Gains and Losses

The four chapters in this part discuss investment gains and losses, including how to figure your basis in property. A gain from selling or trading stocks, bonds, or other investment property generally is taxable. A loss may or may not be deductible. These chapters also discuss gains from selling property you personally use — including the special rules for selling your home. Nonbusiness casualty and theft losses are discussed in chapter 25 in Part Five.

13. Basis of Property

 

What’s New

 

At the time this publication went to print, Congress was considering legislation that would do the following.

1. Provide additional tax relief for those affected by Hurricane Harvey, Irma, or Maria, and tax relief for those affected by other 2017 disasters, such as the California wildfires.
2. Extend certain tax benefits that expired at the end of 2016 and that currently can’t be claimed on your 2017 tax return.
3. Change certain other tax provisions.

To learn whether this legislation was enacted resulting in changes that affect your 2017 tax return, go to Recent Developments at IRS.gov/Pub17.

 

Introduction

This chapter discusses how to figure your basis in property. It is divided into the following sections.

• Cost basis.
• Adjusted basis.
• Basis other than cost.

Your basis is the amount of your investment in property for tax purposes. Use the basis to figure the gain or loss on the sale, exchange, or other disposition of property. Also use it to figure deductions for depreciation, amortization, depletion, and casualty losses.

If you use property for both business or for production of income purposes, and for personal purposes, you must allocate the basis based on the use. Only the basis allocated to the business or the production of income part of the property can be depreciated.

Your original basis in property is adjusted (increased or decreased) by certain events. For example, if you make improvements to the property, increase your basis. If you take deductions for depreciation or casualty losses, or claim certain credits, reduce your basis.

 

Keep accurate records of all items that affect the basis of your property. For more information on keeping records, see chapter 1.

 

Useful Items – You may want to see:

Publication

• 15-BEmployer’s Tax Guide to Fringe Benefits
• 525Taxable and Nontaxable Income
• 535Business Expenses
• 537Installment Sales
• 544Sales and Other Dispositions of Assets
• 550Investment Income and Expenses
• 551Basis of Assets
• 946How To Depreciate Property

 

 

Cost Basis

The basis of property you buy is usually its cost. The cost is the amount you pay in cash, debt obligations, other property, or services. Your cost also includes amounts you pay for the following items.

• Sales tax.

 

• Installation and testing.
• Excise taxes.

 

• Legal and accounting fees (when they must be capitalized).

 

• Revenue stamps.

 

• Recording fees.

 

• Real estate taxes (if you assume liability for the seller).

 

In addition, the basis of real estate and business assets may include other items.

Loans with low or no interest.

 

If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price minus any amount considered to be unstated interest. You generally have unstated interest if your interest rate is less than the applicable federal rate.

For more information, see Unstated Interest and Original Issue Discount (OID) in Pub. 537.

 

Real Property

Real property, also called real estate, is land and generally anything built on, growing on, or attached to land.

If you buy real property, certain fees and other expenses you pay are part of your cost basis in the property.

Lump-sum purchase.

 

If you buy buildings and the land on which they stand for a lump sum, allocate the cost basis between the land and the buildings. Allocate the cost basis according to the respective fair market values (FMVs) of the land and buildings at the time of purchase. Figure the basis of each asset by multiplying the lump sum by a fraction. The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase.

 

If you are not certain of the FMVs of the land and buildings, you can allocate the basis according to their assessed values for real estate tax purposes.

Fair market value (FMV).

FMV 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 all the necessary facts. Sales of similar property on or about the same date may be helpful in figuring the FMV of the property.

Assumption of mortgage.

If you buy property and assume (or buy the property subject to) an existing mortgage on the property, your basis includes the amount you pay for the property plus the amount to be paid on the mortgage.

Settlement costs.

Your basis includes the settlement fees and closing costs you paid for buying the property. (A fee for buying property is a cost that must be paid even if you buy the property for cash.) Do not include fees and costs for getting a loan on the property in your basis.

The following are some of the settlement fees or closing costs you can include in the basis of your property.

• Abstract fees (abstract of title fees).

 

• Charges for installing utility services.

 

• Legal fees (including fees for the title search and preparation of the sales contract and deed).
• Recording fees.
• Survey fees.

 

• Transfer taxes.
• Owner’s title insurance.
• 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.

 

 

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

The following are some of the settlement fees and closing costs you cannot include in the basis of property.

• Casualty insurance premiums.
• Rent for occupancy of the property before closing.
• Charges for utilities or other services related to occupancy of the property before closing.
• Charges connected with getting a loan, such as points (discount points, loan origination fees), mortgage insurance premiums, loan assumption fees, cost of a credit report, and fees for an appraisal required by a lender.

 

• Fees for refinancing a mortgage.

 

 

Real estate taxes.

If you pay real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis. You cannot deduct the taxes as an expense.

If you reimburse the seller for taxes the seller paid for you, you can usually deduct that amount as an expense in the year of purchase. Do not include the amount of real estate taxes you deducted as an expense in the basis of your property. If you did not reimburse the seller, you must reduce your basis by the amount of those taxes.

Points.

If you pay points to get a loan (including a mortgage, second mortgage, line of credit, or a home equity loan), do not add the points to the basis of the related property. Generally, you deduct the points over the term of the loan. For more information on how to deduct points, see chapter 23.

Points on home mortgage.

Special rules may apply to points you and the seller pay when you get a mortgage to buy your main home. If certain requirements are met, you can deduct the points in full for the year in which they are paid. Reduce the basis of your home by any seller-paid points.

 

Adjusted Basis

Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments (increases and decreases) to the cost basis or basis other than cost (discussed later) of the property. The result is the adjusted basis.

 

Increases to Basis

Increase the basis of any property by all items properly added to a capital account. Examples of items that increase basis are shown in Table 13-1. These include the items discussed below.

Improvements.

Add to your basis in property the cost of improvements having a useful life of more than 1 year, that increase the value of the property, lengthen its life, or adapt it to a different use. For example, improvements include 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.

Assessments for local improvements.

Add to the basis of property assessments for improvements such as streets and sidewalks if they increase the value of the property assessed. Do not deduct them as taxes. However, you can deduct as taxes assessments for maintenance or repairs, or for meeting interest charges related to the improvements.

Example.

Your city changes the street in front of your store into an enclosed pedestrian mall and assesses you and other affected property owners for the cost of the conversion. Add the assessment to your property’s basis. In this example, the assessment is a depreciable asset.

 

Decreases to Basis

Decrease the basis of any property by all items that represent a return of capital for the period during which you held the property. Examples of items that decrease basis are shown in Table 13-1. These include the items discussed below.

 

 

Table 13-1. Examples of Adjustments to Basis

Increases to Basis		Decreases to Basis
• Capital improvements:		• Exclusion from income of
	Putting an addition on your home	subsidies for energy conservation
	Replacing an entire roof	measures
	Paving your driveway
	Installing central air conditioning	• Casualty or theft loss deductions
	Rewiring your home	and insurance reimbursements
• Assessments for local improvements:
	Water connections
	Extending utility service lines to the property	• Postponed gain from the sale of a home
	Sidewalks
	Roads
		• Alternative fuel vehicle refueling
		property credit (Form 8911)
		• Residential energy credit (Form 5695)
• Casualty losses:		• Depreciation and section 179 deduction
	Restoring damaged property
		• Nontaxable corporate distributions
• Legal fees:
	Cost of defending and perfecting a title	• Certain canceled debt excluded from
	Fees for getting a reduction of an assessment	income
• Zoning costs		• Easements
		• Adoption tax benefits

 

Casualty and theft losses.

If you have a casualty or theft loss, decrease the basis in your property by any insurance proceeds or other reimbursement and by any deductible loss not covered by insurance.

You must increase your basis in the property by the amount you spend on repairs that restore the property to its pre-casualty condition.

For more information on casualty and theft losses, see chapter 25.

Depreciation and section 179 deduction.

Decrease the basis of your qualifying business property by any section 179 deduction you take and the depreciation you deducted, or could have deducted (including any special depreciation allowance), on your tax returns under the method of depreciation you selected.

For more information about depreciation and the section 179 deduction, see Pub. 946 and the Instructions for Form 4562.

Example.

You owned a duplex used as rental property that cost you $40,000, of which $35,000 was allocated to the building and $5,000 to the land. You added an improvement to the duplex that cost $10,000. In February last year, the duplex was damaged by fire. Up to that time, you had been allowed depreciation of $23,000. You sold some salvaged material for $1,300 and collected $19,700 from your insurance company. You deducted a casualty loss of $1,000 on your income tax return for last year. You spent $19,000 of the insurance proceeds for restoration of the duplex, which was completed this year. You must use the duplex’s adjusted basis after the restoration to determine depreciation for the rest of the property’s recovery period. Figure the adjusted basis of the duplex as follows:

Original cost of duplex			$35,000
Addition to duplex			10,000
Total cost of duplex			$45,000
Minus:	Depreciation		23,000
Adjusted basis before casualty			$22,000
Minus:	Insurance proceeds	$19,700
	Deducted casualty loss	1,000
	Salvage proceeds	1,300	22,000
Adjusted basis after casualty			$-0-
Add: Cost of restoring duplex			19,000
Adjusted basis after restoration			$19,000

 

Note.

Your basis in the land is its original cost of $5,000.

Easements.

The amount you receive for granting an easement is generally considered to be proceeds from the sale of an interest in real property. It reduces the basis of the affected part of the property. If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain.

If the gain is on a capital asset, see chapter 16 for information about how to report it. If the gain is on property used in a trade or business, see Pub. 544 for information about how to report it.

Exclusion of subsidies for energy conservation measures.

You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of an energy conservation measure for a dwelling unit. Reduce the basis of the property for which you received the subsidy by the excluded amount. For more information about this subsidy, see chapter 12.

Postponed gain from sale of home.

If you postponed gain from the sale of your main home under rules in effect before May 7, 1997, you must reduce the basis of the home you acquired as a replacement by the amount of the postponed gain. For more information on the rules for the sale of a home, see chapter 15.

 

Basis Other Than Cost

There are many times when you cannot use cost as basis. In these cases, the fair market value or the adjusted basis of the property can be used. Fair market value (FMV) and adjusted basis were discussed earlier.

 

Property Received for Services

If you receive property for your services, include the FMV of the property in income. The amount you include in income becomes your basis. If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary.

Restricted property.

If you receive property for your services and the property is subject to certain restrictions, your basis in the property is its FMV when it becomes substantially vested. However, this rule doesn’t apply if you make an election to include in income the FMV of the property at the time it is transferred to you, less any amount you paid for it. Property is substantially vested when it is transferable or when it is not subject to a substantial risk of forfeiture (you do not have a good chance of losing it). For more information, see Restricted Property in Pub. 525.

Bargain purchases.

A bargain purchase is a purchase of an item for less than its FMV. If, as compensation for services, you buy goods or other property at less than FMV, include the difference between the purchase price and the property’s FMV in your income. Your basis in the property is its FMV (your purchase price plus the amount you include in income).

If the difference between your purchase price and the FMV is a qualified employee discount, do not include the difference in income. However, your basis in the property is still its FMV. See Employee Discounts in Pub. 15-B.

 

Taxable Exchanges

A taxable exchange is one in which the gain is taxable or the loss is deductible. A taxable gain or deductible loss also is known as a recognized gain or loss. If you receive property in exchange for other property in a taxable exchange, the basis of the property you receive is usually its FMV at the time of the exchange.

 

Nontaxable Exchanges

A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. If you receive property in a nontaxable exchange, its basis is generally the same as the basis of the property you transferred. See Nontaxable Trades in chapter 14.

 

Involuntary Conversions

If you receive replacement property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, figure the basis of the replacement property using the basis of the converted property.

Similar or related property.

 

If you receive replacement property similar or related in service or use to the converted property, the replacement property’s basis is the same as the converted property’s basis on the date of the conversion, with the following adjustments.

1. Decrease the basis by the following.
   1. Any loss you recognize on the involuntary conversion.
   2. Any money you receive that you do not spend on similar property.
2. Increase the basis by the following.
   1. Any gain you recognize on the involuntary conversion.
   2. Any cost of acquiring the replacement property.

 

Money or property not similar or related.

 

If you receive money or property not similar or related in service or use to the converted property, and you buy replacement property similar or related in service or use to the converted property, the basis of the replacement property is its cost decreased by the gain not recognized on the conversion.

Example.

The state condemned your property. The adjusted basis of the property was $26,000 and the state paid you $31,000 for it. You realized a gain of $5,000 ($31,000 − $26,000). You bought replacement property similar in use to the converted property for $29,000. You recognize a gain of $2,000 ($31,000 − $29,000), the unspent part of the payment from the state. Your unrecognized gain is $3,000, the difference between the $5,000 realized gain and the $2,000 recognized gain. The basis of the replacement property is figured as follows:

Cost of replacement property	$29,000
Minus: Gain not recognized	3,000
Basis of replacement property	$26,000

 

Allocating the basis.

 

If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs.

Basis for depreciation.

Special rules apply in determining and depreciating the basis of Modified Accelerated Cost Recovery System (MACRS) property acquired in an involuntary conversion. For information, see What Is the Basis of Your Depreciable Property? in chapter 1 of Pub. 946.

 

Like-Kind Exchanges

The exchange of property for the same kind of property is the most common type of nontaxable exchange. To qualify as a like-kind exchange, the property traded and the property received must be both of the following.

• Qualifying property.
• Like-kind property.

 

The basis of the property you receive is generally the same as the adjusted basis of the property you gave up. If you trade property in a like-kind exchange and also pay money, the basis of the property received is the adjusted basis of the property you gave up increased by the money you paid.

Qualifying property.

 

In a like-kind exchange, you must hold for investment or for productive use in your trade or business both the property you give up and the property you receive.

Like-kind property.

 

There must be an exchange of like-kind property. Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. The exchange of real estate for real estate and personal property for similar personal property are exchanges of like-kind property.

Example.

You trade in an old truck used in your business with an adjusted basis of $1,700 for a new one costing $6,800. The dealer allows you $2,000 on the old truck, and you pay $4,800. This is a like-kind exchange. The basis of the new truck is $6,500 (the adjusted basis of the old one, $1,700, plus the amount you paid, $4,800).

If you sell your old truck to a third party for $2,000 instead of trading it in and then buy a new one from the dealer, you have a taxable gain of $300 on the sale (the $2,000 sale price minus the $1,700 adjusted basis). The basis of the new truck is the price you pay the dealer.

Partially nontaxable exchanges.

A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like-kind property. The basis of the property you receive is the same as the adjusted basis of the property you gave up, with the following adjustments.

