Capital Gains, Losses, Sale of Home:
Property (Basis, Sale of Home, etc.)
What is the basis of property received as a gift?
To figure the basis of property you get as a gift, you must know its adjusted
basis to the donor just before it was given to you. You also must know its
fair market value (FMV) at the time it was given to you. and whether any gift
tax was paid. If the FMV of the property at the time of the gift is less than
the donor's adjusted basis, your basis depends on whether you have a gain
or loss when you dispose of the property. Your basis for figuring 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. See Adjusted Basis in Publication 551, Basis of Assets.
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. Increase
your basis by all or part of any gift tax paid, depending on the date of the
gift. See Gifts received before 1977 in 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. See Adjusted Basis
in Publication 551, Basis of Assets.
For more information on the gift tax, see Publication 950, Introduction
to Estate and Gift Taxes..
I have investment property. Can you explain the term basis
of assets?
Basis is your investment in property for tax purposes. The difference between
the selling price of your assets and your basis determines whether there is
a taxable gain or loss on the disposition of your property. You need to determine
your basis to figure allowable depreciation deductions as well. Your original
basis is usually your cost to acquire the asset. Your adjusted basis (which
is the basis you use to determine gain or loss or depreciation amounts) is
the result of increasing or decreasing your original basis according to certain
events.
Increases to basis include but are not limited to:
. Improvements having a useful life of more than a year
. Assessments for local improvements
. Sales tax
. The cost of extending utilities lines to the property
. Legal fees such as the cost of defending or perfecting title
. Zoning costs
Decreases to basis include but are not limited to:
. Depreciation
. Nontaxable corporate distributions
. Casualty and theft losses
. Easements
. Rebates from the manufacturer or seller
Additional information on basis can be found in Publication 551, Basis
of Assets, or Tax Topic 703, Basis of Assets.
I sold my principal residence this year. What form do I need to
file?
If you meet the ownership and use tests, you will generally only need to
report the sale of your home if your gain exceeds a certain dollar amount
prescribed by law. To determine the amount of gain that can be excluded from
income refer to Publication 523, Selling Your Home.
You may be entitled to exclude gain from income if during the 5-year period
ending on the date of the sale, you have:
- Owned the home for at least 2 years (the ownership test), and
- Lived in the home as your main home for at least 2 years (the use test).
If you owned and lived in the property as your main home for less than
2 years, you may still be able to claim an exclusion in some cases. If you
are required or choose to report a gain, it is reported on Form 1040, Schedule D (PDF), Capital Gains and Losses .
If you were on qualified extended duty in the U.S. Armed Services or the
Foreign Service you may suspend the five-year test period for up to 10 years.
You are on qualified extended duty when the extended duty lasts for more than
90 days or for an indefinite period AND:
- At a duty station that is at least 50 miles from the residence sold, or
- When residing under orders in government housing.
This change applies to home sales after May 6, 1997. You may use this provision
for only one property at a time and one sale every two years.
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?
It is not the money you receive for the sale of your home, but the amount
of gain on the sale over your cost, or basis, that determines whether you
will have to include any proceeds as taxable income on your return. You may
be able to exclude this gain from income up to a maximum dollar limit. If
you can exclude all of the gain, you do not need to report the sale on your
tax return. To determine the maximum dollar limit you can exclude or for additional
information on selling your home, refer to Publication 523, Selling
Your Home.
If I take the exclusion of capital gain tax on the sale of my old
home this year, can I also take the exclusion again if I sell my new home
in the future?
You cannot exclude gain on the sale of your home if, during the 2-year
period ending on the date of the sale, you sold another home at a gain and
excluded all or part of that gain. If you cannot exclude the gain, you must
include it in your income.
Exception. You still can claim an exclusion, but the maximum amount of
gain you can exclude will be reduced, if the reason you sold the home was:
- A change in place of employment
- Health, or
- Unforeseen circumstances (as defined earlier)
With the exception of the 2-year waiting period, there is no limit on the
number of times you can exclude the gain on the sale of your principle residence
so long as you meet the ownership and use tests.
