What are the tax issues associated with a gain or loss on a primary residence?

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For U.S. federal income tax purposes, you may be able to exclude from income any gain on the sale of a home up to $250,000 and $500,000 for a married couple filing a joint return. Generally, to exclude the gain, you must have owned and lived in the property as your main home for two of the five years prior to the date of the sale. If you lose money on a sale, the loss is not tax deductible.

Your adjusted basis

A dollar amount, known as your adjusted basis, determines whether you experience a gain or a loss. If you purchased or built your home, your initial cost basis, typically is the cost to you at the time of purchase. If you inherit a home, the cost basis is usually the fair market value on the date of the decedent's death or on a later valuation date selected by the personal representative of the estate.
In some circumstances, the cost basis may be the fair market value on the date that is six months after the decedent's death, which will depend on whether the decedent's estate is subject to federal estate tax and whether the alternative date would reduce the federal estate tax due from the decedent's estate.
The formula for determining your gain or loss is as follows:
Selling price − Selling expenses= Amount realized
Amount realized − Adjusted basis= Gain or loss
The cost basis may generally be adjusted over time due to the following conditions:
  • Additions and other improvements that have a useful life of one year and that add to the value of your home. These may include a garage, decks, landscaping, a swimming pool, storm windows and doors, heating and air conditioning systems, plumbing, interior improvements and insulation. Note that repairs that keep your house in good condition but do not significantly enhance value, such as fixing gutters, repainting, or plastering, do not affect the basis.
  • Special assessments paid for local improvements
  • Amounts spent to restore damaged property
  • Payments for granting an easement or right-or-way
  • Depreciation if the home was used for business or rental purposes
  • Others as determined by the Internal Revenue Service (See Publication 523 Selling Your Home)
The definition of a "main home," according to the Internal Revenue Service, includes a private residence, condominium, cooperative apartment, mobile home or houseboat. It is to your advantage to maintain records of a home's purchase price, purchase expenses, improvements, additions, and other issues that may affect the adjusted basis.

Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

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The material was authored by a third party, DST Retirement Solutions, LLC, an SS&C company ("SS&C"), not affiliated with Merrill or any of its affiliates and is for information and educational purposes only. The opinions and views expressed do not necessarily reflect the opinions and views of Merrill or any of its affiliates. Any assumptions, opinions and estimates are as of the date of this material and are subject to change without notice. Past performance does not guarantee future results. The information contained in this material does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security, financial instrument, or strategy. Before acting on any recommendation in this material, you should consider whether it is in your best interest based on your particular circumstances and, if necessary, seek professional advice.

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