Selling a Home
Whether you are moving up to a larger home, downsizing after your children leave, or relocating for your job, the home selling process can be as complicated as buying a home. Understanding the steps will help you survive with sanity—and finances—intact.

Plan for Your Home Sale
 

You are ready to sell your home and move. Where to start?

The home-selling process typically starts several months before a property is made available for sale. It's necessary to look at a home through the eyes of a prospective buyer and determine what needs to be cleaned, painted, repaired, and tossed out.

Are you ready?

Ask yourself: If you were buying this home what would you want to see? The goal is to show a home which looks good, maximizes space and attracts as many buyers - and as much demand - as possible.

While part of the "getting ready" phase relates to repairs, painting and other home improvements, this is also a good time to ask why you really want to sell.

Selling a home is an important matter and there should be a good reason to sell - perhaps a job change to a new community or the need for more space. Your reason for selling can impact the negotiating process so it's important to discuss your needs and wants in private with the realtor who lists your home.

Time your sale.

The marketplace tends to be more active in the summer because parents want to enroll children in classes at the beginning of the school year (usually August). The summer is also typically when most homes are likely to be available.

Generally speaking, markets tend to have some balance between buyers and sellers year-round. In a given community, for example, there may be fewer buyers in late December, but there are also likely to be fewer homes available for purchase. So, home prices tend to rise or fall because of general demand patterns rather than the time of the year.

Owners are encouraged to sell when the property is ready for sale, there is a need or desire to sell, and the services of a local realtor have been retained.

Improve your home’s value.

The general rule in real estate is that buyers seek the least expensive home in the best neighborhood they can afford. In terms of improvements, this means you want a home that fits in the neighborhood but is not over-improved. For example, if most homes in your neighborhood have three bedrooms, two baths and 2,500 sq. ft. of finished space, a property with five bedrooms, more baths and far more space would likely be priced much higher and likely be more difficult to sell.

Improvements should be made so that the property shows well, is consistent with the neighborhood and does not involve capital investments, the cost of which cannot be recovered from the sale. Furthermore, improvements should reflect community preferences.

Cosmetic improvements - paint, wallpaper and landscaping - help a home "show" better and often are good investments. Mechanical repairs - to ensure that all systems and appliances are in good working condition - are required to get a top price.

Ideally, you want to be sure that your property is competitive with other homes available in the community. realtors, who see numerous homes, can provide suggestions that are consistent with your marketplace.1

Consider these common improvements.

The following improvements and additions may increase the re-sale value of your home. Of course, bear in mind that the value home buyers place on various improvements will vary regionally, and even from neighborhood to neighborhood. But the list might serve to give you some ideas.

  • Family room
  • Fireplace
  • Dining room
  • Linen closet
  • Garbage disposal
  • Wall-to-wall carpeting
  • Smoke detector
  • Two-sink vanity (bathroom)
  • Double-glass windows
  • Range hood and fan
  • Bathroom dressing area
  • Patio
  • New, stronger locks
  • Central air
  • Guest room
  • Bathroom exhaust fan

1© 2007 Move, Inc. All rights reserved.
2© CPA Site Solutions

Find a Good Real Estate Agent
 

In real estate sales, it pays to have an expert in your corner.

Unless you have a buyer in mind, and want to spend a lot of time researching what you need to accomplish as a home seller, you would probably benefit from using a real estate agent.

There’s never any shortage of agents, so just do some footwork to find one that meets your needs.

To find a good real estate agent, gather a list of names of candidates you will interview. You may want to consider recommendations from colleagues, friends, and professionals, as well as names listed on posted "for sale" signs, especially for houses that have been sold.

Once you have at least three names, schedule a telephone or in-person interview with the agent. You may encounter some resistance; if you run into a broker who refuses to take the time to answer your questions, just move to the next one.

Be sure to ask potential agents the following:

  • What problems do you see in marketing our home?
    The broker should be honest about potential problems in selling the home and able to think creatively about solutions.
  • What would your plan be for marketing our home? What can we do to help you implement your plan?
    Listen to the answer to find out whether the agent exhibits a willingness to think creatively in approaching whatever problems might exist with the selling process and whether he or she has a cooperative attitude.
  • Will you include any ideas you have for selling the home in a listing agreement if we decide to sign with you?
  • Where do you live?
    You want a broker who lives nearby, who knows the good and bad points about your area.
  • How much is your commission?
    The average commission is 6% or 7%. Although brokers sometimes take a cut in their commissions during the negotiation process—in order to move a sale along—there is no point in trying to bargain down a broker’s commission at this point.
  • Do you have a list of comparable homes?
    Such a list is essential in helping you arrive at an asking price for your home.