1. Decrease the basis by the following amounts.
   1. Any money you receive.
   2. Any loss you recognize on the exchange.
2. Increase the basis by the following amounts.
   1. Any additional costs you incur.
   2. Any gain you recognize on the exchange.

If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange.

Allocation of basis.

 

If you receive like-kind and unlike properties in the exchange, allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. The rest is the basis of the like-kind property.

More information.

 

See Like-Kind Exchanges in chapter 1 of Pub. 544 for more information.

Basis for depreciation.

Special rules apply in determining and depreciating the basis of MACRS property acquired in a like-kind exchange. For information, see What Is the Basis of Your Depreciable Property? in chapter 1 of Pub. 946.

 

Property Transferred From a Spouse

The basis of property transferred to you or transferred in trust for your benefit by your spouse is the same as your spouse’s adjusted basis. The same rule applies to a transfer by your former spouse that is incident to divorce. However, for property transferred in trust, adjust your basis for any gain recognized by your spouse or former spouse if the liabilities assumed, plus the liabilities to which the property is subject, are more than the adjusted basis of the property transferred.

If the property transferred to you is a series E, series EE, or series I U.S. savings bond, the transferor must include in income the interest accrued to the date of transfer. Your basis in the bond immediately after the transfer is equal to the transferor’s basis increased by the interest income includible in the transferor’s income. For more information on these bonds, see chapter 7.

At the time of the transfer, the transferor must give you the records needed to determine the adjusted basis and holding period of the property as of the date of the transfer.

For more information about the transfer of property from a spouse, see chapter 14.

 

Property Received as a Gift

To figure the basis of property you receive as a gift, you must know its adjusted basis to the donor just before it was given to you, its FMV at the time it was given to you, and any gift tax paid on it.

FMV less than donor’s adjusted basis.

 

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 a 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 loss is its FMV when you received the gift plus or minus any required adjustments to basis while you held the property. See Adjusted Basis , earlier.

Example.

You received an acre of land as a gift. At the time of the gift, the land had an FMV of $8,000. The donor’s adjusted basis was $10,000. After you received the property, no events occurred to increase or decrease your basis. If you later sell the property for $12,000, you will have a $2,000 gain because you must use the donor’s adjusted basis at the time of the gift ($10,000) as your basis to figure gain. If you sell the property for $7,000, you will have a $1,000 loss because you must use the FMV at the time of the gift ($8,000) as your basis to figure loss.

If the sales price is between $8,000 and $10,000, you have neither gain nor loss.

Business property.

If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deductions is the same as the donor’s adjusted basis plus or minus any required adjustments to basis while you hold the property.

FMV equal to or greater than donor’s adjusted basis.

 

If the FMV of the property 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, explained later.

Also, for figuring gain or loss from a sale or other disposition or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis (the donor’s adjusted basis) by any required adjustments to basis while you held the property. See Adjusted Basis , earlier.

If you received a gift during the tax year, increase your basis in the gift (the donor’s adjusted basis) by the part of the gift tax paid on it due to the net increase in value of the gift. Figure the increase by multiplying the gift tax paid by a fraction. The numerator of the fraction is the net increase in value of the gift and the denominator is the amount of the gift.

The net increase in value of the gift is the FMV of the gift minus the donor’s adjusted basis. The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift.

Example.

In 2017, you received a gift of property from your mother that had an FMV of $50,000. Her adjusted basis was $20,000. The amount of the gift for gift tax purposes was $36,000 ($50,000 minus the $14,000 annual exclusion). She paid a gift tax of $7,320 on the property. Your basis is $26,076, figured as follows:

Fair market value	$50,000
Minus: Adjusted basis	−20,000
Net increase in value	$30,000
Gift tax paid	$7,320
Multiplied by ($30,000 ÷ $36,000)	× 0.83
Gift tax due to net increase in value	$6,076
Adjusted basis of property to your mother	+20,000
Your basis in the property	$26,076

 

 

Inherited Property

Your basis in property you inherited from a decedent is generally one of the following.

• The FMV of the property at the date of the decedent’s death.
• The FMV on the alternate valuation date if the personal representative for the estate elects to use alternate valuation.
• The value under the special-use valuation method for real property used in farming or a closely held business if elected for estate tax purposes.
• The decedent’s adjusted basis in land to the extent of the value excluded from the decedent’s taxable estate as a qualified conservation easement.

 

If a federal estate tax return doesn’t have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes.

For more information, see the Instructions for Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return.

Information for beneficiaries receiving Schedule A (Form 8971).

 

Form 8971, Information Regarding Beneficiaries Acquiring Property From a Decedent, and its Schedule A, are used to comply with the reporting requirements regarding consistency of basis for assets acquired from an estate. In certain circumstances, an executor of an estate (or other person) required to file an estate tax return after July 31, 2015, will be required to provide a Schedule A (Form 8971) to a beneficiary who receives or is to receive property from an estate. For more information about when Form 8971 and Schedule A must be completed, see the Instructions for Form 8971 and Schedule A.

The beneficiary uses the final estate tax value reported on Schedule A to determine his or her basis in the property. When calculating a basis consistent with the final estate tax value, start with the reported value and then make any allowed adjustments.

Community property.

 

In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), married individuals are each usually considered to own half the community property. When either spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property. For this rule to apply, at least half the value of the community property interest must be includible in the decedent’s gross estate, whether or not the estate must file a return.

Example.

You and your spouse owned community property that had a basis of $80,000. When your spouse died, half the FMV of the community interest was includible in your spouse’s estate. The FMV of the community interest was $100,000. The basis of your half of the property after the death of your spouse is $50,000 (half of the $100,000 FMV). The basis of the other half to your spouse’s heirs is also $50,000.

For more information about community property, see Pub. 555, Community Property.

 

Property Changed From Personal to Business or Rental Use

If you hold property for personal use and then change it to business use or use it to produce rent, you can begin to depreciate the property at the time of the change. To do so, you must figure its basis for depreciation at the time of the change. An example of changing property held for personal use to business or rental use would be renting out your former personal residence.

Basis for depreciation.

The basis for depreciation is the lesser of the following amounts.

• The FMV of the property on the date of the change.
• Your adjusted basis on the date of the change.

 

Example.

Several years ago, you paid $160,000 to have your house built on a lot that cost $25,000. You paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for damage to the house before changing the property to rental use last year. Because land is not depreciable, you include only the cost of the house when figuring the basis for depreciation.

Your adjusted basis in the house when you changed its use to rental property was $178,000 ($160,000 + $20,000 − $2,000). On the same date, your property had an FMV of $180,000, of which $15,000 was for the land and $165,000 was for the house. The basis for figuring depreciation on the house is its FMV on the date of the change ($165,000) because it is less than your adjusted basis ($178,000).

Sale of property.

If you later sell or dispose of property changed to business or rental use, the basis you use will depend on whether you are figuring gain or loss.

Gain.

 

The basis for figuring a gain is your adjusted basis in the property when you sell the property.

Example.

Assume the same facts as in the previous example except that you sell the property at a gain after being allowed depreciation deductions of $37,500. Your adjusted basis for figuring gain is $165,500 ($178,000 + $25,000 (land) − $37,500).

Loss.

 

Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. Then make adjustments (increases and decreases) for the period after the change in the property’s use, as discussed earlier under Adjusted Basis .

Example.

Assume the same facts as in the previous example, except that you sell the property at a loss after being allowed depreciation deductions of $37,500. In this case, you would start with the FMV on the date of the change to rental use ($180,000) because it is less than the adjusted basis of $203,000 ($178,000 + $25,000 (land)) on that date. Reduce that amount ($180,000) by the depreciation deductions ($37,500). The basis for loss is $142,500 ($180,000 − $37,500).

 

Stocks and Bonds

The basis of stocks or bonds you buy generally is the purchase price plus any costs of purchase, such as commissions and recording or transfer fees. If you get stocks or bonds other than by purchase, your basis is usually determined by the FMV or the previous owner’s adjusted basis, as discussed earlier.

You must adjust the basis of stocks for certain events that occur after purchase. For example, if you receive additional stock from nontaxable stock dividends or stock splits, reduce your basis for each share of stock by dividing the adjusted basis of the old stock by the number of shares of old and new stock. This rule applies only when the additional stock received is identical to the stock held. Also reduce your basis when you receive nontaxable distributions. The nontaxable distributions are a return of capital.

Example.

In 2015, you bought 100 shares of XYZ stock for $1,000 or $10 a share. In 2016, you bought 100 shares of XYZ stock for $1,600 or $16 a share. In 2017, XYZ declared a 2-for-1 stock split. You now have 200 shares of stock with a basis of $5 a share and 200 shares with a basis of $8 a share.

Other basis.

 

There are other ways to figure the basis of stocks or bonds depending on how you acquired them. For detailed information, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Pub. 550.

Identifying stocks or bonds sold.

 

If you can adequately identify the shares of stock or the bonds you sold, their basis is the cost or other basis of the particular shares of stocks or bonds. If you buy and sell securities at various times in varying quantities and you cannot adequately identify the shares you sell, the basis of the securities you sell is the basis of the securities you acquired first. For more information about identifying securities you sell, seeStocks and Bonds under Basis of Investment Property in chapter 4 of Pub. 550.

Mutual fund shares.

If you sell mutual fund shares you acquired at various times and prices and left on deposit in an account kept by a custodian or agent, you can elect to use an average basis. For more information, see Pub. 550.

Bond premium.

If you buy a taxable bond at a premium and elect to amortize the premium, reduce the basis of the bond by the amortized premium you deduct each year. See Bond Premium Amortization in chapter 3 of Pub. 550 for more information. Although you cannot deduct the premium on a tax-exempt bond, you must amortize the premium each year and reduce your basis in the bond by the amortized amount.

Original issue discount (OID) on debt instruments.

You must increase your basis in an OID debt instrument by the OID you include in income for that instrument. See Original Issue Discount (OID) in chapter 7, and Pub. 1212, Guide To Original Issue Discount (OID) Instruments.

Tax-exempt obligations.

OID on tax-exempt obligations is generally not taxable. However, when you dispose of a tax-exempt obligation issued after September 3, 1982, and acquired after March 1, 1984, you must accrue OID on the obligation to determine its adjusted basis. The accrued OID is added to the basis of the obligation to determine your gain or loss. See chapter 4 of Pub. 550.

14. Sale of Property

 

What’s New

 

At the time this publication went to print, Congress was considering legislation that would do the following.

1. Provide additional tax relief for those affected by Hurricane Harvey, Irma, or Maria, and tax relief for those affected by other 2017 disasters, such as the California wildfires.
2. Extend certain tax benefits that expired at the end of 2016 and that currently can’t be claimed on your 2017 tax return.
3. Change certain other tax provisions.

To learn whether this legislation was enacted resulting in changes that affect your 2017 tax return, go to Recent Developments at IRS.gov/Pub17.

 

Reminder

Foreign income. If you are a U.S. citizen who sells property located outside the United States, you must report all gains and losses from the sale of that property on your tax return unless it is exempt by U.S. law. This is true whether you reside inside or outside the United States and whether or not you receive a Form 1099 from the payer.

 

Introduction

This chapter discusses the tax consequences of selling or trading investment property. It explains the following.

• What a sale or trade is.
• Figuring gain or loss.
• Nontaxable trades.
• Related party transactions.
• Capital gains or losses.
• Capital assets and noncapital assets.
• Holding period.
• Rollover of gain from publicly traded securities.

 

Other property transactions.

 

Certain transfers of property aren’t discussed here. They are discussed in other IRS publications. These include the following.

• Sales of a main home, covered in chapter 15.
• Installment sales, covered in Pub. 537.

 

• Transactions involving business property, covered in Pub. 544.

 

• Dispositions of an interest in a passive activity, covered in Pub. 925.

 

 

Pub. 550 provides a more detailed discussion about sales and trades of investment property. Pub. 550 includes information about the rules covering nonbusiness bad debts, straddles, section 1256 contracts, puts and calls, commodity futures, short sales, and wash sales. It also discusses investment-related expenses.

 

Useful Items – You may want to see:

Publication

• 550 Investment Income and Expenses

Form (and Instructions)

• Schedule D (Form 1040) Capital Gains and Losses
• 8949 Sales and Other Dispositions of Capital Assets
• 8824 Like-Kind Exchanges

 

 

Sales and Trades

If you sold property such as stocks, bonds, or certain commodities through a broker during the year, you should receive from the broker a Form 1099-B. You should receive a Form 1099-B for 2017 by February 15, 2018. It will show the gross proceeds from the sale. It may also show your basis. The IRS will also get a copy of Form 1099-B from the broker.

Use the Form 1099-B received from your broker to complete Form 8949, Sales and Other Dispositions of Capital Assets, and/or Schedule D (Form 1040).

 

What Is a Sale or Trade?

This section explains what is a sale or trade. It also explains certain transactions and events that are treated as sales or trades.

A sale is generally a transfer of property for money or a mortgage, note, or other promise to pay money.

A trade is a transfer of property for other property or services and may be taxed in the same way as a sale.

Sale and purchase.

 

Ordinarily, a transaction isn’t a trade when you voluntarily sell property for cash and immediately buy similar property to replace it. The sale and purchase are two separate transactions. But seeLike-kind exchanges under Nontaxable Trades, later.

Redemption of stock.

A redemption of stock is treated as a sale or trade and is subject to the capital gain or loss provisions unless the redemption is a dividend or other distribution on stock.

Dividend versus sale or trade.

Whether a redemption is treated as a sale, trade, dividend, or other distribution depends on the circumstances in each case. Both direct and indirect ownership of stock will be considered. The redemption is treated as a sale or trade of stock if:

• The redemption isn’t essentially equivalent to a dividend (see chapter 8),
• There is a substantially disproportionate redemption of stock,
• There is a complete redemption of all the stock of the corporation owned by the shareholder, or
• The redemption is a distribution in partial liquidation of a corporation.

 

Redemption or retirement of bonds.

A redemption or retirement of bonds or notes at their maturity is generally treated as a sale or trade.

In addition, a significant modification of a bond is treated as a trade of the original bond for a new bond. For details, see Regulations section 1.1001-3.

Surrender of stock.

A surrender of stock by a dominant shareholder who retains ownership of more than half of the corporation’s voting shares is treated as a contribution to capital rather than as an immediate loss deductible from taxable income. The surrendering shareholder must reallocate his or her basis in the surrendered shares to the shares he or she retains.

Worthless securities.

Stocks, stock rights, and bonds (other than those held for sale by a securities dealer) that became completely worthless during the tax year are treated as though they were sold on the last day of the tax year. This affects whether your capital loss is long term or short term. See Holding Period , later.

Worthless securities also include securities that you abandon after March 12, 2008. To abandon a security, you must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for it. All the facts and circumstances determine whether the transaction is properly characterized as an abandonment or other type of transaction, such as an actual sale or exchange, contribution to capital, dividend, or gift.

