Experienced Tax
Accountant – The
basis of a home you buy is the amount you pay for it. This usually includes
your down payment and any debt, such as a first or second mortgage, or notes
you give to the seller. If, instead, you contract to have your home built on
land that you own, your basis in the home is your basis in the land plus the
amount you pay to have the home completed. This includes the cost of labor and
materials, the amount you pay the contractor, any architect's fees, building
permit charges, utility meter and connection charges, and legal fees that are
directly connected with building your home. If you build all or part of your
home yourself, your basis is the total amount it cost you to complete it. You
cannot include the value of your own labor or any other labor you did not pay
for.
If you buy your home, you
will probably pay settlement or closing costs in addition to the contract
price. These costs are divided between you and the seller according to the
sales contract, local custom, or understanding of the parties. If you build
your home, you will probably pay these costs when you buy the land or settle on
your mortgage.
If, at settlement, you pay
real estate taxes for a portion of the year that are imposed on the seller,
that is, taxes up to the date of sale, you must add those taxes to your basis
in the home. You can deduct the portion of the year's taxes that you pay,
beginning with the date of sale for that tax year. However, if the seller pays
the real estate taxes for the entire year, you are still considered to have
paid, and can deduct, the taxes beginning with the date of sale. If you do not
reimburse the seller for your portion of the taxes, you must reduce your basis
in your home by the amount of those taxes.
Generally, you add the
following items that are charged to you at settlement or closing to the cost of
your home. They are a part of your original basis.
1) Attorney's fees,
2) Abstract fees,
3) Charges for installing
utility service,
4) Transfer and stamp taxes,
5) Surveys,
6) Title insurance, and
7) Unreimbursed amounts the
seller owes but you pay:
a) Back taxes or interest,
b) Recording or mortgage
fees,
c) Charges for improvements
or repairs, or
d) Selling commissions.
If the seller actually pays
for any item that you are liable for and that you can take a deduction for,
such as your share of the real estate taxes for that year, you must reduce your
basis by that amount unless you are charged for it in the settlement. This
amount includes discount points which the seller paid but which you deducted on
the purchase of a principal residence.
There are some settlement
costs which you cannot deduct or add to your basis. These include:
1) Fire insurance premiums,
2) FHA mortgage insurance
premiums,
3) Charges for using
utilities,
4) Rent for occupying the
home before closing, and
5) Other fees or charges for
services concerning occupying the home.
Gift
If someone gave you your
home as a gift, your basis for determining a gain or loss on its sale is the
same as that person's (the donor's) adjusted basis when it was given to you.
However, your basis in the home for determining a loss on its sale is the fair
market value of the home if, when it was given to you, the donor's adjusted
basis was more than the fair market value of the home. Moreover, you can add to
your basis (the donor's adjusted basis) part of the federal gift tax paid by the
donor attributable to the gift. Keep in mind, however, that any loss on the
sale of the home is not deductible, if it is used entirely for personal
purposes.
Inheritance
If you inherited your home,
your basis is generally the fair market value of the home at the date of the
decedent's death or on the alternate valuation date, if the estate qualifies
and uses this date. If an estate tax return was filed, your basis is the value
of the home listed on the estate tax return. If an estate tax return was not
filed, your basis is the appraised value of the home for state inheritance or
transfer taxes at the decedent's date of death.
Special rules may apply if
you inherited your home from someone who died in 2010. If this applies to you,
please contact our offices for further information.
Adjustments to Basis
Once you acquired your
residence, your basis may have been adjusted (increased or decreased) by
certain events.
Increases to basis include:
1) Improvements,
2) Additions,
3) Special assessments for
local improvements, and
4) Amounts spent after a
casualty to restore damaged property.
Decreases to basis include:
1) Insurance reimbursements
for casualty losses,
2) Deductible casualty
losses not covered by insurance,
3) Payments received for an
easement or right-of-way granted,
4) Depreciation allowed or
allowable, if you used your home for business or rental purposes, and
5) An energy conservation
subsidy excluded from your gross income because you received it (directly or
indirectly) from a public utility, after 1992, for the purchase or installation
of any energy conservation measure.
Items that you cannot deduct
from, or add to, your basis include:
1) Certain settlement fees
or closing costs, as outlined above,
2) The cost of repairs, and
3) Any item that you
deducted as a moving expense.
If you have questions regarding your small business accounting,
ABA Tax Accounting is always here. Please do not
hesitate to call me, if you have any other questions or need further guidance. Call
us for a free consultation at 651-300-4777.
