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Why
Track Your Basis in Your Home?
While some brokers
and advisers will tell you that keeping track of your basis is now
unnecessary, since the first $250,000 to $500,000 in gain on sale
of your home won't be taxed and probably won't even need to be computed.
You're on much safer ground if you retain these records.
Knowing the basis of your home is important for several reasons
besides computing your gain when you eventually sell the home.
For example, if you suffer a casualty loss to the home, your deductible
losses may be limited by the amount of your tax basis in the home.
If you don't have accurate records of that, you may lose some of
your tax benefits at a time when you need them most.
If you ever decide to rent out some or all of your home (for example,
if you decide to move when the housing market is very slow and you
need to find a tenant to cover your mortgage payments with some
income for an extended period of time), you'll need to now your
tax basis in order to determine your depreciation deductions. Similarly,
if you ever decide to use part of your home for business, depreciation
is usually computed on the business portion of the home's tax basis.
If you purchased your first home many, many years ago and since
then you've moved several times, deferring gain each time by purchasing
a more expensive home under the old rollover replacement rule, you
may have deferred tens or hundreds of thousands of dollars already,
and the basis of your current home may be very low. If so, you may
hit the $250,000 in capital gains mark very quickly.
Finally, if it turns out that you stay in your home for a long time,
you should realize that the $250,000 exclusion of taxable gain on
the sale of the home is not indexed for inflation. The value of
the exclusion is bound to be eroded as time passes.
If we look at the exclusion in today's dollars, at a modest 3 percent
inflation rate, the value of $250,000 in ten years will be only
$186,023. In 20 years it will be worth $138,418, and in 30 years
it will be worth only $102,996 in 2000 dollars.
Long-time homeowners may well find that they end up paying some
capital gains tax on their home, but they may pay more than necessary
if they haven't kept track of their basis over the years.
And all of this assumes that Congress won't change the law to either
increase or, more likely, decrease the amount of the exclusion or
change the rules for claiming it!
Computing Your Initial Basis
The starting point for your home's tax basis is the sales price
and the charges you paid upon purchasing or building the home (a
special rule applies if you did not purchase the home but acquired
it by gift, inheritance, transfer in a divorce, etc.). The key document
that you'll need for tax purposes is the HUD statement or other
settlement document that shows all the settlement costs paid by
yourself and the seller.
Of course, for legal purposes, you'll also want to keep the signed
sales contract that shows the legal description of the property,
the sales price, and the terms of your sale in a safe place like
your safe deposit box at the bank. But the settlement statement
will generally provide the information you need for tax purposes.
Work Smart
You should keep these documents for at least as long as you own
the home, but preferably for the rest of your life since it may
turn out that your executor or heirs need this information.
To compute your basis for a home that you purchased, start with
the sales price you paid, which is generally composed of your down
payment (including any earnest money) plus the principal amount
of any mortgage or other debt you took out or assumed.
If you built the home, the starting point would be your basis in
the land the home is built on, plus the costs of building the house
including labor and materials, contractor's fee, architect fee,
building permit charges, and legal fees directly connected with
building the home. If you worked on the home yourself, you can count
the value of materials and supplies you used, but not the value
of your labor.
In computing your initial basis, you need to consider:
- settlement
or closing costs
- homes acquired
by gift, inheritance, etc.
- purchases
under the old rollover replacement rule
Be sure to consult with a tax advisor for proper planning and
implementation of tax savings ideas to be sure they are right
for you.
C.
David Pitzer, CPA, PC
118
Two Mile Pike
Goodlettsville, TN 37072
(615) 851-2727
Fax: (615) 851-8711
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©
2002, 2003
C. David Pitzer, CPA, PC
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