Sign The Listing Agreement

The listing agreement is a contract between the homeowners and the agent. It states how much the agent will be paid and what services will be provided.

The exclusive right to sell type of agreement gives the broker the exclusive right to sell your house for a limited period of time. Other types of listing agreements vary either the exclusivity or time period of the listing. No matter which of these agreements are signed, the listing agent gets 100% of the commission if he or she sells the house, and part of the commission if another broker sells the house.

Tip: Generally, try to use an exclusive-right-to-sell agreement limited to a period of three months. This agreement will give the broker an incentive to sell the home, and it will still give you an out if you feel the broker is not doing enough for you. If you have substantial confidence in the broker, and you have seen and approved his or her plans for marketing the home, you may wish to sign for six months.

Tip: If, at any time during the marketing process, you feel that your broker is not as effective as he or she could be, switch brokers. Do not waste time with a broker about whom you have doubts.

Source:© CPA Site Solutions

Set Your Price
 

Is it a fine art or rocket science? Setting your home price is a bit of both.

Every reasonable owner wants the best possible price and terms for his or her home. Several factors, including market conditions and interest rates, will determine how much you can get for your home. The idea is to get the maximum price and the best terms during the window of time when your home is on the market.

In other words, home selling is part science, part marketing, part negotiation and part art. Unlike math where 2 + 2 always equals 4, in real estate there is no certain conclusion. All transactions are different, and because of this, you should do as much as possible to prepare your home for sale and engage a real estate agent you feel is best able to sell your home.

What is your home worth?

All homes have a price, and sometimes more than one. There's the price owners would like to get, the value buyers would like to offer and a point of agreement which can result in a sale.

In considering home values, several factors are important:

  • The value of your home relates to local sale prices. The same home, located elsewhere, would likely have a different value.
  • Sale prices are a product of supply and demand. If you live in a community with an expanding job base, a growing population and a limited housing supply, it's likely that prices will rise. Alternatively, it's important to be realistic. If the local community is losing jobs and people are moving out, then you'll likely have a buyer's market.
  • Owner needs can impact sale values. If owner Smith "must" sell quickly, he will have less leverage in the marketplace. Buyers may think that Smith is willing to trade a quick closing for a lower price -- and they may be right. If Smith has no incentive to sell quickly, he may have more marketplace strength.
  • Sale prices are not based on what owners "need." When an owner says, "I must sell for $300,000 because I need $100,000 in cash to buy my next home," buyers will quickly ask if $300,000 is a reasonable price for the property. If similar homes in the same community are selling for $250,000, the seller will not be successful.
  • Sale prices are NOT the whole deal. Which would you rather have: A sale price of $200,000, or a sale price of $205,000 but where you agree to make a "seller contribution" of $5,000 to offset the buyer's closing costs, pay a $2,000 allowance for roof repairs, fund two mortgage points, re-paint the entire house and leave the washer and dryer?

How much is too much?

Because all transactions are unique there is flexibility in the marketplace. The amount of flexibility depends on local conditions.

For example, suppose you're selling a townhouse. Suppose also that there have been five recent sales of the model you own and that sale values have ranged between $200,000 and $210,000. You now have an idea of how your home might be priced. In a strong market perhaps you can ask for $210,000 or a little more. If the market has slowed, $210,000 may be a reasonable asking price, but perhaps more than the final sale price.

Here's another scenario. Imagine that you live in a community of Victorian-style homes, most of which were built in the 1920s. All the homes are different in terms of size, condition, modernization, style and features. In such a neighborhood, an average sale price is just a statistic without much practical meaning. On a single block one home may sell for $400,000 while another is priced at more than $1 million. The average price may be outrageously high for one home and staggeringly low for another.1

1© 2007 Move, Inc. All rights reserved.

Speed up the Selling Process
 

Your home never gets a second chance to make a first impression. Get it market-ready now.

You may have the best agent, your home priced perfectly, and a lot of showings, but if your home is not appealing, it may take a long time for it to sell. Learn about several “tricks” to ensure your home sells more quickly.