I lived in a home as my principal residence for the first 2 of the
last 5 years. For the last 3 years, the home was a rental property before
selling it. Can I still avoid the capital gains tax and, if so, how should
I deal with the depreciation I took while it was rented out?
If, during the 5-year period ending on the date of sale, you owned the
home for at least 2 years and lived in it as your main home for at least 2
years, you can exclude up to the maximum dollar limit. However, you cannot
exclude the portion of the gain equal to depreciation allowed or allowable
for periods after May 6, 1997. This gain is reported on Form 4797 (PDF), Sale of Business Property. Refer to Publication 523, Selling Your Home, and Form 4797 (PDF), Sale of Business Property, for specifics on calculating
and reporting the amount of gain.
How do you report the sale of a second residence?
Your second home is considered a capital asset. Use Form 1040, Schedule D (PDF)to report sales, exchanges, and other dispositions
of capital assets. If you have a qualified home office or rent your second
home, see Publication 587, Business Use of Your Home, or Publication 527Residential Rental Property for more details
on reporting the sale of your second residence.
How do I figure the cost basis of stock that has split, giving me
more of the same stock, so I can figure my capital gain (or loss) on the sale
of the stock?
When the old stock and the new stock are identical the basis of the old
shares must be allocated to the old and new shares. Thus, you generally divide
the adjusted basis of the old stock by the number of shares of old and new
stock. The result is your new basis per share of stock. If the old shares
were purchased in separate lots for differing amounts of money, the adjusted
basis of the old stock must be allocated between the old and new stock on
a lot by lot basis.
How do I figure the cost basis when the stocks I'm selling were
purchased at various times and at different prices?
If you can identify which shares of stock you sold, your basis is what
you paid for the shares sold (plus sales commissions). If you sell a block
of the same kind of stock, you can report all the shares sold at the same
time as one sale, writing VARIOUS in the "date acquired"
column of Form 1040, Schedule D (PDF). However,
what you enter into the "cost or other basis" column is the total of all the
acquisition costs of the shares sold.
If you cannot adequately identify the shares you sold and you bought the
shares at various times for different prices, the basis of the stock sold
is the basis of the shares you acquired first (first-in first-out). Except
for certain mutual fund shares, you cannot use the average price per share
to figure gain or loss on the sale of stock.
For more information, refer to Publication 550, Investment Income
and Expenses.
How do we show on our tax form where dividends are reinvested?
Some corporations allow investors to choose to use their dividends to buy
more shares of stock in the corporation instead of receiving the dividends
in cash. If you are a member of this type of plan, you must report the fair
market value on the dividend payment date of the dividends that are reinvested
as income on your tax return. You do not actually show that the dividends
were reinvested on your return. Keep records of the dollar amount of the reinvested
dividends, the number of additional shares purchased, and the purchase dates.
You will need this information to establish your basis when you sell the shares.
Report the dividends that were reinvested with your other dividends, if
any, on Form 1040 (PDF) or Form 1040A (PDF). If your total income from ordinary dividends exceeds a dollar
amount set by law, you also must file either Form 1040, Schedule B (PDF) or Form 1040A, Schedule 1 (PDF).
For more information on this and other types of dividend reinvestment plans,
refer to Ordinary Dividends in Chapter 1 of Publication 550, Investment
Income and Expenses.
How do I compute the basis for stock I sold, when I received the
stock over several years through a dividend reinvestment plan?
The basis of the stock you sold is the cost of the shares plus any adjustments,
such as sales commissions. If you have not kept detailed records of your dividend
reinvestments, you may be able to reconstruct those records with the help
of public records from sources such as the media, your broker, or the company
that issued the dividends.
If you cannot specifically identify which shares were sold, you must use
the first-in first-out rule. This means that you deem that you sold the oldest
shares first, then the next oldest, until you have accounted for the number
of shares in the sale. In order to establish the basis of these shares, you
need to have kept adequate documentation of all your purchases, including
those that were made through the dividend reinvestment plan. You may not use
an average cost basis. Only mutual fund shares may have an average cost basis.