If you are a cash basis taxpayer and make payments on a negotiable promissory note that you issued for stock that became worthless, you can deduct these payments as losses in the years you actually make the payments. Don’t deduct them in the year the stock became worthless.

How to report loss.

 

Report worthless securities on Form 8949, Part I or Part II, whichever applies.

 

Report your worthless securities transactions on Form 8949 with the correct box checked for these transactions. See Form 8949 and the Instructions for Form 8949.

 

For more information on Form 8949 and Schedule D (Form 1040), see Reporting Capital Gains and Losses in chapter 16. See also Schedule D (Form 1040), Form 8949, and their separate instructions.

Filing a claim for refund.

If you don’t claim a loss for a worthless security on your original return for the year it becomes worthless, you can file a claim for a credit or refund due to the loss. You must use Form 1040X to amend your return for the year the security became worthless. You must file it within 7 years from the date your original return for that year had to be filed, or 2 years from the date you paid the tax, whichever is later. For more information about filing a claim, see Amended Returns and Claims for Refund in chapter 1.

 

How To Figure Gain or Loss

You figure gain or loss on a sale or trade of property by subtracting the adjusted basis of the property from the amount you realize on the sale or trade.

Gain.

 

If the amount you realize from a sale or trade is more than the adjusted basis of the property you transfer, the difference is a gain.

Loss.

 

If the adjusted basis of the property you transfer is more than the amount you realize, the difference is a loss.

Adjusted basis.

The adjusted basis of property is your original cost or other original basis properly adjusted (increased or decreased) for certain items. See chapter 13 for more information about determining the adjusted basis of property.

Amount realized.

The amount you realize from a sale or trade of property is everything you receive for the property minus your expenses related to the sale (such as redemption fees, sales commissions, sales charges, or exit fees). Amount realized includes the money you receive plus the fair market value of any property or services you receive. If you received a note or other debt instrument for the property, see How To Figure Gain or Loss in chapter 4 of Pub. 550 to figure the amount realized.

If you finance the buyer’s purchase of your property and the debt instrument doesn’t provide for adequate stated interest, the unstated interest that you must report as ordinary income will reduce the amount realized from the sale. For more information, see Pub. 537.

Fair market value.

Fair market value is the price at which the property would change hands between a buyer and a seller, neither being forced to buy or sell and both having reasonable knowledge of all the relevant facts.

Example.

You trade A Company stock with an adjusted basis of $7,000 for B Company stock with a fair market value of $10,000, which is your amount realized. Your gain is $3,000 ($10,000 − $7,000).

Debt paid off.

A debt against the property, or against you, that is paid off as a part of the transaction, or that is assumed by the buyer, must be included in the amount realized. This is true even if neither you nor the buyer is personally liable for the debt. For example, if you sell or trade property that is subject to a nonrecourse loan, the amount you realize generally includes the full amount of the note assumed by the buyer even if the amount of the note is more than the fair market value of the property.

Example.

You sell stock that you had pledged as security for a bank loan of $8,000. Your basis in the stock is $6,000. The buyer pays off your bank loan and pays you $20,000 in cash. The amount realized is $28,000 ($20,000 + $8,000). Your gain is $22,000 ($28,000 − $6,000).

Payment of cash.

If you trade property and cash for other property, the amount you realize is the fair market value of the property you receive. Determine your gain or loss by subtracting the cash you pay plus the adjusted basis of the property you trade in from the amount you realize. If the result is a positive number, it is a gain. If the result is a negative number, it is a loss.

No gain or loss.

You may have to use a basis for figuring gain that is different from the basis used for figuring loss. In this case, you may have neither a gain nor a loss. See Basis Other Than Cost in chapter 13.

 

Nontaxable Trades

This section discusses trades that generally don’t result in a taxable gain or deductible loss. For more information on nontaxable trades, see chapter 1 of Pub. 544, Sales and Other Dispositions of Assets.

Like-kind exchanges.

If you trade business or investment property for other business or investment property of a like kind, you don’t pay tax on any gain or deduct any loss until you sell or dispose of the property you receive. To be nontaxable, a trade must meet all six of the following conditions.

1. The property must be business or investment property. You must hold both the property you trade and the property you receive for productive use in your trade or business or for investment. Neither property may be property used for personal purposes, such as your home or family car.
2. The property must not be held primarily for sale. The property you trade and the property you receive must not be property you sell to customers, such as merchandise.
3. The property must not be stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest, including partnership interests. However, seeSpecial rules for mutual ditch, reservoir, or irrigation company stockin chapter 4 of Pub. 550 for an exception. Also, you can have a nontaxable trade of corporate stocks under a different rule, as discussed later.
4. There must be a trade of like property. The trade of real estate for real estate, or personal property for similar personal property, is a trade of like property. The trade of an apartment house for a store building, or a panel truck for a pickup truck, is a trade of like property. The trade of a piece of machinery for a store building isn’t a trade of like property. Real property located in the United States and real property located outside the United States aren’t like property. Also, personal property used predominantly within the United States and personal property used predominantly outside the United States aren’t like property.
5. The property to be received must be identified in writing within 45 days after the date you transfer the property given up in the trade.
6. The property to be received must be received by the earlier of:
   1. The 180th day after the date on which you transfer the property given up in the trade; or
   2. The due date, including extensions, for your tax return for the year in which the transfer of the property given up occurs.

 

If you trade property with a related party in a like-kind exchange, a special rule may apply. See Related Party Transactions , later in this chapter. Also, see chapter 1 of Pub. 544 for more information on exchanges of business property and special rules for exchanges using qualified intermediaries or involving multiple properties.

Partly nontaxable exchange.

If you receive money or property that is not like-kind in addition to like-kind property, and the above six conditions are met, you have a partly nontaxable trade. You are taxed on any gain you realize, but only up to the amount of the money and the fair market value of the property that is not like-kind that you receive. You can’t deduct a loss.

Like property and unlike property transferred.

 

If you give up unlike property in addition to the like property, you must recognize gain or loss on the unlike property you give up. The gain or loss is the difference between the adjusted basis of the unlike property and its fair market value.

Like property and money transferred.

If all of the above conditions (1)–(6) are met, you have a nontaxable trade even if you pay money in addition to the like property.

Basis of property received.

To figure the basis of the property received, see Nontaxable Exchanges in chapter 13.

How to report.

You must report the trade of like-kind property on Form 8824. If you figure a recognized gain or loss on Form 8824, report it on Schedule D (Form 1040), or on Form 4797, Sales of Business Property, whichever applies. See the instructions for line 22 in the Instructions for Form 8824.

For information on using Form 4797, see chapter 4 of Pub. 544.

Corporate stocks.

The following trades of corporate stocks generally don’t result in a taxable gain or a deductible loss.

Corporate reorganizations.

In some instances, a company will give you common stock for preferred stock, preferred stock for common stock, or stock in one corporation for stock in another corporation. If this is a result of a merger, recapitalization, transfer to a controlled corporation, bankruptcy, corporate division, corporate acquisition, or other corporate reorganization, you don’t recognize gain or loss.

Stock for stock of the same corporation.

 

You can exchange common stock for common stock or preferred stock for preferred stock in the same corporation without having a recognized gain or loss. This is true for a trade between two stockholders as well as a trade between a stockholder and the corporation.

Convertible stocks and bonds.

You generally will not have a recognized gain or loss if you convert bonds into stock or preferred stock into common stock of the same corporation according to a conversion privilege in the terms of the bond or the preferred stock certificate.

Property for stock of a controlled corporation.

If you transfer property to a corporation solely in exchange for stock in that corporation, and immediately after the trade you are in control of the corporation, you ordinarily will not recognize a gain or loss. This rule applies both to individuals and to groups who transfer property to a corporation. It doesn’t apply if the corporation is an investment company.

For this purpose, to be in control of a corporation, you or your group of transferors must own, immediately after the exchange, at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the outstanding shares of each class of nonvoting stock of the corporation.

If this provision applies to you, you may have to attach to your return a complete statement of all facts pertinent to the exchange. For details, see Regulations section 1.351-3.

Additional information.

 

For more information on trades of stock, see Nontaxable Trades in chapter 4 of Pub. 550.

Insurance policies and annuities.

You will not have a recognized gain or loss if the insured or annuitant is the same under both contracts and you trade:

• A life insurance contract for another life insurance contract or for an endowment or annuity contract or for a qualified long-term care insurance contract,
• An endowment contract for another endowment contract that provides for regular payments beginning at a date no later than the beginning date under the old contract or for an annuity contract or for a qualified long-term insurance contract,
• An annuity contract for annuity contract or for a qualified long-term care insurance contract, or
• A qualified long-term care insurance contract for a qualified long-term care insurance contract.

 

You also may not have to recognize gain or loss on an exchange of a portion of an annuity contract for another annuity contract. See Revenue Ruling 2003-76 and Revenue Procedure 2011-38.

For tax years beginning after 2010, amounts received as an annuity for a period of 10 years or more, or for the lives of one or more individuals, under any portion of an annuity, endowment, or life insurance contract, are treated as a separate contract and are considered partial annuities. A portion of an annuity, endowment, or life insurance contract may be annuitized, provided that the annuitization period is for 10 years or more or for the lives of one or more individuals. The investment in the contract is allocated between the part of the contract from which amounts are received as an annuity and the part of the contract from which amounts aren’t received as an annuity.

Exchanges of contracts not included in this list, such as an annuity contract for an endowment contract, or an annuity or endowment contract for a life insurance contract, are taxable.

Demutualization of life insurance companies.

If you received stock in exchange for your equity interest as a policyholder or an annuitant, you generally will not have a recognized gain or loss. See Demutualization of Life Insurance Companies in Pub. 550.

U.S. Treasury notes or bonds.

You can trade certain issues of U.S. Treasury obligations for other issues designated by the Secretary of the Treasury, with no gain or loss recognized on the trade. See Savings bonds traded in chapter 1 of Pub. 550 for more information.

 

Transfers Between Spouses

Generally, no gain or loss is recognized on a transfer of property from an individual to (or in trust for the benefit of) a spouse, or if incident to a divorce, a former spouse. This nonrecognition rule doesn’t apply in the following situations.

• The recipient spouse or former spouse is a nonresident alien.
• Property is transferred in trust and liability exceeds basis. Gain must be recognized to the extent the amount of the liabilities assumed by the trust, plus any liabilities on the property, exceed the adjusted basis of the property.

For other situations, see Transfers Between Spouses in chapter 4 of Pub. 550.

Any transfer of property to a spouse or former spouse on which gain or loss isn’t recognized is treated by the recipient as a gift and isn’t considered a sale or exchange. The recipient’s basis in the property will be the same as the adjusted basis of the giver immediately before the transfer. This carryover basis rule applies whether the adjusted basis of the transferred property is less than, equal to, or greater than either its fair market value at the time of transfer or any consideration paid by the recipient. This rule applies for purposes of determining loss as well as gain. Any gain recognized on a transfer in trust increases the basis.

A transfer of property is incident to a divorce if the transfer occurs within 1 year after the date on which the marriage ends, or if the transfer is related to the ending of the marriage.

 

Related Party Transactions

Special rules apply to the sale or trade of property between related parties.

Gain on sale or trade of depreciable property.

Your gain from the sale or trade of property to a related party may be ordinary income, rather than capital gain, if the property can be depreciated by the party receiving it. See chapter 3 of Pub. 544 for more information.

Like-kind exchanges.

Generally, if you trade business or investment property for other business or investment property of a like kind, no gain or loss is recognized. See Like-kind exchanges , earlier, under Nontaxable Trades.

This rule also applies to trades of property between related parties, defined next under Losses on sales or trades of property. However, if either you or the related party disposes of the like property within 2 years after the trade, you both must report any gain or loss not recognized on the original trade on your return filed for the year in which the later disposition occurs. See Related Party Transactions in chapter 4 of Pub. 550 for exceptions.

Losses on sales or trades of property.

 

You can’t deduct a loss on the sale or trade of property, other than a distribution in complete liquidation of a corporation, if the transaction is directly or indirectly between you and the following related parties.

• Members of your family. This includes only your brothers and sisters, half-brothers and half-sisters, spouse, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.).
• A partnership in which you directly or indirectly own more than 50% of the capital interest or the profits interest.
• A corporation in which you directly or indirectly own more than 50% in value of the outstanding stock. (SeeConstructive ownership of stock, later.)
• A tax-exempt charitable or educational organization directly or indirectly controlled, in any manner or by any method, by you or by a member of your family, whether or not this control is legally enforceable.

 

In addition, a loss on the sale or trade of property isn’t deductible if the transaction is directly or indirectly between the following related parties.

• A grantor and fiduciary, or the fiduciary and beneficiary, of any trust.
• Fiduciaries of two different trusts, or the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts.
• A trust fiduciary and a corporation of which more than 50% in value of the outstanding stock is directly or indirectly owned by or for the trust, or by or for the grantor of the trust.
• A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital interest, or the profits interest, in the partnership.
• Two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation.
• Two corporations, one of which is an S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation.
• An executor and a beneficiary of an estate (except in the case of a sale or trade to satisfy a pecuniary bequest).
• Two corporations that are members of the same controlled group. (Under certain conditions, however, these losses aren’t disallowed but must be deferred.)
• Two partnerships if the same persons own, directly or indirectly, more than 50% of the capital interests or the profit interests in both partnerships.

 

Multiple property sales or trades.

If you sell or trade to a related party a number of blocks of stock or pieces of property in a lump sum, you must figure the gain or loss separately for each block of stock or piece of property. The gain on each item may be taxable. However, you can’t deduct the loss on any item. Also, you can’t reduce gains from the sales of any of these items by losses on the sales of any of the other items.

Indirect transactions.

You can’t deduct your loss on the sale of stock through your broker if, under a prearranged plan, a related party buys the same stock you had owned. This doesn’t apply to a trade between related parties through an exchange that is purely coincidental and isn’t prearranged.

Constructive ownership of stock.

In determining whether a person directly or indirectly owns any of the outstanding stock of a corporation, the following rules apply.

Rule 1.

 

Stock directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries.

Rule 2.

 

An individual is considered to own the stock directly or indirectly owned by or for his or her family. Family includes only brothers and sisters, half-brothers and half-sisters, spouse, ancestors, and lineal descendants.

Rule 3.

 

An individual owning, other than by applying rule 2, any stock in a corporation is considered to own the stock directly or indirectly owned by or for his or her partner.

Rule 4.