There are various things you can do before and during the selling process to move it along—and make it less onerous. A good real estate agent may suggest the following:

  • Make all the cosmetic improvements you can to get the house looking as good as possible. For instance, repaint, re-wallpaper, do some landscaping, replace broken shingles or shutters, and do anything else, within reasonable financial limits, to make your house look good.
  • Increase the comfort of your home by repairing or replacing any part of it that is difficult to use. For instance, you and your family may have gotten used to that stubborn garage door, but it is now worth installing a new one.
  • Change any overly unconventional aspects of your home to make them more middle of the road. For instance, change bright-colored paint jobs to white or a neutral color.
  • Make your home seem cozy and inviting when potential buyers come by. Make sure the inside and outside are clean, neat, and well maintained, and have a fire burning in the fireplace, or a pot of coffee brewing. Be sure all toys, tools, and other items are put away. Keep pets out of sight, unless they are extremely well behaved, since buyers may be turned off by them. Try not to cook foods with lingering odors, such as cabbage.
  • Consider offering a warranty. Home buyers are often wary of buying a home and then discovering surprise defects one or two years down the road. Sometimes offering a warranty, though exposing you to some risk, on the roof, electrical system, appliances, or other area that is causing the buyers to balk can speed up a sale or smooth the negotiating process. It may be a worthwhile sales tool in the long run.
  • Create a home sale kit with your broker. This consists of flyers to be distributed to potential home buyers. The flyer should contain photos of your home’s exterior, interior, and surroundings. It should also list major selling points, such as a superior school district, or a swimming pool. finally, it should include information buyers need, such as utility costs, taxes, and a floor plan.
  • Do not help the broker show the home; this will only interfere in the process. Allow the broker to do his or her job, and make yourself available for questions, but do not try to help sell to potential buyers who are looking at your home.
  • If appropriate, offer to pay half of the points on closing.
  • If your house has been on the market for a long time, take it off and re-list it at a later time.

Source: © CPA Site Solutions

Negotiate Effectively
 

Where the rubber meets the road: offer, counter-offer, acceptance.

 This is the point every home seller and buyer anxiously anticipates. . .negotiating the offer and acceptance. Officially, the potential buyer makes an offer and the seller either accepts or declines the offer. A seller can make a counter-offer, however and the whole process starts over again. You’ll need a strong negotiating position—and nerves of steel—during this process.

Although it is the broker’s job to do the actual negotiating, the home owners should stay involved in the process. Here are some tips for negotiating with buyers, once they have made their first offer.

  • Find out as much as possible about the potential buyer’s situation. Knowing whether the buyer needs to buy a home quickly or is in a position to take plenty of time to negotiate will help you in deciding what type of negotiating stance to take. Knowing about the buyer’s family will help you decide which selling points to emphasize. And knowing whether the buyer needs to equip him or herself with all new appliances and furniture enables you to throw in deal-sweeteners—e.g., refrigerators, washer and dryers, and furnishings.
  • Reveal as little as possible about your own situation.

Overall, it is important to prevent the negotiations from becoming confrontational and thus killing a potential deal. The offers you receive will be 10 to 15% below your asking price. Do not be offended by this or by any low-balling techniques engaged in by buyers. Rather, show a willingness to make some concessions, and make counter-offers to try to bring the offer closer to your asking price. If you feel that an offer is unreasonable, however, there is no reason to entertain it.

© CPA Site Solutions

Close the Deal
 

The end is in sight. Or is it?

You’ve gotten an offer from a buyer and accepted it. All done, right? Hardly. As the saying goes, “the deal’s not over ‘till it’s over.” Here are some things to keep in mind in the end stages of the sale.

It might seem as though once a sale agreement has been signed that the selling process is complete. Not only is it not over yet, but some of the most complex aspects of a real estate transaction now begin.

A sale agreement sets not only a purchase price for the home, but also a series of terms and conditions. For instance:

  • Contracts routinely depend on the ability of a buyer to obtain financing, which is why most sellers prefer buyers with preapproval letters from lenders.
  • A growing percentage of transactions involve a home inspection, or a physical review of the home by a trained and independent observer.
  • Lenders will establish numerous conditions before granting a loan. They will want a title exam, title insurance to protect against title errors, termite inspections, surveys and an appraisal to assure that the home has sufficient value to secure the loan.

The real estate agent typically arranges required inspections and helps the owner prepare for closing.

When should you close?

With automation now available, closings can occur within a week in some areas -- at least in theory. In practice, it takes time to arrange financing, conduct inspections, obtain appraisals, locate replacement housing, contact movers, pack and actually move.

While instant closings are not practical, neither are closings too far in the future. The problem with closings much past 60 days is that loan rates are difficult to lock in. If mortgage rates go up, it's possible that the buyer will no longer be able to afford the home and thus the deal may fall through.

The result of these considerations is that most homes close 30 to 45 days after a sale agreement has been signed.

What happens?

Closing -- or "settlement" or "escrow" as it is known in some areas -- is essentially a meeting where the closing agent (the party who conducts settlement) takes in money from the buyers, pays out money to the owner and makes sure that the purchaser's title is properly recorded in local records along with any mortgage liens.

