Determining Basis of a Residence

         

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.