 

When applying rule 1, 2, or 3, stock constructively owned by a person under rule 1 is treated as actually owned by that person. But stock constructively owned by an individual under rule 2 or rule 3 isn’t treated as owned by that individual for again applying either rule 2 or rule 3 to make another person the constructive owner of the stock.

Property received from a related party.

 

If you sell or trade at a gain property you acquired from a related party, you recognize the gain only to the extent it is more than the loss previously disallowed to the related party. This rule applies only if you are the original transferee and you acquired the property by purchase or exchange. This rule doesn’t apply if the related party’s loss was disallowed because of the wash sale rules described in chapter 4 of Pub. 550 under Wash Sales. See Example 1 below.

If you sell or trade at a loss property you acquired from a related party, you can’t recognize the loss that wasn’t allowed to the related party. See Example 2 below.

Example 1.

Your brother sells you stock for $7,600. His cost basis is $10,000. Your brother can’t deduct the loss of $2,400. Later, you sell the same stock to an unrelated party for $10,500, realizing a gain of $2,900. Your reportable gain is $500 (the $2,900 gain minus the $2,400 loss not allowed to your brother).

Example 2.

If, in Example 1, you sold the stock for $6,900 instead of $10,500, your recognized loss is only $700 (your $7,600 basis minus $6,900). You can’t deduct the loss that wasn’t allowed to your brother.

 

Capital Gains and Losses

This section discusses the tax treatment of gains and losses from different types of investment transactions.

Character of gain or loss.

 

You need to classify your gains and losses as either ordinary or capital gains or losses. You then need to classify your capital gains and losses as either short term or long term. If you have long-term gains and losses, you must identify your 28% rate gains and losses. If you have a net capital gain, you must also identify any unrecaptured section 1250 gain.

The correct classification and identification helps you figure the limit on capital losses and the correct tax on capital gains. Reporting capital gains and losses is explained in chapter 16.

 

Capital or Ordinary Gain or Loss

If you have a taxable gain or a deductible loss from a transaction, it may be either a capital gain or loss or an ordinary gain or loss, depending on the circumstances. Generally, a sale or trade of a capital asset (defined next) results in a capital gain or loss. A sale or trade of a noncapital asset generally results in ordinary gain or loss. Depending on the circumstances, a gain or loss on a sale or trade of property used in a trade or business may be treated as either capital or ordinary, as explained in Pub. 544. In some situations, part of your gain or loss may be a capital gain or loss and part may be an ordinary gain or loss.

 

Capital Assets and Noncapital Assets

For the most part, everything you own and use for personal purposes, pleasure, or investment is a capital asset. Some examples are:

• Stocks or bonds held in your personal account;

 

• A house owned and used by you and your family;

 

• Household furnishings;

 

• A car used for pleasure or commuting;

 

• Coin or stamp collections;

 

• Gems and jewelry; and

 

• Gold, silver, or any other metal.

 

 

Any property you own is a capital asset, except the following noncapital assets.

1. Property held mainly for sale to customers or property that will physically become a part of the merchandise for sale to customers. For an exception, see Capital Asset Treatment for Self-Created Musical Works, later.

 

2. Depreciable property used in your trade or business, even if fully depreciated.

 

3. Real property used in your trade or business.

 

4. A copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property that is:
   1. Created by your personal efforts,
   2. Prepared or produced for you (in the case of a letter, memorandum, or similar property), or
   3. Acquired under circumstances (for example, by gift) entitling you to the basis of the person who created the property or for whom it was prepared or produced.

For an exception to this rule, see Capital Asset Treatment for Self-Created Musical Works , later.

5. Accounts or notes receivable acquired in the ordinary course of a trade or business for services rendered or from the sale of property described in (1).
6. S. Government publications that you received from the government free or for less than the normal sales price, or that you acquired under circumstances entitling you to the basis of someone who received the publications free or for less than the normal sales price.
7. Certain commodities derivative financial instruments held by commodities derivatives dealers.

 

8. Hedging transactions, but only if the transaction is clearly identified as a hedging transaction before the close of the day on which it was acquired, originated, or entered into.

 

9. Supplies of a type you regularly use or consume in the ordinary course of your trade or business.

 

 

 

Investment Property

Investment property is a capital asset. Any gain or loss from its sale or trade is generally a capital gain or loss.

Gold, silver, stamps, coins, gems, etc.

These are capital assets except when they are held for sale by a dealer. Any gain or loss you have from their sale or trade generally is a capital gain or loss.

Stocks, stock rights, and bonds.

All of these (including stock received as a dividend) are capital assets except when held for sale by a securities dealer. However, if you own small business stock, see Losses on Section 1244 (Small Business) Stock , later, and Losses on Small Business Investment Company Stock in chapter 4 of Pub. 550.

 

Personal Use Property

Property held for personal use only, rather than for investment, is a capital asset, and you must report a gain from its sale as a capital gain. However, you can’t deduct a loss from selling personal use property.

 

Capital Asset Treatment for Self-Created Musical Works

You can elect to treat musical compositions and copyrights in musical works as capital assets when you sell or exchange them if:

• Your personal efforts created the property, or
• You acquired the property under circumstances (for example, by gift) entitling you to the basis of the person who created the property or for whom it was prepared or produced.

 

You must make a separate election for each musical composition (or copyright in a musical work) sold or exchanged during the tax year. Make the election by the due date (including extensions) of the income tax return for the tax year of the sale or exchange. Make the election on Form 8949 and your Schedule D (Form 1040) by treating the sale or exchange as the sale or exchange of a capital asset, according to Form 8949, Schedule D (Form 1040), and their separate instructions.

You can revoke the election if you have IRS approval. To get IRS approval, you must submit a request for a letter ruling under the appropriate IRS revenue procedure. See, for example, Revenue Procedure 2017-1, available at IRS.gov/irb/2017-01_IRB/ar07.html#d0e1497. Alternatively, you are granted an automatic 6-month extension from the due date of your income tax return (excluding extensions) to revoke the election, provided you timely file your income tax return, and within this 6-month extension period, you file Form 1040X that treats the sale or exchange as the sale or exchange of property that isn’t a capital asset.

 

Discounted Debt Instruments

Treat your gain or loss on the sale, redemption, or retirement of a bond or other debt instrument originally issued at a discount or bought at a discount as capital gain or loss, except as explained in the following discussions.

Short-term government obligations.

Treat gains on short-term federal, state, or local government obligations (other than tax-exempt obligations) as ordinary income up to your ratable share of the acquisition discount. This treatment applies to obligations with a fixed maturity date not more than 1 year from the date of issue. Acquisition discount is the stated redemption price at maturity minus your basis in the obligation.

However, don’t treat these gains as income to the extent you previously included the discount in income. See Discount on Short-Term Obligations in chapter 1 of Pub. 550.

Short-term nongovernment obligations.

Treat gains on short-term nongovernment obligations as ordinary income up to your ratable share of original issue discount (OID). This treatment applies to obligations with a fixed maturity date of not more than 1 year from the date of issue.

However, to the extent you previously included the discount in income, you don’t have to include it in income again. See Discount on Short-Term Obligations in chapter 1 of Pub. 550.

Tax-exempt state and local government bonds.

If these bonds were originally issued at a discount before September 4, 1982, or you acquired them before March 2, 1984, treat your part of OID as tax-exempt interest. To figure your gain or loss on the sale or trade of these bonds, reduce the amount realized by your part of OID.

If the bonds were issued after September 3, 1982, and acquired after March 1, 1984, increase the adjusted basis by your part of OID to figure gain or loss. For more information on the basis of these bonds, see Discounted Debt Instruments in chapter 4 of Pub. 550.

Any gain from market discount is usually taxable on disposition or redemption of tax-exempt bonds. If you bought the bonds before May 1, 1993, the gain from market discount is capital gain. If you bought the bonds after April 30, 1993, the gain is ordinary income.

You figure the market discount by subtracting the price you paid for the bond from the sum of the original issue price of the bond and the amount of accumulated OID from the date of issue that represented interest to any earlier holders. For more information, see Market Discount Bonds in chapter 1 of Pub. 550.

A loss on the sale or other disposition of a tax-exempt state or local government bond is deductible as a capital loss.

Redeemed before maturity.

If a state or local bond issued before June 9, 1980, is redeemed before it matures, the OID isn’t taxable to you.

If a state or local bond issued after June 8, 1980, is redeemed before it matures, the part of OID earned while you hold the bond isn’t taxable to you. However, you must report the unearned part of OID as a capital gain.

Example.

On July 5, 2006, the date of issue, you bought a 20-year, 6% municipal bond for $800. The face amount of the bond was $1,000. The $200 discount was OID. At the time the bond was issued, the issuer had no intention of redeeming it before it matured. The bond was callable at its face amount beginning 10 years after the issue date.

The issuer redeemed the bond at the end of 11 years (July 5, 2017) for its face amount of $1,000 plus accrued annual interest of $60. The OID earned during the time you held the bond, $73, isn’t taxable. The $60 accrued annual interest also isn’t taxable. However, you must report the unearned part of OID, $127 ($200 − $73 = $127) as a capital gain.

Long-term debt instruments issued after 1954 and before May 28, 1969 (or before July 2, 1982, if a government instrument).

If you sell, trade, or redeem for a gain one of these debt instruments, the part of your gain that isn’t more than your ratable share of the OID at the time of the sale or redemption is ordinary income. The rest of the gain is capital gain. If, however, there was an intention to call the debt instrument before maturity, all of your gain that isn’t more than the entire OID is treated as ordinary income at the time of the sale. This treatment of taxable gain also applies to corporate instruments issued after May 27, 1969, under a written commitment that was binding on May 27, 1969, and at all times thereafter.

Long-term debt instruments issued after May 27, 1969 (or after July 1, 1982, if a government instrument).

If you hold one of these debt instruments, you must include a part of OID in your gross income each year you own the instrument. Your basis in that debt instrument is increased by the amount of OID that you have included in your gross income. See Original Issue Discount (OID) in chapter 7 for information about OID that you must report on your tax return.

If you sell or trade the debt instrument before maturity, your gain is a capital gain. However, if at the time the instrument was originally issued there was an intention to call it before its maturity, your gain generally is ordinary income to the extent of the entire OID reduced by any amounts of OID previously includible in your income. In this case, the rest of the gain is capital gain.

Market discount bonds.

If the debt instrument has market discount and you chose to include the discount in income as it accrued, increase your basis in the debt instrument by the accrued discount to figure capital gain or loss on its disposition. If you didn’t choose to include the discount in income as it accrued, you must report gain as ordinary interest income up to the instrument’s accrued market discount. The rest of the gain is capital gain. See Market Discount Bonds in chapter 1 of Pub. 550.

A different rule applies to market discount bonds issued before July 19, 1984, and purchased by you before May 1, 1993. See Market discount bonds under Discounted Debt Instruments in chapter 4 of Pub. 550.

Retirement of debt instrument.

Any amount you receive on the retirement of a debt instrument is treated in the same way as if you had sold or traded that instrument.

Notes of individuals.

If you hold an obligation of an individual issued with OID after March 1, 1984, you generally must include the OID in your income currently, and your gain or loss on its sale or retirement is generally capital gain or loss. An exception to this treatment applies if the obligation is a loan between individuals and all the following requirements are met.

• The lender isn’t in the business of lending money.
• The amount of the loan, plus the amount of any outstanding prior loans, is $10,000 or less.
• Avoiding federal tax isn’t one of the principal purposes of the loan.

 

If the exception applies, or the obligation was issued before March 2, 1984, you don’t include the OID in your income currently. When you sell or redeem the obligation, the part of your gain that isn’t more than your accrued share of OID at that time is ordinary income. The rest of the gain, if any, is capital gain. Any loss on the sale or redemption is capital loss.

 

Deposit in Insolvent or Bankrupt Financial Institution

If you lose money you have on deposit in a bank, credit union, or other financial institution that becomes insolvent or bankrupt, you may be able to deduct your loss in one of three ways.

• Ordinary loss.
• Casualty loss.
• Nonbusiness bad debt (short-term capital loss).

For more information, see Deposit in Insolvent or Bankrupt Financial Institution in chapter 4 of Pub. 550.

 

Sale of Annuity

The part of any gain on the sale of an annuity contract before its maturity date that is based on interest accumulated on the contract is ordinary income.

 

Losses on Section 1244 (Small Business) Stock

You can deduct as an ordinary loss, rather than as a capital loss, your loss on the sale, trade, or worthlessness of section 1244 stock. Report an ordinary loss from the sale, exchange, or worthlessness of section 1244 stock on Form 4797. However, if the total loss is more than the maximum amount that can be treated as an ordinary loss, also report the transaction on Form 8949. See the instructions for Forms 4797 and 8949.

Any gain on section 1244 stock is a capital gain if the stock is a capital asset in your hands. Report the gain on Form 8949. See Losses on Section 1244 (Small Business) Stock in chapter 4 of Pub. 550.

 

For more information on Form 8949 and Schedule D (Form 1040), see Reporting Capital Gains and Losses in chapter 16. See also Schedule D (Form 1040), Form 8949, and their separate instructions.

 

Holding Period

If you sold or traded investment property, you must determine your holding period for the property. Your holding period determines whether any capital gain or loss was a short-term or long-term capital gain or loss.

Long-term or short-term.

If you hold investment property more than 1 year, any capital gain or loss is a long-term capital gain or loss. If you hold the property 1 year or less, any capital gain or loss is a short-term capital gain or loss.

To determine how long you held the investment property, begin counting on the date after the day you acquired the property. The day you disposed of the property is part of your holding period.

Example.

If you bought investment property on February 3, 2016, and sold it on February 3, 2017, your holding period isn’t more than 1 year and you have a short-term capital gain or loss. If you sold it on February 6, 2017, your holding period is more than 1 year and you will have a long-term capital gain or loss.

Securities traded on established market.

For securities traded on an established securities market, your holding period begins the day after the trade date you bought the securities, and ends on the trade date you sold them.

 

Don’t confuse the trade date with the settlement date, which is the date by which the stock must be delivered and payment must be made.

Example.

You are a cash method, calendar year taxpayer. You sold stock on December 30, 2017. According to the rules of the stock exchange, the sale was closed by delivery of the stock and payment of the sale price in January 2018. Report your gain or loss on your 2017 return, even though you received the payment in 2018. The gain or loss is long term or short term depending on whether you held the stock more than 1 year. Your holding period ended on December 30.

U.S. Treasury notes and bonds.

 

The holding period of U.S. Treasury notes and bonds sold at auction on the basis of yield starts the day after the Secretary of the Treasury, through news releases, gives notification of acceptance to successful bidders. The holding period of U.S. Treasury notes and bonds sold through an offering on a subscription basis at a specified yield starts the day after the subscription is submitted.

Automatic investment service.