The closing agent reviews the sale agreement to determine what payments and credits the owner should receive and what amounts are due from the buyer. The closing agent also assures that certain transaction costs are paid (taxes and title searches).

Closing is also the time when "adjustments" will be made. For instance, suppose you've pre-paid taxes four months in advance. In this case, the closing agent will compensate you for the prepayment at closing by having the buyer pay you additional money.

It could also work in reverse. If you are behind on property taxes, the closing agent will reduce the money due to you at settlement by the amount of the unpaid taxes.

How do you prepare to sell?

It's important to look at the sale agreement and review your obligations. For instance, if you have agreed to paint a room or replace the dishwasher, such work must be completed before closing. Your REALTOR® can discuss your agreement and the steps which must be taken to complete the transaction.

The closing agent will handle both the settlement papers and related documents.

© 2007 Move, Inc. All rights reserved.

Understand the Tax Implications
 

Congratulations! You sold your home. But what about the taxes on the sale?

Your responsibilities do not end with the sale of the old home and the move to the new one. There are tax consequences, often complex, that need to be considered. How much is the gain? How much of it is taxable? How to minimize the tax impact?

Step one: get professional advice.

Most taxpayers will not have to pay any tax on a gain. This exclusion replaces the old "rollover" rules and the one-time $125,000 exclusion for taxpayers age 55 and older that applied to sales before May 7,1997.

Note: If you have a loss from the sale, it is a personal loss. You cannot deduct the loss. If you have a bad credit report, you should work on fixing it before applying for a loan.

You must report the sale of your main home on your tax return (Schedule D) if you have a taxable gain—that is, where you don't qualify for exclusion, your gain exceeds the exclusion, or you used part of the property in business or for rent.

Where is your principal residence?

Usually, the home you live in most of the time is your main home. It can be a houseboat, a mobile home, a cooperative apartment, or a condominium.

To qualify under the new, post-May-6-1997 exclusion rules, you must generally have owned and used the property as your main home for at least two years during the five-year period ending on the date of sale. To qualify under the old rollover rules, both the home you sold and the one you bought to replace it had to qualify as your main home.

You may sell the land on which your main home is located, but not the house itself. In this case, you cannot postpone tax on any gain you have from the sale of the land.

How secure is your job? Is your company laying off? Could you be fired and, if so, how hard would it be to get another job right away? Unemployment compensation is rarely enough to cover mortgage payments. Are you likely to be transferred to another city within the next two to three years? If you had to sell due to a job transfer, your property would need to appreciate at least 10% to cover the cost of selling; otherwise, you would lose money on the sale. When you buy a home, you should plan to stay put for a while.

If you have more than one home, only the sale of your main home qualifies for excluding the gain. If you have two homes and live in both of them, your main home is the one you live in most of the time.

Example: You own and live in a house in town. You also own beach property, which you use in the summer months. The town property is your main home; the beach property is not.

Example: You own a house, but you live in another house that you rent. The rented home is your main home.

Where a second residence has soared in value and you want to sell, some tax advisors have suggested moving to the second residence for the required period to qualify for exclusion on its sale. If this is your situation, professional guidance is suggested.

Figure your gain or loss.

Key information for determining gain or loss are the selling price, the amount realized, and the adjusted basis.

The selling price is the total amount you receive 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 you receive. From the selling price, you then deduct the selling expenses such as commissions, advertising, legal fees, and loan charges paid by the seller.

The difference is the "amount realized". If the amount realized is more than your home’s "adjusted basis," discussed later, the difference is your gain. If the amount realized is less than the adjusted basis, the difference is your loss.

However, it does not include amounts you received 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.

How to consider non-traditional sales.

The following discussion covers how to determine your gain or loss if you trade one home for another, if your home is foreclosed on or repossessed or if you transfer a jointly owned home.

Jointly owned home. If you and your spouse sell your jointly owned home and file a joint return, you figure and report your gain or loss as one taxpayer. If you file separate returns, each of you must figure and report your own gain or loss according to your ownership interest in the home. Your ownership interest is determined by state law.

If you and a joint owner other than your spouse sell your jointly owned home, each of you must figure and report your own gain or loss according to your ownership interest in the home. Each of you applies the exclusion rules individual basis.

Trading homes. If you trade your old home for another home, treat the trade as a sale and a purchase.

Foreclosure or repossession. If your home was foreclosed on or repossessed, you have a sale that you may have to report on your tax return. The gain or loss from this sale is generally figured the same way as a gain or loss from any sale. But the amount of your gain or loss depends, in part, on whether you were personally liable for repaying the debt secured by the home.