Refer to Publication 550, Investment Income and Expenses, and Publication 551, Basis of Assets.
How do I report participation in an employee stock purchase plan
on my tax return?
If you participated in an employee stock purchase plan, you do not include
any amount in your gross income as a result of the grant or exercise of your
option to purchase stock. When you sell the stock that you purchased by exercising
the option, you may have to report compensation and capital gain or capital
loss. For additional information on tax treatment and holding period requirements,
refer to Publication 525, Taxable and Nontaxable Income.
I purchased stock from my employer under an employee stock purchase
plan. Now I have received a Form 1099-B from selling it. How do I report this?
If the special holding period requirements described below are met, the
sale of stock is treated generally as capital gain or loss. However, you may
have income reportable as wages on Form 1040 if:
- The option price of the stock was below the stock's fair market value
at the time the option was granted, or
- You did not meet either or both of the holding period requirement.
The holding period requirements are that you must hold the stock for more
than 2 years from the time the option is granted to you and for more than
1 year from when the stock was transferred to you. If you do not meet either
or both of these holding period requirements at the time you sell the stock,
there is a disqualifying disposition of the stock. The compensation income
wages that you should report in the year of the disqualifying disposition
is the excess of the fair market value of the stock on the date the stock
was transferred to you less the amount paid for the shares. Then increase
your basis in the stock by the amount of the ordinary income before calculating
your capital gain or loss.
If the holding period requirements are met, but the option exercise price
is below the fair market value of the stock at the time the option was granted,
you report the discount as compensation income (wages) when you sell the stock.
Generally, this compensation income is the lesser of the excess of the fair
market value of the stock on the date of the disposition less the exercise
price OR the excess of the fair market value of the stock at the time the
option was granted less the exercise price.
If the holding period requirements are met and your gain is more than the
amount you report as compensation income, the remainder is a capital gain
reported on Form 1040, Schedule D (PDF). If you
sell the stock for less than the amount you paid for it, your loss is a capital
loss, and you do not have ordinary income.
For more information, refer to Publication 525, Taxable
and Nontaxable Income, and Publication 551, Basis
of Assets.
Should I advise the IRS why amounts reported on Form 1099-B do not
agree with my Schedule D for proceeds from short sales of stock not closed
by the end of year?
If you are able to defer the reporting of gain or loss until the year the
short sale closes, you will need to attach a statement to your Form 1040, Schedule D (PDF) explaining the details of your short sale and that
it has not closed as of the end of the year. This will allow you to reconcile
your Form 1099-B (PDF) to your Form 1040, Schedule D (PDF) and still not recognize the gain or loss from the
short sale. Include your name as it appears on the return and your social
security number.
For more on these rules and the rules for put options and wash sales refer
to Chapter 4 of Publication 550, Investment Income and Expenses.
Do I need to pay taxes on that portion of stock I gained as a result
of a split?
No, you generally do not need to pay tax on the additional shares of stock
you received due to the stock split. You will need to adjust basis per share
of the stock. Your overall cost basis has not changed, but your per share
cost has changed.
You will have to pay taxes if you have gain when you sell the stock. Gain
is the amount of the proceeds from the sale, minus sales commissions, that
exceeds the adjusted basis of the stock sold.
I have both purchased and sold shares in a money-market mutual fund.
The fund is managed so the share price is constant. All gain is reported as
dividends. Do I have to report the sale of these shares?
Yes, you report the sale of your shares on Form 1040, Schedule D (PDF), Capital Gains and Losses. Generally, whenever
you sell, exchange, or otherwise dispose of a capital asset, you report it
on Schedule D.
If the share price were constant, you would have neither a gain nor a
loss when you sell shares because you are selling the shares for the same
price you purchased them.
If you actually owned shares that were later sold, the fund or the broker
should have issued a Form 1099-B. That form is issued without regard to whether
there is a gain or loss on the sale. It reports a sale or exchange of an investment
asset and sales proceeds.