In determining your holding period for shares bought by the bank or other agent, full shares are considered bought first and any fractional shares are considered bought last. Your holding period starts on the day after the bank’s purchase date. If a share was bought over more than one purchase date, your holding period for that share is a split holding period. A part of the share is considered to have been bought on each date that stock was bought by the bank with the proceeds of available funds.

Nontaxable trades.

If you acquire investment property in a trade for other investment property and your basis for the new property is determined, in whole or in part, by your basis in the old property, your holding period for the new property begins on the day following the date you acquired the old property.

Property received as a gift.

If you receive a gift of property and your basis is determined by the donor’s adjusted basis, your holding period is considered to have started on the same day the donor’s holding period started.

If your basis is determined by the fair market value of the property, your holding period starts on the day after the date of the gift.

Inherited property.

 

Generally, if you inherited investment property, your capital gain or loss on any later disposition of that property is long-term capital gain or loss. This is true regardless of how long you actually held the property.

Real property bought.

To figure how long you have held real property bought under an unconditional contract, begin counting on the day after you received title to it or on the day after you took possession of it and assumed the burdens and privileges of ownership, whichever happened first. However, taking delivery or possession of real property under an option agreement isn’t enough to start the holding period. The holding period can’t start until there is an actual contract of sale. The holding period of the seller can’t end before that time.

Real property repossessed.

If you sell real property but keep a security interest in it, and then later repossess the property under the terms of the sales contract, your holding period for a later sale includes the period you held the property before the original sale and the period after the repossession. Your holding period doesn’t include the time between the original sale and the repossession. That is, it doesn’t include the period during which the first buyer held the property. However, the holding period for any improvements made by the first buyer begins at the time of repossession.

Stock dividends.

The holding period for stock you received as a taxable stock dividend begins on the date of distribution.

The holding period for new stock you received as a nontaxable stock dividend begins on the same day as the holding period of the old stock. This rule also applies to stock acquired in a “spin-off,” which is a distribution of stock or securities in a controlled corporation.

Nontaxable stock rights.

Your holding period for nontaxable stock rights begins on the same day as the holding period of the underlying stock. The holding period for stock acquired through the exercise of stock rights begins on the date the right was exercised.

 

Nonbusiness Bad Debts

If someone owes you money that you can’t collect, you have a bad debt. You may be able to deduct the amount owed to you when you figure your tax for the year the debt becomes worthless.

Generally, nonbusiness bad debts are bad debts that didn’t come from operating your trade or business, and are deductible as short-term capital losses. To be deductible, nonbusiness bad debts must be totally worthless. You can’t deduct a partly worthless nonbusiness debt.

Genuine debt required.

 

A debt must be genuine for you to deduct a loss. A debt is genuine if it arises from a debtor-creditor relationship based on a valid and enforceable obligation to repay a fixed or determinable sum of money.

Basis in bad debt required.

To deduct a bad debt, you must have a basis in it—that is, you must have already included the amount in your income or loaned out your cash. For example, you can’t claim a bad debt deduction for court-ordered child support not paid to you by your former spouse. If you are a cash method taxpayer (as most individuals are), you generally can’t take a bad debt deduction for unpaid salaries, wages, rents, fees, interest, dividends, and similar items.

When deductible.

You can take a bad debt deduction only in the year the debt becomes worthless. You don’t have to wait until a debt is due to determine whether it is worthless. A debt becomes worthless when there is no longer any chance that the amount owed will be paid.

It isn’t necessary to go to court if you can show that a judgment from the court would be uncollectible. You must only show that you have taken reasonable steps to collect the debt. Bankruptcy of your debtor is generally good evidence of the worthlessness of at least a part of an unsecured and unpreferred debt.

How to report bad debts.

Deduct nonbusiness bad debts as short-term capital losses on Form 8949.

 

Make sure you report your bad debt(s) (and any other short-term transactions for which you didn’t receive a Form 1099-B) on Form 8949, Part I, with box C checked.

 

For more information on Form 8949 and Schedule D (Form 1040), see Reporting Capital Gains and Losses in chapter 16. See also Schedule D (Form 1040), Form 8949, and their separate instructions.

For each bad debt, attach a statement to your return that contains:

• A description of the debt, including the amount, and the date it became due;
• The name of the debtor, and any business or family relationship between you and the debtor;
• The efforts you made to collect the debt; and
• Why you decided the debt was worthless. For example, you could show that the borrower has declared bankruptcy, or that legal action to collect would probably not result in payment of any part of the debt.

 

Filing a claim for refund.

 

If you don’t deduct a bad debt on your original return for the year it becomes worthless, you can file a claim for a credit or refund due to the bad debt. To do this, use Form 1040X to amend your return for the year the debt became worthless. You must file it within 7 years from the date your original return for that year had to be filed, or 2 years from the date you paid the tax, whichever is later. For more information about filing a claim, see Amended Returns and Claims for Refund in chapter 1.

Additional information.

 

For more information, see Nonbusiness Bad Debts in Pub. 550. For information on business bad debts, see chapter 10 of Pub. 535.

 

Wash Sales

You can’t deduct losses from sales or trades of stock or securities in a wash sale.

A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:

1. Buy substantially identical stock or securities,
2. Acquire substantially identical stock or securities in a fully taxable trade,
3. Acquire a contract or option to buy substantially identical stock or securities, or
4. Acquire substantially identical stock for your individual retirement account (IRA) or Roth IRA.

 

If your loss was disallowed because of the wash sale rules, add the disallowed loss to the cost of the new stock or securities (except in (4) above). The result is your basis in the new stock or securities. This adjustment postpones the loss deduction until the disposition of the new stock or securities. Your holding period for the new stock or securities includes the holding period of the stock or securities sold.

For more information, see Wash Sales in chapter 4 of Pub. 550.

 

Rollover of Gain From Publicly Traded Securities

You may qualify for a tax-free rollover of certain gains from the sale of publicly traded securities. This means that if you buy certain replacement property and make the choice described in this section, you postpone part or all of your gain.

You postpone the gain by adjusting the basis of the replacement property as described in Basis of replacement property , later. This postpones your gain until the year you dispose of the replacement property.

You qualify to make this choice if you meet all the following tests.

• You sell publicly traded securities at a gain. Publicly traded securities are securities traded on an established securities market.
• Your gain from the sale is a capital gain.
• During the 60-day period beginning on the date of the sale, you buy replacement property. This replacement property must be either common stock of, or a partnership interest in a specialized small business investment company (SSBIC). This is any partnership or corporation licensed by the Small Business Administration under section 301(d) of the Small Business Investment Act of 1958, as in effect on May 13, 1993.

 

Amount of gain recognized.

 

If you make the choice described in this section, you must recognize gain only up to the following amount.

• The amount realized on the sale, minus
• The cost of any common stock or partnership interest in an SSBIC that you bought during the 60-day period beginning on the date of sale (and didn’t previously take into account on an earlier sale of publicly traded securities).

If this amount is less than the amount of your gain, you can postpone the rest of your gain, subject to the limit described next. If this amount is equal to or more than the amount of your gain, you must recognize the full amount of your gain.

Limit on gain postponed.

 

The amount of gain you can postpone each year is limited to the smaller of:

• $50,000 ($25,000 if you are married and file a separate return); or
• $500,000 ($250,000 if you are married and file a separate return), minus the amount of gain you postponed for all earlier years.

 

Basis of replacement property.

 

You must subtract the amount of postponed gain from the basis of your replacement property.

How to report and postpone gain.

 

See How to report and postpone gain under Rollover of Gain From Publicly Traded Securities in chapter 4 of Pub. 550 for details.

15. Selling Your Home

 

What’s New

 

At the time this publication went to print, Congress was considering legislation that would do the following.

1. Provide additional tax relief for those affected by Hurricane Harvey, Irma, or Maria, and tax relief for those affected by other 2017 disasters, such as the California wildfires.
2. Extend certain tax benefits that expired at the end of 2016 and that currently can’t be claimed on your 2017 tax return.
3. Change certain other tax provisions.

To learn whether this legislation was enacted resulting in changes that affect your 2017 tax return, go to Recent Developments at IRS.gov/Pub17.

 

Reminder

Home sold with undeducted points. If you haven’t deducted all the points you paid to secure a mortgage on your old home, you may be able to deduct the remaining points in the year of the sale. See Mortgage ending early under Points in chapter 23.

 

Introduction

This chapter explains the tax rules that apply when you sell your main home. In most cases, your main home is the one in which you live most of the time.

If you sold your main home in 2017, you may be able to exclude from income any gain up to a limit of $250,000 ($500,000 on a joint return in most cases). See Excluding the Gain , later. Generally, if you can exclude all the gain, you don’t need to report the sale on your tax return.

If you have gain that is more than the exclusion amount or that otherwise can’t be excluded, then you have taxable gain. Report it on Form 8949, Sales and Other Dispositions of Capital Assets, and Schedule D (Form 1040). You may also have to complete Form 4797, Sales of Business Property. See Reporting the Sale , later.

If you have a loss on the sale, you generally can’t deduct it on your return. However, you may need to report it. See Reporting the Sale , later.

The following are main topics in this chapter.

• Figuring gain or loss.
• Excluding the gain.
• Ownership and use tests.
• Reporting the sale.

Other topics include the following.

• Business use or rental of home.
• Recapturing a federal mortgage subsidy.

 

 

Useful Items – You may want to see:

Publication

• 523 Selling Your Home
• 530 Tax Information for Homeowners
• 547Casualties, Disasters, and Thefts

Form (and Instructions)

• Schedule D (Form 1040) Capital Gains and Losses
• 982Reduction of Tax Attributes Due to Discharge of Indebtedness
• 8828 Recapture of Federal Mortgage Subsidy
• 8949Sales and Other Dispositions of Capital Assets

 

 

Main Home

This section explains the term “main home.” Usually, the home you live in most of the time is your main home and can be a:

• House,
• Houseboat,
• Mobile home,
• Cooperative apartment, or

 

To exclude gain under the rules of this chapter, in most cases, you must have owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date of sale.

Land.

If you sell the land on which your main home is located, but not the house itself, you can’t exclude any gain you have from the sale of the land. However, if you sell vacant land that is used as part of your main home and that is adjacent to the land on which your home sits, you may be able to exclude the gain from the sale under certain circumstances. See Pub. 523 for more information.

Example.

You buy a piece of land and move your main home to it. Then you sell the land on which your main home was located. This sale isn’t considered a sale of your main home, and you can’t exclude any gain on the sale of the land.

More than one home.

If you have more than one home, you can exclude gain only from the sale of your main home. You must include in income gain from the sale of any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time during the year.

Example 1.

You own two homes, one in New York and one in Florida. From 2013 through 2017, you live in the New York home for 7 months and in the Florida residence for 5 months of each year. In the absence of facts and circumstances indicating otherwise, the New York home is your main home. You would be eligible to exclude the gain from the sale of the New York home but you wouldn’t be eligible to exclude the gain on the Florida home in 2017.

Example 2.

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

Example 3.

You own two homes, one in Virginia and one in New Hampshire. In 2013 and 2014, you lived in the Virginia home. In 2015 and 2016, you lived in the New Hampshire home. In 2017, you lived again in the Virginia home. Your main home in 2013, 2014, and 2017 is the Virginia home. Your main home in 2015 and 2016 is the New Hampshire home. You would be eligible to exclude gain from the sale of either home (but not both) in 2017.

Property used partly as your main home.

 

If you use only part of the property as your main home, the rules discussed in this publication apply only to the gain or loss on the sale of that part of the property. For details, seeBusiness Use or Rental of Home , later.

 

Figuring Gain or Loss

To figure the gain or loss on the sale of your main home, you must know the selling price, the amount realized, and the adjusted basis. Subtract the adjusted basis from the amount realized to get your gain or loss.

		Selling price
	−	Selling expenses
		Amount realized

 

		Amount realized
	−	Adjusted basis
		Gain or loss

 

 

Selling Price

The selling price is the total amount you receive for your home. It includes money and the fair market value of any other property or any other services you receive and all notes, mortgages, or other debts assumed by the buyer as part of the sale.

Payment by employer.

You may have to sell your home because of a job transfer. If your employer pays you for a loss on the sale or for your selling expenses, don’t include the payment as part of the selling price. Your employer will include it as wages in box 1 of your Form W-2, and you will include it in your income on Form 1040, line 7.

Option to buy.

If you grant an option to buy your home and the option is exercised, add the amount you receive for the option to the selling price of your home. If the option isn’t exercised, you must report the amount as ordinary income in the year the option expires. Report this amount on Form 1040, line 21.

Form 1099-S.

If you received Form 1099-S, Proceeds From Real Estate Transactions, box 2 (Gross proceeds) should show the total amount you received for your home.

However, box 2 won’t include the fair market value of any services or property other than cash or notes you received or will receive. Instead, box 4 will be checked to indicate your receipt or expected receipt of these items.

 

Amount Realized

The amount realized is the selling price minus selling expenses.

Selling expenses.

 

Selling expenses include:

• Commissions;
• Advertising fees;
• Legal fees; and
• Loan charges paid by the seller, such as loan placement fees or “points.”

 

 

Adjusted Basis

While you owned your home, you may have made adjustments (increases or decreases) to the basis. This adjusted basis must be determined before you can figure gain or loss on the sale of your home. For information on how to figure your home’s adjusted basis, see Determining Basis , later.

 

Amount of Gain or Loss

To figure the amount of gain or loss, compare the amount realized to the adjusted basis.

Gain on sale.

 

If the amount realized is more than the adjusted basis, the difference is a gain and, except for any part you can exclude, in most cases is taxable.

Loss on sale.

 

If the amount realized is less than the adjusted basis, the difference is a loss. A loss on the sale of your main home can’t be deducted.

Jointly owned home.

If you and your spouse sell your jointly owned home and file a joint return, you figure your gain or loss as one taxpayer.

Separate returns.

 

If you file separate returns, each of you must figure your own gain or loss according to your ownership interest in the home. Your ownership interest is generally determined by state law.

Joint owners not married.

 

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

 

Dispositions Other Than Sales

Some special rules apply to other dispositions of your main home.

Foreclosure or repossession.

If your home was foreclosed on or repossessed, you have a disposition. See Pub. 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments, to determine if you have ordinary income, gain, or loss.

Abandonment.

If you abandon your home, see Pub. 4681 to determine if you have ordinary income, gain, or loss.

Trading (exchanging) homes.

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

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 home priced at $80,000. This is treated as a sale of your old home for $50,000 with a gain of $9,000 ($50,000 – $41,000).

If the dealer had allowed you $27,000 and assumed your unpaid mortgage of $23,000 on your old home, your sales price would still be $50,000 (the $27,000 trade-in allowed plus the $23,000 mortgage assumed).