If you were not personally liable for repaying the debt secured by the home, your selling price includes the full amount of debt canceled by the foreclosure or repossession.

If you were personally liable for repaying the debt secured by the home and the debt is canceled, your selling price includes the amount of the debt canceled by the foreclosure or repossession, up to the home's fair market value.

In addition to any gain or loss, if you were personally liable for the debt you may have ordinary income. If the canceled debt is more than the home's fair market value, you have ordinary income equal to the difference. However, the income from cancellation of debt is not taxed to you if the cancellation is intended as a gift, or if you are insolvent or bankrupt.

Example: You owned and lived in a home with an adjusted basis of $41,000. A real estate dealer accepted your old home as a trade-in and allowed you $50,000 toward a new house priced at $80,000 (its fair market value). You are considered to have sold your old home for $50,000 and to have had a gain of $9,000 ($50,000 minus $41,000). If the dealer had allowed you $27,000 and assumed your unpaid mortgage of $23,000 on your old home, $50,000 would still be considered the sales price of the old home (the trade-in allowed plus the mortgage assumed).

Transfer to spouse. If you transfer your home to your spouse, or to your former spouse incident to your divorce, you generally have no gain or loss, even if you receive cash or other consideration for the home. Therefore, the rules explained in this Guide do not apply.

If you owned your home jointly with your spouse and transfer your interest in the home to your spouse, or to your former spouse incident to your divorce, the same rule applies. You have no gain or loss.

If you buy or build a new home, its basis will not be affected by your transfer of your old home to your spouse, or to your former spouse incident to divorce. The basis of the home you transferred will not affect the basis of your new home.

Start with the “basis”.

You will need to know your basis in your home as a starting point for determining 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 acquired it in some other way, its basis is either its fair market value when you received it or the adjusted basis of the person you received it from.

While you owned your home, you may have made adjustments (increases or decreases) to the basis. This adjusted basis is used to figure gain or loss on the sale of your home.

Cost as Basis. The cost of property is the amount you pay for it in cash or other property.

Purchase. If you buy your home, your basis is its cost to you. This includes the purchase price and certain settlement or closing costs. Your cost includes your down payment and any debt, such as a first or second mortgage or notes you gave the seller in payment for the home.

Seller-paid points. If you bought your home after April 3, 1994, you must reduce the basis of your home by any points the seller paid, whether or not you deducted them. If you bought your home after 1990 but before April 4, 1994, you must reduce your basis by the amount of seller-paid points only if you chose to deduct them as home mortgage interest in the year paid.

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 can include in your basis the settlement fees and closing costs that are for buying the home. You cannot include in your basis the fees and costs that are for getting a mortgage loan. A fee is for buying the home if you would have had to pay it even if you paid cash for the home.

Settlement fees do not include amounts placed in escrow for the future payment of items such as taxes and insurance.

Some of the settlement fees or closing costs that you can include in the basis of your property are:

  • Abstract fees (sometimes called abstract of title fees),
  • Charges for installing utility services,
  • Legal fees (including fees for the title search and preparing the sales contract and deed),
  • Recording fees,
  • Surveys,
  • Transfer taxes,
  • Owner's title insurance, and
  • Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions.

Some settlement fees and closing costs not included in your basis are:

  • Fire insurance premiums.
  • Rent for occupancy of the house before closing.
  • Charges for utilities or other services relating to occupancy of the house before closing
  • Any item that you deducted as a moving expense (settlement fees and closing costs incurred after 1993 cannot be deducted as moving expenses).
  • Fees for refinancing a mortgage.
  • 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.

Construction. 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. This amount includes the cost of labor and materials, or the amounts paid to the contractor, and any architect’s fees, building permit charges, utility meter and connection charges, and legal fees directly connected with building your home. Your cost includes your down payment and any debt, such as a first or second mortgage or notes you gave the seller or builder. It also includes certain settlement or closing costs. You may have to reduce the basis by points the seller paid for you. 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 the value of your own labor, or any other labor you did not pay for, in the cost of the house.

When cost isn’t your basis.

If your home was acquired in a transaction other than a traditional purchase, you may have to use a basis other than cost, such as fair market value.

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.

Condominium. Your basis is generally its cost to you.

Note: Fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of the relevant facts. Sales of similar property, on or about the same date, may be helpful in figuring the fair market value of the property.

Home received as gift. If your home was a gift, its basis to you is the same as the donor's adjusted basis when the gift was made. However, if the donor's adjusted basis was more than the fair market value of the home when it was given to you, you must use that fair market value as your basis for measuring any loss on its sale.

