Capital Gains FAQs

Internal Revenue Service
  • I have investment property. Can you explain the term "basis" ?

  • What is the basis of property received as a gift ?

  • I sold my primary residence this year. What form do I need to file?

  • If I sell my home and use the money I receive to pay off the mortgage , do I have to pay taxes on that money?

  • How many times can I take the exclusion of capital gain tax on the sale of a home?

  • How can I figure the basis of gifted stock ?

  • How do I offset capital gains and losses ?

  • Is the loss on the sale of your home deductible?

  • As a result of a bankruptcy, the bank foreclosed on my house . Can you tell me where and how to report this loss on my taxes?

    Q: I have investment property. Can you explain the term "basis"?

    A: "Basis" is your investment in property for tax purposes. Before you can figure any gain or loss on a sale, exchange or other disposition of property, or figure allowable depreciation, you must determine what called the "adjusted basis." Adjusted basis is the result of increasing or decreasing your original basis according to certain events. Your original basis is usually your cost to acquire the asset.

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    Q: What is the basis of property received as a gift?

    A: To figure the basis of property you get as a gift, you must know its adjusted basis to the donor just before it was given to you. You also must know its fair market value at the time it was given to you, and any gift tax paid on it. Refer to IRS Publication 551, Basis of Assets, for specific details.

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    Q: I sold my primary residence this year. What form do I need to file?

    A: If you meet the ownership and use tests, you will generally only need to report the sale of your home if your gain is more than $250,000 ($500,000 if married filing a joint return). This means that during the five-year period ending on the date of the sale, you must have:
    • Owned the home for at least two years (the ownership test), and
    • Lived in the home as your main home for at least two years (the use test)

    If you owned and lived in the property as your main home for less than 2 years, you may still be able to claim an exclusion in some cases. The maximum amount you can exclude will be reduced. If you're required to report a gain, you'll use Form 1040, SCHEDULE D, Capital Gains and Losses.

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    Q: If I sell my home and use the money I receive to pay off the mortgage, do I have to pay taxes on that money?

    A: It is not the money you receive for the sale of your home, but the amount of gain on the sale over your cost, or basis, that determines whether you will have to include any proceeds from the sale as taxable income on your return. You may be able to exclude any gain from income up to a limit of $250,000 ($500,000 on a joint return in most cases). If you can exclude all of the gain, you do not need to report the sale on your tax return.

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    Q: How many times can I take the exclusion of capital gain tax on the sale of a home?

    A: There is no limit on the number of times you can exclude the gain on the sale of your principle residence, so long as you meet the ownership and use tests.

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    Q: How can I figure the basis of the gifted stock?

    A: 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 fair market value ("FMV") at the time it was given to you, and any gift tax paid on it.

    If the FMV of the property was less than the donor's adjusted basis, your basis for gain on its sale or other disposition is the same as the donor's adjusted basis plus or minus any required adjustment to basis during the period you held the property. Your basis for loss on its sale or other disposition is the FMV at the time you received the gift plus or minus any required adjustment to basis during the period you held the property.

    If the FMV of the property was equal to or greater than the donor's adjusted basis, your basis for gain or loss on its sale or other disposition is the same as the donor's adjusted basis at the time you received the gift. Increase your basis by all or part of the gift tax paid, depending on the date of the gift.

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    Q: How do I offset capital gains and losses?

    A: Long-term capital gains and losses must first be combined to arrive at net long-term gain or loss before the result can be "netted" against the net short-term gain or loss. If you follow the Form 1040, SCHEDULE D, Capital Gains and Losses, Parts 1 and 2, line-by-line, the form will perform the "netting" for you in this order.

    Before a loss from one category, short- or long- term, can offset gain from the other category, the losses and gains from each category must be combined to arrive at a net gain or loss from that category. Then, the net gain or loss from each category is combined.

    When you carry a capital loss over to the following year, it retains its character as long-term or short-term and must be first combined with the other entries in its category.

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    Q: Is a loss on the sale of your home deductible?

    A: The loss on the sale of a personal residence is a nondeductible personal loss.

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    Q: As a result of a bankruptcy, the bank foreclosed on my house. Can you tell me where and how to report this loss on my taxes?

    A: The foreclosure or repossession is treated as a sale or exchange from which you, the borrower, may realize gain or loss. However, if you have a loss on personal use property, such as your primary residence, the loss isn't deductible.

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