Transfer to spouse.

If you transfer your home to your spouse or you transfer it to your former spouse incident to your divorce, in most cases, you have no gain or loss. This is true even if you receive cash or other consideration for the home. As a result, the rules in this chapter don’t apply.

More information.

 

If you need more information, see Pub. 523 and Property Settlements in Pub. 504, Divorced or Separated Individuals.

Involuntary conversion.

 

You have a disposition when your home is destroyed or condemned and you receive other property or money in payment, such as insurance or a condemnation award. This is treated as a sale and you may be able to exclude all or part of any gain from the destruction or condemnation of your home, as explained later under Special Situations .

 

Determining Basis

You need to know your basis in your home to figure any gain or loss when you sell it. Your basis in your home is determined by how you got the home. Generally, your basis is its cost if you bought it or built it. If you got it in some other way (inheritance, gift, etc.), your basis is generally either its fair market value when you received it or the adjusted basis of the previous owner.

While you owned your home, you may have made adjustments (increases or decreases) to your home’s basis. The result of these adjustments is your home’s adjusted basis, which is used to figure gain or loss on the sale of your home. See Adjusted Basis , later.

You can find more information on basis and adjusted basis in chapter 13 of this publication and in Pub. 523.

 

Cost as Basis

The cost of property is the amount you paid for it in cash, debt obligations, other property, or services.

Purchase.

 

If you bought your home, your basis is its cost to you. This includes the purchase price and certain settlement or closing costs. In most cases, your purchase price 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. If you build, or contract to build, a new home, your purchase price can include costs of construction, as discussed in Pub. 523.

Settlement fees or closing costs.

When you bought your home, you may have paid settlement fees or closing costs in addition to the contract price of the property. You can include in your basis some of the settlement fees and closing costs you paid for buying the home, but not the fees and costs for getting a mortgage loan. A fee paid for buying the home is any fee you would have had to pay even if you paid cash for the home (that is, without the need for financing).

Chapter 13 lists some of the settlement fees and closing costs that you can include in the basis of property, including your home. It also lists some settlement costs that can’t be included in basis.

Also see Pub. 523 for additional items and a discussion of basis other than cost.

 

Adjusted Basis

Adjusted basis is your cost or other basis increased or decreased by certain amounts. To figure your adjusted basis, see Pub. 523.

 

If you are selling a home in which you acquired an interest from a decedent who died in 2010, see Pub. 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, to determine your basis.

Increases to basis.

 

These include the following.

• Additions and other improvements that have a useful life of more than 1 year.
• Special assessments for local improvements.
• Amounts you spent after a casualty to restore damaged property.

 

Improvements.

 

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

For example, putting a recreation room or another bathroom in your unfinished basement, putting up a new fence, putting in new plumbing or wiring, putting on a new roof, or paving your unpaved driveway is an improvement. An addition to your house, such as a new deck, a sun room, or a new garage, is also an improvement.

Repairs.

 

These maintain your home in good condition but don’t add to its value or prolong its life. You don’t add their cost to the basis of your property.

Examples of repairs include repainting your house inside or outside, fixing your gutters or floors, repairing leaks or plastering, and replacing broken window panes.

Decreases to basis.

 

These include the following.

• Discharge of qualified principal residence indebtedness that was excluded from income before January 1, 2017.
• Some or all of the cancellation of debt income that was excluded due to your bankruptcy or insolvency. For details, see Pub. 4681.
• Gain you postponed from the sale of a previous home before May 7, 1997.
• Deductible casualty losses.
• Insurance payments you received or expect to receive for casualty losses.
• Payments you received for granting an easement or right-of-way.
• Depreciation allowed or allowable if you used your home for business or rental purposes.
• Energy-related credits allowed for expenditures made on the residence. (Reduce the increase in basis otherwise allowable for expenditures on the residence by the amount of credit allowed for those expenditures.)
• Adoption credit you claimed for improvements added to the basis of your home.
• Nontaxable payments from an adoption assistance program of your employer you used for improvements you added to the basis of your home.
• Energy conservation subsidy excluded from your gross income because you received it (directly or indirectly) from a public utility after 1992 to buy or install any energy conservation measure. An energy conservation measure is an installation or modification primarily designed either to reduce consumption of electricity or natural gas or to improve the management of energy demand for a home.
• District of Columbia first-time homebuyer credit (allowed on the purchase of a principal residence in the District of Columbia beginning on August 5, 1997, and before January 1, 2012).
• General sales taxes (beginning in 2004) claimed as an itemized deduction on Schedule A (Form 1040) that were imposed on the purchase of personal property, such as a houseboat used as your home or a mobile home.

 

 

Recordkeeping. You should keep records to prove your home’s adjusted basis. Ordinarily, you must keep records for 3 years after the due date for filing your return for the tax year in which you sold your home. But if you sold a home before May 7, 1997, and postponed tax on any gain, the basis of that home affects the basis of the new home you bought. Keep records proving the basis of both homes as long as they are needed for tax purposes.

The records you should keep include:

• Proof of the home’s purchase price and purchase expenses;
• Receipts and other records for all improvements, additions, and other items that affect the home’s adjusted basis;
• Any worksheets or other computations you used to figure the adjusted basis of the home you sold, the gain or loss on the sale; the exclusion, and the taxable gain;
• Any Form 982 you filed to report any discharge of qualified principal residence indebtedness;
• Any Form 2119, Sale of Your Home, you filed to postpone gain from the sale of a previous home before May 7, 1997; and
• Any worksheets you used to prepare Form 2119, such as the Adjusted Basis of Home Sold Worksheet or the Capital Improvements Worksheet from the Form 2119 instructions, or other source of computations.

 

 

Excluding the Gain

You may qualify to exclude from your income all or part of any gain from the sale of your main home. This means that, if you qualify, you won’t have to pay tax on the gain up to the limit described under Maximum Exclusion , next. To qualify, you must meet the ownership and use tests described later.

You can choose not to take the exclusion by including the gain from the sale in your gross income on your tax return for the year of the sale.

See Pub. 523 to figure the amount of your exclusion and your taxable gain, if any.

 

If you have any taxable gain from the sale of your home, you may have to increase your withholding or make estimated tax payments. See Pub. 505, Tax Withholding and Estimated Tax.

 

Maximum Exclusion

You can exclude up to $250,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if all of the following are true.

• You meet the ownership test.
• You meet the use test.
• During the 2-year period ending on the date of the sale, you didn’t exclude gain from the sale of another home.

 

For details on gain allocated to periods of nonqualified use, see Periods of nonqualified use , later.

You may be able to exclude up to $500,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if you are married, file a joint return, and meet the requirements listed in the discussion of the special rules for joint returns, later, under Married Persons .

 

Ownership and Use Tests

To claim the exclusion, you must meet the ownership and use tests. This means that during the 5-year period ending on the date of the sale, you must 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).

 

Exception.

 

If you owned and lived in the property as your main home for less than 2 years, you can still claim an exclusion in some cases. However, the maximum amount you may be able to exclude will be reduced. SeeReduced Maximum Exclusion , later.

Example 1—Home owned and occupied for at least 2 years.

Mya bought and moved into her main home in September 2015. She sold the home at a gain in October 2017. During the 5-year period ending on the date of sale in October 2017, she owned and lived in the home for more than 2 years. She meets the ownership and use tests.

Example 2—Ownership test met but use test not met.

Ayden bought a home, lived in it for 6 months, moved out, and never occupied the home again. He later sold the home for a gain. He owned the home during the entire 5-year period ending on the date of sale. He meets the ownership test but not the use test. He can’t exclude any part of his gain on the sale unless he qualified for a reduced maximum exclusion (explained later).

 

Period of Ownership and Use

The required 2 years of ownership and use during the 5-year period ending on the date of the sale don’t have to be continuous nor do they both have to occur at the same time.

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 (365 × 2) during the 5-year period ending on the date of sale.

Temporary absence.

 

Short temporary absences for vacations or other seasonal absences, even if you rent out the property during the absences, are counted as periods of use. The following examples assume that thereduced maximum exclusion (discussed later) doesn’t apply to the sales.

Example 1.

David Johnson, who is single, bought and moved into his home on February 1, 2015. Each year during 2015 and 2016, David left his home for a 2-month summer vacation. David sold the house on March 1, 2017. Although the total time David used his home is less than 2 years (21 months), he meets the requirement and may exclude gain. The 2-month vacations are short temporary absences and are counted as periods of use in determining whether David used the home for the required 2 years.

Example 2.

Professor Paul Beard, who is single, bought and moved into a house on August 19, 2014. He lived in it as his main home continuously until January 5, 2016, when he went abroad for a 1-year sabbatical leave. On February 5, 2017, 1 month after returning from the leave, Paul sold the house at a gain. Because his leave wasn’t a short temporary absence, he can’t include the period of leave to meet the 2-year use test. He can’t exclude any part of his gain, because he didn’t use the residence for the required 2 years.

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.

Beginning in 2006, Helen Jones lived in a rented apartment. The apartment building was later converted to condominiums, and she bought her same apartment on December 2, 2014. In 2015, Helen became ill and on April 14 of that year she moved to her daughter’s home. On July 7, 2017, while still living in her daughter’s home, she sold her condominium.

Helen can exclude gain on the sale of her condominium because she met the ownership and use tests during the 5-year period from July 8, 2012, to July 7, 2017, the date she sold the condominium. She owned her condominium from December 2, 2014, to July 7, 2017 (more than 2 years). She lived in the property from July 8, 2012 (the beginning of the 5-year period), to April 14, 2015 (more than 2 years).

The time Helen lived in her daughter’s home during the 5-year period can be counted toward her period of ownership, and the time she lived in her rented apartment during the 5-year period can be counted toward her period of use.

Cooperative apartment.

If you sold stock as a tenant-stockholder in a cooperative housing corporation, the ownership and use tests are met if, during the 5-year period ending on the date of sale, you:

• Owned the stock for at least 2 years, and
• Lived in the house or apartment that the stock entitles you to occupy as your main home for at least 2 years.

 

 

Exceptions to Ownership and Use Tests

The following sections contain exceptions to the ownership and use tests for certain taxpayers.

Exception for individuals with a disability.

 

There is an exception to the use test if:

• You become physically or mentally unable to care for yourself, and
• You owned and lived in your home as your main home for a total of at least 1 year during the 5-year period before the sale of your home.

Under this exception, you are considered to live in your home during any time within the 5-year period that you own the home and live in a facility (including a nursing home) 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.

Previous home destroyed or condemned.

For the ownership and use tests, 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 replacement home on whose sale 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.

Members of the uniformed services or Foreign Service, employees of the intelligence community, or employees or volunteers of the Peace Corps.

You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve on “qualified official extended duty” as a member of the uniformed services or Foreign Service of the United States, or as an employee of the intelligence community. You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve outside the United States either as an employee of the Peace Corps on “qualified official extended duty” or as an enrolled volunteer or volunteer leader of the Peace Corps. This means that you may be able to meet the 2-year use test even if, because of your service, you didn’t actually live in your home for at least the required 2 years during the 5-year period ending on the date of sale.

If this helps you qualify to exclude gain, you can choose to have the 5-year test period suspended by filing a return for the year of sale that doesn’t include the gain.

For more information about the suspension of the 5-year test period, see Service, Intelligence, and Peace Corps Personnel in Pub. 523.

 

Married Persons

If you and your spouse file a joint return for the year of sale and one spouse meets the ownership and use tests, you can exclude up to $250,000 of the gain. (But see Special rules for joint returns next.)

Special rules for joint returns.

 

You can exclude up to $500,000 of the gain on the sale of your main home if all of the following are true.

• You are married and file a joint return for the year.
• Either you or your spouse meets the ownership test.
• Both you and your spouse meet the use test.
• During the 2-year period ending on the date of the sale, neither you nor your spouse excluded gain from the sale of another home.

If either spouse doesn’t satisfy all these requirements, the maximum exclusion that can be claimed by the couple is the total of the maximum exclusions that each spouse would qualify for if not married and the amounts were figured separately. For this purpose, each spouse is treated as owning the property during the period that either spouse owned the property.

Example 1—One spouse sells a home.

Emily sells her home in June 2017 for a gain of $300,000. She marries Jamie later in the year. She meets the ownership and use tests, but Jamie doesn’t. Emily can exclude up to $250,000 of gain on a separate or joint return for 2017. The $500,000 maximum exclusion for certain joint returns doesn’t apply because Jamie doesn’t meet the use test.

Example 2—Each spouse sells a home.

The facts are the same as in Example 1 , except that Jamie also sells a home in 2017 for a gain of $200,000 before he marries Emily. He meets the ownership and use tests on his home, but Emily doesn’t. Emily can exclude $250,000 of gain and Jamie can exclude $200,000 of gain on the respective sales of their individual homes. However, Emily can’t use Jamie’s unused exclusion to exclude more than $250,000 of gain. Therefore, Emily and Jamie must recognize $50,000 of gain on the sale of Emily’s home. The $500,000 maximum exclusion for certain joint returns doesn’t apply because Emily and Jamie don’t both meet the use test for the same home.

Sale of main home by surviving spouse.

 

If your spouse died and you didn’t remarry before the date of sale, you are considered to have owned and lived in the property as your main home during any period of time when your spouse owned and lived in it as a main home.

If you meet all of the following requirements, you may qualify to exclude up to $500,000 of any gain from the sale or exchange of your main home.

• The sale or exchange took place after 2007.
• The sale or exchange took place no more than 2 years after the date of death of your spouse.
• You haven’t remarried.
• You and your spouse met the use test at the time of your spouse’s death.
• You or your spouse met the ownership test at the time of your spouse’s death.
• Neither you nor your spouse excluded gain from the sale of another home during the last 2 years.

 

Example.

 

Harry owned and used a house as his main home since 2013. Harry and Wilma married on July 1, 2017, and from that date they use Harry’s house as their main home. Harry died on August 15, 2017, and Wilma inherited the property. Wilma sold the property on September 2, 2017, at which time she hadn’t remarried. Although Wilma owned and used the house for less than 2 years, Wilma is considered to have satisfied the ownership and use tests because her period of ownership and use includes the period that Harry owned and used the property before death.

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 live in it under a divorce or separation instrument and uses it as his or her main home.

 

 

Reduced Maximum Exclusion

If you fail to meet the requirements to qualify for the $250,000 or $500,000 exclusion, you may still qualify for a reduced exclusion. This applies to those who:

• Fail to meet the ownership and use tests, or
• Have used the exclusion within 2 years of selling their current home.

 

In both cases, to qualify for a reduced exclusion, the sale of your main home must be due to one of the following reasons.

• A change in place of employment.
• Unforeseen circumstances.

 

Unforeseen circumstances.

