to the donor just before the donor made the gift to you.

• The fair market value (FMV) at the time the donor made the gift.

• The amount of any gift tax paid on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.

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.

• Your basis for figuring a gain is the same as the donor’s adjusted basis, plus or minus any required adjustments to basis while you held the property.

• Your basis for figuring a loss is the FMV of the property when you received the gift, plus or minus any required adjustments to basis while you held 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.

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 any capital gain that you can’t exclude.

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.

If you used and owned the property as your principal residence for an aggregated 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 didn’t use the exclusion

on the sale of another residence during the 2-year period that ends on the date of sale, or if 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 don’t 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, Sales of Business Property for specifics on how to calculate and report the amount of gain.

Your second residence (such as a vacation home) is considered a 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.

It’s best to sell a home when there are more buyers than houses available. This encourages bidding wars on houses, and can substantially increase the selling price for your home. Some of the best indicators of a good time to sell a home include:

• When the economy is doing well and people’s outlook for the future is positive

• When interest rates are low – this allows people to borrow money more cheaply

• When people are more likely to move – traditionally many more houses are sold during the spring than during the winter

• When your community is considered especially attractive – a common example of this is to sell your home during the period when schools in your area are enrolling new students

Absolutely. Before you sell a home, you should probably hire a professional home inspector because eventual buyers certainly will, and it pays to know what they will find first. A professional home inspection can:

• Allow you to address problems and complete repairs before you sell a home

• Help you set the price on your home

• Ensure that the sale process won’t be held up by unseen issues

• Boost your credibility and trustworthiness

• Reduce your liability by relying on professional documentation in your disclosure statement

The easiest way to determine the value of your house is to get a professional appraisal. A professional appraisal will compare your house to similar houses in your area (called a “comp”) and give you a good idea of how much you should sell your house for. When evaluating a “comp”, it is important not only to find similar houses in the area, but also to look at how recently those homes were sold. Sales closer in time are a more accurate guideline when setting the price on your home.

Real estate agents will have local sales figures and can give you a good estimate on your house’s worth. Be aware, however, that many real estate agents may overvalue your house slightly in the hope that you will list your house with them. If you have a real estate agent determine a value for your home, ask to see the data on similar houses and see for yourself whether or not it makes sense.

Finally, many internet sites will allow you to see what houses in your neighborhood have sold for lately. This can help you determine a value on your own, but you should be careful when looking at this data since it doesn’t take into account any special features of your home, such as a unique location or recent remodeling efforts.

Be careful in setting your price. If you overprice your house, most buyers will simply ignore you and your house could sit on the market for a very long time. The longer a house sits on the market, the more likely other buyers are to think there’s something wrong with the house and avoid it.

The sale of your house generates “capital gains” as defined by the IRS which is normally taxable. However, since the Taxpayer Relief Act of 1997, individuals can exclude up to $250,000 in capital gains for individuals, and married couples can exclude up to $500,000 in capital gains.

To see how this works in practice, imagine you bought your house for $100,000, and then sold it for $300,000. That sale would generate $200,000 in capital gains, all of which could be excluded since individuals can exclude up to $250,000 and married couples could exclude up to $500,000. Accordingly, you wouldn’t owe any taxes on the capital gains from the sale of your home.

Only a few states require you to hire a real estate agent or attorney, but it may often be worth it. Selling a house, even with an agent, is an exhausting process. If you are the one stuck doing all of the paper work and showing the house, it can be like taking on a second job. Alternatively, you may consider hiring a real estate agent to only help with portions of the process, and take on other portions of the process yourself.

There are two common ways outside of a common mortgage scenario to finance the sale of a house. The first method is to loan money to the buyer and take back a mortgage on the home when you sell it. The buyer would sign a promissory note (to repay the loan) and either a mortgage or a deed of trust (both of which would allow you to foreclose on the house if the buyer failed to pay). In return, the seller would sign a deed transferring title of the house to the buyer (which allows the buyer to sell or refinance the house).

The second method is to create what is commonly referred to as a “contract for deed”, “contract of sale”, “land sale contract” or “installment sales contract”. This document will allow the seller to keep the title to the property until the buyer pays off the loan. Unlike this first method, this means that the buyer is unable to sell or refinance the house. Once all payments have been made, the seller would sign a deed transferring title to the buyer.

Thanks to the Taxpayer Relief Act of 1997, many home sellers no longer owe taxes on the gain they make when they sell their houses. Married taxpayers who file jointly now get to keep, tax-free, up to $500,000 in gain on the sale of their home, as long as they lived in it for two of the prior five years. Single folks and married taxpayers who file separately get to keep up to $250,000.