If you use the donor's adjusted basis to figure a gain and get a loss, and then use the fair market value to figure a loss and get a gain, you have neither a gain nor a loss on the sale or disposition.

If you received your home as a gift and its fair market value was more than the donor's adjusted basis at the time of the gift, you may be able to add to your basis any federal gift tax paid on the gift. If the gift was before 1977, the basis cannot be increased to more than fair market value of the home when it was given to you. On the other hand, if you received your home as a gift after 1976, you would add to your basis the part of the federal gift tax paid that is due to the home's "net increase" in value (value less donor's adjusted basis).

Home received from spouse. You may have received your home from your spouse or from your former spouse incident to your divorce.

  • If you received the home after July 18, 1984, you had no gain or loss on the transfer. Your basis in this home is generally the same as your spouse's (or former spouse's) adjusted basis just before you received it. This rule applies even if you received the home in exchange for cash, the release of marital rights, the assumption of liabilities, or other consideration.
  • If you owned a home jointly with your spouse and your spouse transferred his or her interest in the home to you, your basis in the half interest received from your spouse is generally the same as your spouse's adjusted basis just before the transfer. This rule also applies if your former spouse transferred his or her interest in the home to you incident to your divorce. Your basis in the half interest you already owned does not change. Your new basis in the home is the total of these two amounts.
  • If you received your home before July 19,1984, in exchange for your release of marital rights, your basis in the home is generally its fair market value at the time you received it.
  • Home received as inheritance. If you inherited your home, its basis is its fair market value on the date of the decedent's death or the later alternate valuation date if that date was used for federal estate tax purposes. If an estate tax return was filed, the value listed there for the property generally is your basis. If a federal estate tax return did not have to be filed, your basis in the home is the same as its appraised value at the date of death for purposes of state inheritance or transmission taxes.
  • 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 owned by your spouse 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 is the total of these two amounts.

Example: Your jointly owned home had an adjusted basis of $50,000 on the date of your spouse's death, and the fair market value on that date was $100,000. Your new basis in the home is $75,000 ($25,000 for one-half of the adjusted basis plus $50,000 for one-half of the fair market value).

In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), each spouse is usually considered to own half of the community property. When either spouse dies, the fair market value of the community property becomes the basis of the entire property, including the portion belonging to the surviving spouse. For this to apply, at least half of the community interest must be included in the decedent's gross estate, whether or not the estate must file a return.

Home received in trade. If you acquired your home in a trade for other property, the basis of your home is generally its fair market value at the time of the trade. If you traded one home for another, you have made a sale and purchase. In that case, you may have realized a gain.

Adjusting your basis.

Adjusted basis is your basis increased or decreased by certain amounts.

Increases to basis include:

  • Improvements.
  • Additions.
  • Special assessments for local improvements.
  • Amounts spent after a casualty to restore damaged property.

Decreases to basis include:

  • Gain from the sale of your old home before May 7, 1997 on which tax was postponed.
  • Insurance payments for casualty losses.
  • Deductible casualty losses not covered by insurance.
  • Payments received for granting an easement or right-of-way.
  • Depreciation allowed or allowable if you used your home for business or rental purposes.
  • Residential energy credit (generally allowed from 1977 through 1987) claimed for the cost of energy improvements that you added to the basis of your home.
  • Adoption credit you claimed for improvements that you added to the basis of your home.
  • Nontaxable payments from an employer’s adoption assistance program that you used for improvements you added to the basis of your home.
  • First-time home buyer’s credit (allowed to certain first-time buyers in the District of Columbia).
  • Energy conservation subsidy excluded from your gross income because you received it (directly or indirectly) from a public utility after December 3l,1992, to buy or install any energy conservation measure. An energy conservation measure includes an installation or modification that is primarily designed either to reduce consumption of electricity or natural gas or to improve the management of energy demand for a home.

Improvements. These add to the value of your home, prolong its useful life, or adapt it to new uses. You add the cost of improvements to the basis of your property.

Example: Putting a recreation room in your unfinished basement, adding another bathroom or bedroom, putting up a fence, putting in new plumbing or wiring, installing a new roof, or paving your driveway are improvements.

Here are some other examples:

  • Additions: Bedroom, bathroom, deck, garage, porch, patio
  • Lawn and grounds: Landscaping, driveway, walkway, fence, retaining wall, sprinkler system, swimming pool
  • Miscellaneous: Storm windows or doors, new roof, central vacuum, wiring upgrades, satellite dish, security system
  • Heating and air conditioning: Heating system, central air, furnace, duct work, central humidifier, filtration system
  • Plumbing: Septic system, water heater, soft water system, filtration system
  • Interior: Built-in appliances, kitchen modernization, flooring, wall-to-wall carpet
  • Insulation: attic, walls, floor, pipes, duct work
  • Improvements no longer part of home. Your home's adjusted basis does not include the cost of any improvements that are no longer part of the home.