 

The sale of your main home is because of an unforeseen circumstance if your primary reason for the sale is the occurrence of an event that you couldn’t reasonably have anticipated before buying and occupying your main home.

See Pub. 523 for more information.

 

Business Use or Rental of Home

You may be able to exclude gain from the sale of a home you have used for business or to produce rental income. But you must meet the ownership and use tests.

Periods of nonqualified use.

 

In most cases, gain from the sale or exchange of your main home won’t qualify for the exclusion to the extent that the gains are allocated to periods of nonqualified use. Nonqualified use is any period after 2008 during which neither you nor your spouse (or your former spouse) used the property as a main home with the following exceptions.

Exceptions.

 

A period of nonqualified use doesn’t include:

1. Any portion of the 5-year period ending on the date of the sale or exchange after the last date you (or your spouse) use the property as a main home;
2. Any period (not to exceed an aggregate period of 10 years) during which you (or your spouse) are serving on qualified official extended duty:
   1. As a member of the uniformed services,
   2. As a member of the Foreign Service of the United States, or
   3. As an employee of the intelligence community; and
3. Any other period of temporary absence (not to exceed an aggregate period of 2 years) due to change of employment, health conditions, or such other unforeseen circumstances as may be specified by the IRS.

 

The gain resulting from the sale of the property is allocated between qualified and nonqualified use periods based on the amount of time the property was held for qualified and nonqualified use. Gain from the sale or exchange of a main home allocable to periods of qualified use will continue to qualify for the exclusion for the sale of your main home. Gain from the sale or exchange of property allocable to nonqualified use won’t qualify for the exclusion.

Calculation.

 

To figure the portion of the gain allocated to the period of nonqualified use, multiply the gain by the following fraction.

	Total nonqualified use during the period of ownership after 2008
	Total period of ownership

 

Example 1.

On May 24, 2011, Amy, who is single for all years in this example, bought a house. She moved in on that date and lived in it until May 31, 2013, when she moved out of the house and put it up for rent. The house was rented from June 1, 2013, to March 31, 2015. Amy claimed depreciation deductions in 2013 through 2015 totaling $10,000. Amy moved back into the house on April 1, 2015, and lived there until she sold it on January 28, 2017, for a gain of $200,000. During the 5-year period ending on the date of the sale (January 29, 2012–January 28, 2017), Amy owned and lived in the house for more than 2 years as shown in the following table.

Five-Year Period	Used as Home	Used as Rental
1/29/12 – 5/31/13	16 months
6/1/13 – 3/31/15		22 months
4/1/15 – 1/28/17	21 months
	37 months	22 months

Next, Amy must figure how much of her gain is allocated to nonqualified use and how much is allocated to qualified use. During the period Amy owned the house (2,076 days), her period of nonqualified use was 669 days. Amy divides 669 by 2,076 and obtains a decimal (rounded to at least three decimal places) of 0.322. To figure her gain attributable to the period of nonqualified use, she multiplies $190,000 (the gain not attributable to the $10,000 depreciation deduction) by 0.322. Because the gain attributable to periods of nonqualified use is $61,180, Amy can exclude $128,820 of her gain.

See the worksheet for Taxable Gain on Sale of Home—Completed Example 1 for Amy, later, for how to figure Amy’s taxable gain and exclusion.

 

Worksheet.Taxable Gain on Sale of Home— Completed Example 1 for Amy

Part 1. Gain or (Loss) on Sale
1.		Selling price of home	1.
2.		Selling expenses (including commissions, advertising and legal fees, and seller-paid loan charges)	2.
3.		Subtract line 2 from line 1. This is the amount realized	3.
4.		Adjusted basis of home sold. See Pub. 523	4.
5.		Gain or (loss) on the sale. Subtract line 4 from line 3. If this is a loss, stop here	5.	200,000
Part 2. Exclusion and Taxable Gain
6.		Enter any depreciation allowed or allowable on the property for periods after May 6, 1997. If none, enter -0-	6.	10,000
7.		Subtract line 6 from line 5. If the result is less than zero, enter -0-	7.	190,000
8.		Aggregate number of days of nonqualified use after 2008. If none, enter -0-. If line 8 is equal to zero, skip to line 12 and enter the amount from line 7 on line 12	8.	669
9.		Number of days taxpayer owned the property	9.	2,076
10.		Divide the amount on line 8 by the amount on line 9. Enter the result as a decimal (rounded to at least 3 places). Don’t enter an amount greater than 1.000	10.	0.322
11.		Gain allocated to nonqualified use. (Line 7 multiplied by line 10)	11.	61,180
12.		Gain eligible for exclusion. Subtract line 11 from line 7	12.	128,820
13.		If you qualify to exclude gain on the sale, enter your maximum exclusion. If you qualify for a reduced maximum exclusion, enter your reduced maximum exclusion. If you don’t qualify to exclude gain, enter -0-. See Pub. 523	13.	250,000
14.		Exclusion. Enter the smaller of line 12 or line 13	14.	128,820
15.		Taxable gain. Subtract line 14 from line 5. If the amount on line 6 is more than zero, complete line 16	15.	71,180
16.		Enter the smaller of line 6 or line 15. Enter this amount on line 12 of the Unrecaptured Section 1250 Gain Worksheet in the Instructions for Schedule D (Form 1040)	16.	10,000

Example 2.

William owned and used a house as his main home from 2011 through 2014. On January 1, 2015, he moved to another state. He rented his house from that date until April 29, 2017, when he sold it. During the 5-year period ending on the date of sale (April 30, 2012–April 29, 2017), William owned and lived in the house for more than 2 years. He must report the sale on Form 4797 because it was rental property at the time of sale. Because the period of nonqualified use doesn’t include any part of the 5-year period after the last date William lived in the house, he has no period of nonqualified use. Because he met the ownership and use tests, he can exclude gain up to $250,000. However, he can’t exclude the part of the gain equal to the depreciation he claimed or could have claimed for renting the house, as explained next.

Depreciation after May 6, 1997.

If you were entitled to take depreciation deductions because you used your home for business purposes or as rental property, you can’t exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997. If you can show by adequate records or other evidence that the depreciation allowed was less than the amount allowable, then you may limit the amount of gain recognized to the depreciation allowed. See Pub. 544 for more information.

Property used partly for business or rental.

 

If you used property partly as a home and partly for business or to produce rental income, see Pub. 523.

 

Reporting the Sale

Don’t report the 2017 sale of your main home on your tax return unless:

• You have a gain and don’t qualify to exclude all of it,
• You have a gain and choose not to exclude it, or
• You received Form 1099-S.

 

If any of these conditions apply, report the entire gain or loss. For details on how to report the gain or loss, see the Instructions for Schedule D (Form 1040) and the Instructions for Form 8949.

If you used the home for business or to produce rental income, you may have to use Form 4797 to report the sale of the business or rental part (or the sale of the entire property if used entirely for business or rental). See Pub. 523 and the Instructions for Form 4797 for additional information.

Installment sale.

 

Some sales are made under arrangements that provide for part or all of the selling price to be paid in a later year. These sales are called “installment sales.” If you finance the buyer’s purchase of your home yourself instead of having the buyer get a loan or mortgage from a bank, you probably have an installment sale. You may be able to report the part of the gain you can’t exclude on the installment basis.

Use Form 6252, Installment Sale Income, to report the sale. Enter your exclusion on line 15 of Form 6252.

Seller-financed mortgage.

If you sell your home and hold a note, mortgage, or other financial agreement, the payments you receive in most cases consist of both interest and principal. You must separately report as interest income the interest you receive as part of each payment. If the buyer of your home uses the property as a main or second home, you must also report the name, address, and social security number (SSN) of the buyer on line 1 of Schedule B (Form 1040A or 1040). The buyer must give you his or her SSN, and you must give the buyer your SSN. Failure to meet these requirements may result in a $50 penalty for each failure. If either you or the buyer doesn’t have and isn’t eligible to get an SSN, see Social Security Number (SSN) in chapter 1.

More information.

 

For more information on installment sales, see Pub. 537, Installment Sales.

 

Special Situations

The situations that follow may affect your exclusion.

Sale of home acquired in a like-kind exchange.

You can’t claim the exclusion if:

1. (a) You acquired your home in a like-kind exchange (also known as a section 1031 exchange), or (b) your basis in your home is determined by reference to a previous owner’s basis, and that previous owner acquired the property in a like-kind exchange (for example, the owner acquired the home and then gave it to you as a gift); and
2. You sold the home within 5-years of the date your home was acquired in the like-kind exchange.

Gain from a like-kind exchange isn’t taxable at the time of the exchange. This means that gain won’t be taxed until you sell or otherwise dispose of the property you receive. To defer gain from a like-kind exchange, you must have exchanged business or investment property for business or investment property of a like kind. For more information about like-kind exchanges, see Pub. 544, Sales and Other Dispositions of Assets.

Home relinquished in a like-kind exchange.

 

If you use your main home partly for business or rental purposes and then exchange the home for another property, see Pub. 523.

Expatriates.

You can’t claim the exclusion if the expatriation tax applies to you. The expatriation tax applies to certain U.S. citizens who have renounced their citizenship (and to certain long-term residents who have ended their residency). For more information about the expatriation tax, see Expatriation Tax in chapter 4 of Pub. 519, U.S. Tax Guide for Aliens.

Home destroyed or condemned.

If your home was destroyed or condemned, any gain (for example, because of insurance proceeds you received) qualifies for the exclusion.

Any part of the gain that can’t be excluded (because it’s more than the maximum exclusion) can be postponed under the rules explained in:

• 547, in the case of a home that was destroyed; or
• 544, chapter 1, in the case of a home that was condemned.

 

Sale of remainder interest.

Subject to the other rules in this chapter, you can choose to exclude gain from the sale of a remainder interest in your home. If you make this choice, you can’t choose to exclude gain from your sale of any other interest in the home that you sell separately.

Exception for sales to related persons.

You can’t exclude gain from the sale of a remainder interest in your home to a related person. Related persons include your brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.). Related persons also include certain corporations, partnerships, trusts, and exempt organizations.

 

Recapturing (Paying Back) a Federal Mortgage Subsidy

If you financed your home under a federally subsidized program (loans from tax-exempt qualified mortgage bonds or loans with mortgage credit certificates), you may have to recapture all or part of the benefit you received from that program when you sell or otherwise dispose of your home. You recapture the benefit by increasing your federal income tax for the year of the sale. You may have to pay this recapture tax even if you can exclude your gain from income under the rules discussed earlier; that exclusion doesn’t affect the recapture tax.

Loans subject to recapture rules.

 

The recapture applies to loans that:

1. Came from the proceeds of qualified mortgage bonds, or
2. Were based on mortgage credit certificates.

The recapture also applies to assumptions of these loans.

When recapture applies.

 

Recapture of the federal mortgage subsidy applies only if you meet both of the following conditions.

• You sell or otherwise dispose of your home at a gain within the first 9 years after the date you close your mortgage loan.
• Your income for the year of disposition is more than that year’s adjusted qualifying income for your family size for that year (related to the income requirements a person must meet to qualify for the federally subsidized program).

 

When recapture doesn’t apply.

 

Recapture doesn’t apply in any of the following situations.

• Your mortgage loan was a qualified home improvement loan (QHIL) of not more than $15,000 used for alterations, repairs, and improvements that protect or improve the basic livability or energy efficiency of your home.
• Your mortgage loan was a QHIL of not more than $150,000 in the case of a QHIL used to repair damage from Hurricane Katrina to homes in the hurricane disaster area; a QHIL funded by a qualified mortgage bond that is a qualified Gulf Opportunity Zone Bond; or a QHIL for an owner-occupied home in the Gulf Opportunity Zone (GO Zone), Rita GO Zone, or Wilma GO Zone. For more information, see Pub. 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma. Also see Pub. 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas.
• The home is disposed of as a result of your death.
• You dispose of the home more than 9 years after the date you closed your mortgage loan.
• You transfer the home to your spouse, or to your former spouse incident to a divorce, where no gain is included in your income.
• You dispose of the home at a loss.
• Your home is destroyed by a casualty, and you replace it on its original site within 2 years after the end of the tax year when the destruction happened. The replacement period is extended for main homes destroyed in a federally declared disaster area, a Midwestern disaster area, the Kansas disaster area, and the Hurricane Katrina disaster area. For more information, see Replacement Periodin Pub. 547.
• You refinance your mortgage loan (unless you later meet the conditions listed previously under When recapture applies, earlier).

 

Notice of amounts.

 

At or near the time of settlement of your mortgage loan, you should receive a notice that provides the federally subsidized amount and other information you will need to figure your recapture tax.

How to figure and report the recapture.

 

The recapture tax is figured on Form 8828. If you sell your home and your mortgage is subject to recapture rules, you must file Form 8828 even if you don’t owe a recapture tax. Attach Form 8828 to your Form 1040. For more information, see Form 8828 and its instructions.

16. Reporting Gains and Losses

 

What’s New

 

At the time this publication went to print, Congress was considering legislation that would do the following.

1. Provide additional tax relief for those affected by Hurricane Harvey, Irma, or Maria, and tax relief for those affected by other 2017 disasters, such as California wildfires.
2. Extend certain tax benefits that expired at the end of 2016 and that currently can’t be claimed on your 2017 tax return.
3. Change certain other tax provisions.

To learn whether this legislation was enacted, resulting in changes that affect your 2017 tax return, go to Recent Developments at IRS.gov/Pub17.

 

Introduction

This chapter discusses how to report capital gains and losses from sales, exchanges, and other dispositions of investment property on Form 8949 and Schedule D (Form 1040). The discussion includes the following topics.

• How to report short-term gains and losses.
• How to report long-term gains and losses.
• How to figure capital loss carryovers.
• How to figure your tax on a net capital gain.

 

If you sell or otherwise dispose of property used in a trade or business or for the production of income, see Pub. 544, Sales and Other Dispositions of Assets, before completing Schedule D (Form 1040).

 

Useful Items – You may want to see:

Publication

• 537 Installment Sales
• 544 Sales and Other Dispositions of Assets
• 550 Investment Income and Expenses

Form (and Instructions)

• Schedule D (Form 1040) Capital Gains and Losses
• 4797 Sales of Business Property
• 6252 Installment Sale Income
• 8582 Passive Activity Loss Limitations
• 8949 Sales and Other Dispositions of Capital Assets

 

 

Reporting Capital Gains and Losses

Generally, report capital gains and losses on Form 8949. Complete Form 8949 before you complete line 1b, 2, 3, 8b, 9, or 10 of Schedule D (Form 1040).

Use Form 8949 to report:

• The sale or exchange of a capital asset not reported on another form or schedule,
• Gains from involuntary conversions (other than from casualty or theft) of capital assets not held for business or profit,
• Nonbusiness bad debts, and
• Securities that become worthless.