How do return of principal payments affect my cost basis when I
sell mutual funds?
A return of principal (or return of capital) reduces your basis in your
mutual fund shares. Unlike a dividend or a capital gain distribution, a return
of capital is a return of part of your investment (cost). However, basis cannot
be reduced below zero. Once your basis reaches zero, any return of principal
is capital gain and must be reported on Form 1040 Schedule D (PDF), Capital
Gains and Losses.
How do I calculate the average basis for the sale of mutual fund
shares?
In order to figure your gain or loss using an average basis, you must have
acquired the shares at various times and prices and have left them on deposit
in a managed account.
There are two average basis methods:
- Single-category method, and
- Double-category method.
Single-category method. First, add up the cost of all the shares you own
in the mutual fund. Divide that result by the total number of shares you own.
This gives you your average per share. Multiply that number by the number
of shares sold. You may have both short and long term gains or losses. Use
the FIFO method to determine your holding period.
Double-category method. First, divide your shares into two categories,
long-term and short-term. Then use the steps above to get an average basis
for each category. The average basis for that category is then the basis of
each share in the sale from that category.
Once you elect to use an average basis method, you must continue to use
it for all accounts in the same fund. You must clearly identify on your tax
return the average basis method that you have elected to use. You do this
identification by including "AVGB" in column (a) of Form 1040, Schedule D (PDF).
Refer to Publication 564, Mutual Fund Distributions.
If I used an average basis method for shares of one mutual fund
I sold, do I have to use it for all mutual funds I sell?
No, you may use a different method, as long as you have not used an average
basis method for that fund previously. Once you have elected to use an average
basis method to compute the gain or loss on shares in a mutual fund, you must
use that same method for the sale of shares from any account in that same
fund.
How do I calculate the average cost method of a mutual fund if the
fund price splits?
If your mutual fund splits, or adjusts its price, it is treated like a
stock split. Your total basis doesn't change after the split, but since you
now own more shares without paying any more money, your per-share basis will
decrease. To calculate your per-share basis, divide the total cost that you
have invested in the fund (minus any shares previously sold) by the current
number of shares that you hold.
I received a 1099-DIV showing a capital gain. Why do I have to report
capital gains from my mutual funds if I never sold any shares?
A mutual fund is a regulated investment company that pools funds of investors
allowing them to take advantage of a diversity of investments and professional
asset management. You own shares in the fund, but the fund owns assets such
as shares of stock, corporate bonds, government obligations, etc. One of the
ways the fund makes money for its investors is to sell these assets at a gain.
If the asset was held by the mutual fund for more than one year, the nature
of the income is capital gain, which gets passed on to you. These are called
capital gain distributions, which are distinguished on Form 1099-DIV (PDF), from income that is from other profits, called ordinary dividends.
Capital gains distribution are taxed as long term capital gains regardless
of how long you have owned the shares in the mutual fund. If your capital
gains distribution is automatically reinvested, the reinvested amount is the
basis of the additional shares purchased.
Is the loss on the sale of your home deductible?
The loss on the sale of a personal residence is a nondeductible personal
loss.
I own stock which became worthless last year. Can I take a bad debt
deduction on my tax return?
If you own securities, including stocks, and they become totally worthless,
you can take a deduction for a loss, but not for a bad debt.
Worthless securities are treated as though they were capital assets sold
on the last day of the tax year. Report this claim for loss from worthless
securities on Form 1040, Schedule D (PDF), in
Part 1 or 2 depending on whether you held the stock short term or long term,
and write "Worthless"in the applicable column of Schedule
D. Keep in mind that recordkeeping requirements for claims for a loss from
worthless securities require that you keep your records for 7 years. For additional
information, refer to Chapter 4 of Publication 550, Investment Income
and Expenses (Including Capital Gains and Losses) and Publication 552, Recordkeeping for Individuals. For more information
on bad debts, refer to Tax Topic 453, Bad Debt Deduction.
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