Example: You put wall-to-wall carpeting in your home 15 years ago. Later, you replaced that carpeting with new wall-to-wall carpeting. The cost of the old carpeting you replaced is no longer part of your home's adjusted basis.

Repairs. These maintain the good condition of your home. They do not add to its value or prolong its life, and you do not add their costs to the basis of your property.

Example: Repainting your house inside or outside, fixing your gutters or floors, repairing leaks or plastering, and replacing broken window panes are examples of repairs. The entire job is considered an improvement, however, if items that would otherwise be considered repairs are done as part of an extensive remodeling or restoration of your home.

Recordkeeping. You should keep records of your home's purchase price and purchase expenses. Furthermore, you should also save receipts and other records for all improvements, additions, and other items that affect the basis of your home.

You must keep records for 3 years after the due date for filing your return for the tax year in which you sold, or otherwise disposed of, your home. But if the basis of your old home affects the basis of your new one, such as when you sold your old home before May 7, 1997 and postponed tax on any gain, you should keep those records forever.

Exclusion For Sales After May 6, 1997

If you sell your main home after May 6, 1997, you may qualify to exclude all or part of any gain from your income. This means that, if you qualify, you will not have to pay tax on the gain up to the limit described under Amount of Exclusion. To qualify, you must meet the ownership and use tests described later.

Amount of Exclusion: You can exclude the entire gain on the sale of your main home up to:

  • $250,000, or
  • $500,000, if all of the following apply: (1) you are married and file jointly for the year, (2) either you or your spouse meets the ownership test, (3) both you and your spouse meet the use test, and (4) neither you nor your spouse is excluding gain from the sale of another home in the 2-year period before sale (not counting such sales before May 7, 1997.)

Ownership and Use Tests: You can claim the exclusion if, during the 5-year period ending on the date of 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).

Note: If you owned and used the property as your main home for less than 2 years, you may be able to claim a reduced exclusion.

The two years of ownership and use during the five-year period don’t have to be continuous. You meet the tests if you can show that you owned and lived in the property as your main home for either 24 full months or 730 days during the five-year period. Short temporary absences, e.g., for vacations, are counted as periods of use, even if you rent out the property during that time.

Example: From 1994 through August of this year, Anne lived with her parents in a house that her parents owned. On September 29 of this year, she bought this house from her parents. She continued to live there until December 15 of this year, when she sold it at a gain. Although Anne lived in the property as her main home for more than 2 years, she did not own it for the required 2 years. Therefore, she cannot exclude any part of her gain on the sale, unless she sold the property due to a change in health or place of employment.

Example: Professor Moore bought and moved into a house on January 4, 2001. He lived in it as his main home continuously until October 1, 2002, when he went abroad for a one-year sabbatical. During part of the leave, the house was unoccupied, and during the rest of the time he rented it out. On October 1, 2003, he sold the house. Because his leave was not a short temporary absence, he cannot include the period of leave to meet the 2-year use test.
Ownership and Use Tests Met at Different Times. You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale.

Example: In 1996, Harry was 60 years old and lived in a rental apartment. When the apartment building went co-op, he bought his apartment on December 1, 1999. Harry then went to live with his daughter on April 14, 2001 because he became ill. On July 10, 2003, he sold his co-op while still living with his daughter. Harry can exclude gain on the sale of his co-op because he met the ownership and use tests. His 5-year period runs from July 11, 1998, to July 10, 2003, the date he sold the co-op. Even though, he only owned the co-op from December 1, 1999 to July 10, 2003--over two years, he lived in the apartment from July 11, 1997 (the beginning of the five-year period) to April 14, 2001 (over two years).

Special Situations. There are a number of special situations that may result in exceptions to the general rules

Individuals with Disabilities. There is an exception to the 2-out-of-5-year use test if you become physically or mentally unable to care for yourself at any time during the 5-year period. You qualify for this exception to the use test if, during the 5-year period before the sale of your home:

  • You become physically or mentally unable to care for yourself, and
  • You owned and lived in your home as a main home for a total of at least one year.

Under this exception, you are considered to live in your home during any time that you live in a facility (including a nursing home) that is licensed by a state or political subdivision to care for persons in your condition.

If you meet this exception to the use test, you still have to meet the 2-out-of-5-year ownership test to claim the exclusion.