 

Use Schedule D (Form 1040) to report:

• Overall gain or loss from transactions reported on Form 8949;
• Certain transactions you do not have to report on Form 8949;
• Gain from Form 2439 or 6252 or Part I of Form 4797;
• Gain or loss from Form 4684, 6781, or 8824;
• Gain or loss from a partnership, S corporation, estate, or trust;
• Capital gain distributions not reported directly on your Form 1040; and
• Capital loss carryover from the previous year to the current year.

 

On Form 8949, enter all sales and exchanges of capital assets, including stocks, bonds, etc., and real estate (if not reported on Form 4684, 4797, 6252, 6781, or 8824, or line 1a or 8a of Schedule D (Form 1040)). Include these transactions even if you did not receive a Form 1099-B or 1099-S for the transaction. Report short-term gains or losses in Part I. Report long-term gains or losses in Part II. Use as many Forms 8949 as you need.

Exceptions to filing Form 8949 and Schedule D (Form 1040).

 

There are certain situations where you may not have to file Form 8949 and/or Schedule D (Form 1040).

Exception 1.

 

You do not have to file Form 8949 or Schedule D (Form 1040) if you have no capital losses and your only capital gains are capital gain distributions from Form(s) 1099-DIV, box 2a. If any Form(s) 1099-DIV you receive have an amount in box 2b (unrecaptured section 1250 gain), box 2c (section 1202 gain), or box 2d (collectibles (28%) gain), you do not qualify for this exception.

If you qualify for this exception, report your capital gain distributions directly on line 13 of Form 1040 (and check the box on line 13). Also use the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 instructions to figure your tax. You can report your capital gain distributions on line 10 of Form 1040A, instead of on Form 1040, if you do not have to file Form 1040.

Exception 2.

 

You must file Schedule D (Form 1040), but generally do not have to file Form 8949, if Exception 1above does not apply and your only capital gains and losses are:

• Capital gain distributions;
• A capital loss carryover;
• A gain from Form 2439 or 6252 or Part I of Form 4797;
• A gain or loss from Form 4684, 6781, or 8824;
• A gain or loss from a partnership, S corporation, estate, or trust; or
• Gains and losses from transactions for which you received a Form 1099-B that shows the basis was reported to the IRS and for which you do not need to make any adjustments in column (g) of Form 8949 or enter any codes in column (f) of Form 8949.

 

Installment sales.

You can’t use the installment method to report a gain from the sale of stock or securities traded on an established securities market. You must report the entire gain in the year of sale (the year in which the trade date occurs).

Passive activity gains and losses.

If you have gains or losses from a passive activity, you may also have to report them on Form 8582. In some cases, the loss may be limited under the passive activity rules. Refer to Form 8582 and its instructions for more information about reporting capital gains and losses from a passive activity.

Form 1099-B transactions.

If you sold property, such as stocks, bonds, or certain commodities, through a broker, you should receive a Form 1099-B from the broker. Use the Form 1099-B to complete Form 8949 and/or Schedule D (Form 1040).

If you received a Form 1099-B for a transaction, you usually report the transaction on Form 8949. Report the proceeds shown in box 1d of Form 1099-B in column (d) of either Part I or Part II of Form 8949, whichever applies. Include in column (g) any selling expenses or option premiums not reflected in Form 1099-B, box 1d or box 1e. If you include a selling expense in column (g), enter “E” in column (f). Enter the basis shown in box 1e in column (e). If the basis shown on Form 1099-B is not correct, see How To Complete Form 8949, Columns (f) and (g) in the Instructions for Form 8949 for the adjustment you must make. If no basis is shown on Form 1099-B, enter the correct basis of the property in column (e). See the instructions for Form 1099-B, Form 8949, and Schedule D (Form 1040) for more information.

Form 1099-CAP transactions.

If a corporation in which you own stock has had a change in control or a substantial change in capital structure, you should receive Form 1099-CAP from the corporation. Use the Form 1099-CAP to fill in Form 8949. If your computations show that you would have a loss because of the change, do not enter any amounts on Form 8949 or Schedule D (Form 1040). You cannot claim a loss on Schedule D (Form 1040) as a result of this transaction.

Report the aggregate amount received shown in box 2 of Form 1099-CAP as the sales price in column (d) of either Part I or Part II of Form 8949, whichever applies.

Form 1099-S transactions.

If you sold or traded land (including air rights), a building or similar structure, a condominium unit, or co-op stock, you may receive a Form 1099-S, Proceeds From Real Estate Transactions, showing your proceeds and other important information.

See the Instructions for Form 8949 and the Instructions for Schedule D (Form 1040) for how to report these transactions and include them in Part I or Part II of Form 8949 as appropriate. However, report like-kind exchanges on Form 8824 instead.

See Form 1099-S and the Instructions for Form 1099-S for more information.

Nominees.

 

If you receive gross proceeds as a nominee (that is, the gross proceeds are in your name but actually belong to someone else), see the Instructions for Form 8949 for how to report these amounts on Form 8949.

File Form 1099-B or Form 1099-S with the IRS.

If you received gross proceeds as a nominee in 2017, you must file a Form 1099-B or Form 1099-S for those proceeds with the IRS. Send the Form 1099-B or Form 1099-S with a Form 1096, Annual Summary and Transmittal of U.S. Information Returns, to your Internal Revenue Service Center by February 28, 2018 (April 2, 2018, if you file Form 1099-B or Form 1099-S electronically). Give the actual owner of the proceeds Copy B of the Form 1099-B or Form 1099-S by February 15, 2018. On Form 1099-B, you should be listed as the “Payer.” The actual owner should be listed as the “Recipient.” On Form 1099-S, you should be listed as the “Filer.” The actual owner should be listed as the “Transferor.” You do not have to file a Form 1099-B or Form 1099-S to show proceeds for your spouse. For more information about the reporting requirements and the penalties for failure to file (or furnish) certain information returns, see the General Instructions for Certain Information Returns. If you are filing electronically, see Pub. 1220.

Sale of property bought at various times.

If you sell a block of stock or other property that you bought at various times, report the short-term gain or loss from the sale on one row in Part I of Form 8949, and the long-term gain or loss on one row in Part II of Form 8949. Write “Various” in column (b) for the “Date acquired.”

Sale expenses.

 

On Form 8949, include in column (g) any expense of sale, such as broker’s fees, commissions, state and local transfer taxes, and option premiums, unless you reported the net sales price in column (d). If you include an expense of sale in column (g), enter “E” in column (f).

For information about adjustments to basis, see chapter 13.

Short-term gains and losses.

Capital gain or loss on the sale or trade of investment property held 1 year or less is a short-term capital gain or loss. You report it in Part I of Form 8949.

You combine your share of short-term capital gain or loss from partnerships, S corporations, estates, and trusts, and any short-term capital loss carryover, with your other short-term capital gains and losses to figure your net short-term capital gain or loss on line 7 of Schedule D (Form 1040).

Long-term gains and losses.

A capital gain or loss on the sale or trade of investment property held more than 1 year is a long-term capital gain or loss. You report it in Part II of Form 8949.

You report the following in Part II of Schedule D (Form 1040).

• Undistributed long-term capital gains from a mutual fund (or other regulated investment company) or real estate investment trust (REIT).
• Your share of long-term capital gains or losses from partnerships, S corporations, estates, and trusts.
• All capital gain distributions from mutual funds and REITs not reported directly on line 10 of Form 1040A or line 13 of Form 1040.
• Long-term capital loss carryovers.

 

The result after combining these items with your other long-term capital gains and losses is your net long-term capital gain or loss (Schedule D (Form 1040), line 15).

Total net gain or loss.

To figure your total net gain or loss, combine your net short-term capital gain or loss (Schedule D (Form 1040), line 7) with your net long-term capital gain or loss (Schedule D (Form 1040), line 15). Enter the result on Schedule D (Form 1040), Part III, line 16. If your losses are more than your gains, see Capital Losses next. If both lines 15 and 16 of your Schedule D (Form 1040) are gains and your taxable income on your Form 1040 is more than zero, see Capital Gain Tax Rates , later.

 

Capital Losses

If your capital losses are more than your capital gains, you can claim a capital loss deduction. Report the amount of the deduction on line 13 of Form 1040, in parentheses.

Limit on deduction.

Your allowable capital loss deduction, figured on Schedule D (Form 1040), is the lesser of:

• $3,000 ($1,500 if you are married and file a separate return), or
• Your total net loss as shown on line 16 of Schedule D (Form 1040).

 

You can use your total net loss to reduce your income dollar for dollar, up to the $3,000 limit.

Capital loss carryover.

If you have a total net loss on line 16 of Schedule D (Form 1040) that is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you had incurred it in that next year. If part of the loss is still unused, you can carry it over to later years until it is completely used up.

When you figure the amount of any capital loss carryover to the next year, you must take the current year’s allowable deduction into account, whether or not you claimed it and whether or not you filed a return for the current year.

When you carry over a loss, it remains long term or short term. A long-term capital loss you carry over to the next tax year will reduce that year’s long-term capital gains before it reduces that year’s short-term capital gains.

Figuring your carryover.

 

The amount of your capital loss carryover is the amount of your total net loss that is more than the lesser of:

1. Your allowable capital loss deduction for the year, or
2. Your taxable income increased by your allowable capital loss deduction for the year and your deduction for personal exemptions.

 

If your deductions are more than your gross income for the tax year, use your negative taxable income in figuring the amount in item (2) above.

Complete the Capital Loss Carryover Worksheet in the Instructions for Schedule D or Pub. 550 to determine the part of your capital loss that you can carry over.

Example.

Brian and Jackie sold securities in 2017. The sales resulted in a capital loss of $7,000. They had no other capital transactions. Their taxable income was $26,000. On their joint 2017 return, they can deduct $3,000. The unused part of the loss, $4,000 ($7,000 − $3,000), can be carried over to 2018.

If their capital loss had been $2,000, their capital loss deduction would have been $2,000. They would have no carryover.

Use short-term losses first.

When you figure your capital loss carryover, use your short-term capital losses first, even if you incurred them after a long-term capital loss. If you have not reached the limit on the capital loss deduction after using the short-term capital losses, use the long-term capital losses until you reach the limit.

Decedent’s capital loss.

A capital loss sustained by a decedent during his or her last tax year (or carried over to that year from an earlier year) can be deducted only on the final income tax return filed for the decedent. The capital loss limits discussed earlier still apply in this situation. The decedent’s estate cannot deduct any of the loss or carry it over to following years.

Joint and separate returns.

If you and your spouse once filed separate returns and are now filing a joint return, combine your separate capital loss carryovers. However, if you and your spouse once filed a joint return and are now filing separate returns, any capital loss carryover from the joint return can be deducted only on the return of the spouse who actually had the loss.

 

Capital Gain Tax Rates

The tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income. These lower rates are called the maximum capital gain rates.

The term “net capital gain” means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss.

For 2017, the maximum capital gain rates are 0%, 15%, 20%, 25%, and 28%. See Table 16-1 for details.

 

If you figure your tax using the maximum capital gain rate and the regular tax computation results in a lower tax, the regular tax computation applies.

Example.

All of your net capital gain is from selling collectibles, so the capital gain rate would be 28%. If you are otherwise subject to a rate lower than 28%, the 28% rate does not apply.

Investment interest deducted.

If you claim a deduction for investment interest, you may have to reduce the amount of your net capital gain that is eligible for the capital gain tax rates. Reduce it by the amount of the net capital gain you choose to include in investment income when figuring the limit on your investment interest deduction. This is done on the Schedule D Tax Worksheet or the Qualified Dividends and Capital Gain Tax Worksheet. For more information about the limit on investment interest, see Interest Expenses in chapter 3 of Pub. 550.

 

Table 16-1. What Is Your Maximum Capital Gain Rate?

IF your net capital gain is from …	THEN your maximum capital gain rate is …
collectibles gain	28%
eligible gain on qualified small business stock minus the section 1202 exclusion	28%
unrecaptured section 1250 gain	25%
other gain1 and the regular tax rate that would apply is 39.6%	20%
other gain1 and the regular tax rate that would apply is 25%, 28%, 33%, or 35%	15%
other gain1 and the regular tax rate that would apply is 10% or 15%	0%
1 “Other gain” means any gain that is not collectibles gain, gain on small business stock, or unrecaptured section 1250 gain.

 

Collectibles gain or loss.

 

This is gain or loss from the sale or trade of a work of art, rug, antique, metal (such as gold, silver, and platinum bullion), gem, stamp, coin, or alcoholic beverage held more than 1 year.

Collectibles gain includes gain from sale of an interest in a partnership, S corporation, or trust due to unrealized appreciation of collectibles.

Gain on qualified small business stock.

If you realized a gain from qualified small business stock that you held more than 5 years, you generally can exclude some or all of your gain under section 1202. The eligible gain minus your section 1202 exclusion is a 28% rate gain. See Gains on Qualified Small Business Stock in chapter 4 of Pub. 550.

Unrecaptured section 1250 gain.

Generally, this is any part of your capital gain from selling section 1250 property (real property) that is due to depreciation (but not more than your net section 1231 gain), reduced by any net loss in the 28% group. Use the Unrecaptured Section 1250 Gain Worksheet in the Schedule D (Form 1040) instructions to figure your unrecaptured section 1250 gain. For more information about section 1250 property and section 1231 gain, see chapter 3 of Pub. 544.

Tax computation using maximum capital gain rates.

 

Use the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet (whichever applies) to figure your tax if you have qualified dividends or net capital gain. You have net capital gain if Schedule D (Form 1040), lines 15 and 16, are both gains.

Schedule D Tax Worksheet.

 

Use the Schedule D Tax Worksheet in the Schedule D (Form 1040) instructions to figure your tax if:

• You have to file Schedule D (Form 1040); and
• Schedule D (Form 1040), line 18 (28% rate gain) or line 19 (unrecaptured section 1250 gain), is more than zero.

 

Qualified Dividends and Capital Gain Tax Worksheet.

 

If you do not have to use the Schedule D Tax Worksheet (as explained above) and any of the following apply, use the Qualified Dividends and Capital Gain Tax Worksheet in the instructions for Form 1040 or Form 1040A (whichever you file) to figure your tax.

• You received qualified dividends. (See Qualified Dividendsin chapter 8.)
• You do not have to file Schedule D (Form 1040) and you received capital gain distributions. (See Exceptions to filing Form 8949 and Schedule D (Form 1040), earlier.)
• Schedule D (Form 1040), lines 15 and 16, are both more than zero.

 

Alternative minimum tax.

 

These capital gain rates are also used in figuring alternative minimum tax.