If you’re lucky enough that your profits on the house exceed this amount, don’t panic quite yet — not all of it may be taxable gain, for example if you invested in home improvements.

If you use a real estate agent to sell your home, you probably won’t meet your buyers until after the closing — if then. Your agent (or the buyer’s agent) will handle visits to the house by potential buyers and probably encourage you to make yourself scarce during those visits lest you blurt out something you regret later.

You may meet your buyers’ real estate agents if they choose to formally present purchase offers to you and your agents. You may even be handed photos of the prospective buyers, and personal letters, if they’re in a competitive bidding situation. And you can certainly find out their names from the purchase offer forms, in case you’d like to Google them later. But that’s still not a personal meeting.

Even closings are often done separately, with you meeting with the escrow agent on one day to sign documents and the buyer doing so on another day.

It’s not that there’s any law against meeting the buyers — but you’ll probably appreciate, at various times along the way, having your agent serve as a buffer in any negotiations and be the bearer of bad news, if need be.

After the closing, however, arranging a time to meet with the buyers at your house can be a nice gesture — and a good opportunity to show them things like how to turn on the furnace, turn off the security alarm, and which plants are weeds.

It’s important to prepare in advance for buyers’ expectations about what you’ll leave behind. As a general rule, you’ll be expected to leave behind all “fixtures,” defined in most states as things that are affixed, fastened to, or an integral part of the home or landscaping. For example, lights and their shades (the sort that can’t be unplugged and carried away), built-in dishwashers and other appliances, window shades, curtain rods (and sometimes the curtains), built-in bookshelves, and all trees, plants, and shrubs with their roots in the ground instead of in pots are all normally considered fixtures. No matter how good they make the house look, if you don’t want the buyer to keep them, replace them before you start showing the house.

Also realize that buyers may associate some items that aren’t technically fixtures so strongly with your house that they won’t be happy at you carrying them off — for example, a backyard statue that’s so perfectly placed in the center of a brick circle that you’d think it was a permanent part of the landscaping. The buyer may name such items in the purchase offer to make sure you leave them behind (or to start negotiations over them) — or may assume they come with the house and raise a fuss on closing day when they’ve been moved. Take a good look at what you plan to move. If anything falls into the category of “A buyer may fall in love with this and assume it comes with the house,” decide now whether to move it before the sale or to buy a replacement.

Home buyers ‘ fascination with fixer-uppers seems to be on the wane. Even if it costs more, home buyers are increasingly looking for a home that’s move-in ready. So where does that leave you, as the home seller?

Paying more money just to get money out of your home may be the last thing you were hoping to take on (or have the cash to complete). Nevertheless, some investment may be necessary in order to attract buyer attention.

At a minimum, you’ll want to fix obvious eyesores and danger spots, such as cracked windowpanes, tiles, and plaster. Correct high-priority issues like moisture leakage or rickety stairs. Walk around your house with a critical eye, noticing areas where you’ve always meant to

deal with a problem – such as a light switch that doesn’t work or a window shade that’s lost its pull string — but haven ‘t gotten around to it.

After that, a new paint job is one of the more affordable ways to give a house a fresh look. If painting the exterior is more than you can afford, consider at least painting the front door, and possibly the trim.

Simple cosmetic touch-ups can give your house a more cared-for look – all the way up to a major staging job, as described in “Is Hiring a Home Stager Worth the Cost? ”

Of course, we ‘re dancing around the big issue here, which is what if the kitchen, bathroom, or somewhere else is just crying out for a remodel? You may have already noticed, from reading the real estate ads, that the agents never fail to mention “newly remodeled kitchen. “You ‘ll need to proceed with caution. The worst possible result is to pour money into a remodel that buyers don ‘t like and plan to rip out anyway. For tips on how to plan a remodel that will recoup its costs and then some, see “Do Home Improvements Really Add Value? “

If you can choose when to sell, it’s best to wait until your local real estate market is “hot,” or a “sellers’ market.” This can occur on a very local basis, regardless of what’s common across the United States. The heat of a market can usually be gauged numerically, because the number of available homes drops well below the number of buyers wanting them. Here are some other indicators that the market is good for sellers:

• Mortgage interest rates are low, allowing buyers to finance larger mortgages.

• The economic climate of your region is healthy, and people feel confident about the future.

• There’s a jump in house buying activity, as often occurs in the spring.

• Your area is considered especially attractive — because of the schools, low crime rate, weather, affordability of starter homes, proximity to a major city, or other factors such as employment opportunities.