Gain postponed on sale of previous home. For the ownership and use tests, you may be able to add the time you owned and lived in a previous home to the time you lived in the home on which you wish to exclude gain. You can do this if you postponed all or part of the gain on the sale of the previous home because of buying the home on which you wish to exclude gain.

Also, if buying the previous home enabled you to postpone all or part of the gain on the sale of a home you owned earlier, you can also include the time you owned and lived in that earlier home.

Previous home destroyed or condemned. For the ownership and use test, you add the time you owned and lived in a previous home that was destroyed or condemned to the time you owned and lived in the home on which you wish to exclude gain. This rule applies if any part of the basis of the home you sold depended on the basis of the destroyed or condemned home. Otherwise, you must have owned and lived in the same home for 2 of the 5 years before the sale to qualify for the exclusion.

Married Persons: If you and your spouse file a joint return for the year of sale, you can exclude gain if either spouse meets the ownership and use tests. (But see Amount of Exclusion, earlier.)

Example: Mary sells her home in June of this year and marries John later in the year. She meets the ownership and use tests, but John does not. Emily can exclude up to $250,000 of gain on a separate or joint return for this year.

Example: Now assume that John also sells a home. He meets the ownership and use tests on his home. Mary and John can each exclude $250,000 of gain.

Death of spouse before sale. If your spouse died before the date of sale, you are considered to have owned and used the property as your main home during any period of time when your spouse owned and used it as a main home.

Home transferred from spouse. If your home was transferred to you by your spouse (or former spouse if the transfer was incident to divorce), you are considered to have owned it during any period of time when your spouse owned it.

Use of home after divorce. You are considered to have used property as your main home during any period when you owned it and your spouse or former spouse is allowed to use it under a divorce or separation instrument. Such use is added to your own use before or after divorce.

More Than One Home Sold During The Two-Year Period: You cannot exclude gain on the sale of your home if, during the two-year period ending on the date of the sale, you sold another home at a gain and are excluding all or part of that gain. If you cannot exclude the gain, you must include it in your income.

However, you can claim a reduced exclusion if you sold the home due to a change in health or place of employment. When counting the number of sales during a two-year period, do not count sales before May 7, 1997.

Expatriates. You cannot claim the exclusion if section 877(a)(1) applies to you because you have renounced their citizenship and one of the primary purposes was to avoid U.S. taxes.

Home destroyed or condemned. If your home is destroyed or condemned after May 6, 1997, any gain (e.g., due to insurance proceeds) qualifies for the exclusion.

Home used in business. So long as the business use takes place in the same dwelling unit as your main home, the exclusion is not affected by business use, with this exception: You cannot exclude the part of your gain that is equal to any depreciation allowed or allowable for the business use of your home after May 6, 1997. The 2 out of 5 year use-as-the-main-home test is not applied to deny exclusion for gain allocable to business use in the same dwelling unit, except for allowable depreciation.

Example: You bought a home in 1997 and used it throughout 3/4 as your residence and 1/4 as your home office. On December 30, 2002 you sold it. The gain qualifies for exclusion except that you cannot exclude the part of your gain that is equal to any depreciation allowed or allowable for the business use of your home after May 6, 1997.

This is the current rule. Under the rule in effect before December 24, 2002, only 3/4 of the gain (disregarding the effect of the depreciation deduction) would have qualified for exclusion, since only 3/4 of the home met the 2 out of 5 year test for use as your main home. However, IRS now also lets taxpayers use the current rule described above for sales before December 24, 2002, and claim refunds for tax paid under its old rule.

Reduced exclusion. You are allowed a reduced exclusion in limited cases where you have failed to meet all the exclusion requirements. Reduced exclusion is allowed where because of a change in health, or place of employment, or unforeseen circumstances (such as a natural disaster or a divorce) you either failed to meet the ownership and use tests or you sold after having excluded gain on sale of another home after May 6, 1997 and within 2 years of this sale.

The $250,000 (or $500,000) exclusion is reduced according to a formula whose numerator is the number of days of qualified ownership or use (or between sales of the homes) and the denominator is 730 days (for 2 years). If married filing jointly, duplicate the same calculation for your spouse’s ownership and use (or days between sales).

Example: You owned and used your main home for 400 days before selling it at a $150,000 gain following your move to a new job location. Your exclusion is $136,986, that is, 400/730 x $250,000.

Recapture your federal subsidy.

If you financed your home under a federally subsidized program, you may have to recapture all or part of the benefit you received from that program when you sell your home. This recapture is accomplished by your paying more federal income tax in the year of sale. The exclusion does not apply to this recapture tax.

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