The Importance of Basis
The basis of the property is usually the cost. The cost is the amount paid in cash, debt obligations, other property, or services as well as significant property improvements made to the property. Often times overlooked for inclusion of the basis is any ‘special assessments’ paid by owners who are selling condominiums, town homes, etc.
In addition to the cost of the property, certain other fees and expenses become part of your cost basis as well.
- Real Estate Taxes. If you pay real estate taxes the seller owed on the real property purchased and the seller did not reimburse you, treat those taxes as part of your basis—not property taxes paid. 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 the purchase—do not include this amount in the basis of the property. If the seller is not reimbursed, this amount must be reduced from the basis.
- Settlement Costs: Your basis includes the settlement fees and closing costs for buying the property. You cannot include in your basis the fees and costs for getting a loan on the property. A fee for buying property is a cost that must be paid even if the property was purchased with cash. Settlement costs do not include amounts placed in escrow for the future payments of items such as taxes and insurance.
- There are some special rules that apply to the disposition of homes other than sales. Many times in divorcing situations there are other types of property disposition and the importance of accurately calculating the basis in these situations should not be overlooked.
Foreclosure or Repossession and Abandonment
Transfer to spouse—if you transfer your home to your spouse or transfer it to your former spouse incident to divorce, you in most cases have no gain or loss. This is true even if you receive cash or other consideration for the home. If you owned your home jointly with your spouse and transfer your interest in the home to your spouse, or to your former spouse incident to your divorce, the same rule applies. You have no gain or loss.
Exception: These transfer rules do not apply if your spouse or former spouse is a nonresident alien. In this case, you generally will have a gain or loss.
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.