Top Frequently Asked Questions for Capital Gains, Losses, and Sale of Home

What is the basis of property received as a gift?

Answer:

To figure out the basis of property you receive as a gift, you must know three amounts:

  • The adjusted cost basis to the donor just before the donor made the gift to you.
  • The fair market value (FMV) at the time the donor made the gift.
  • The amount of any gift tax paid on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.

If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your adjusted basis depends on whether you have a gain or loss when you dispose of the property.

  • Your basis for figuring a 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 a loss is the FMV of the property when you received the gift, plus or minus any required adjustments to basis while you held the property.

Note:  If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and get a gain, you have neither a gain nor loss on the sale or disposition of the property.

If the FMV 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. If you received a gift after 1976, increase your basis by the part of the gift tax paid on it that is due to the net increase in value of the gift. To figure out the net increase in value or for other information on gifts received before 1977, see Publication 551, Basis of Assets. Also, for figuring gain or loss, you must increase or decrease your basis by any required adjustments to basis while you held the property.

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?

Answer:

The amount of the proceeds from the sale of your home that you use to pay off the mortgage isn't a factor in figuring your taxable amount for the sale. Instead, the amount you realize on the sale of your home and the adjusted basis of your home are important in determining whether you're subject to tax on the sale.

If the amount you realize, which generally includes any cash or other property you receive plus any of your indebtedness the buyer assumes or is otherwise paid off as part of the sale, less your selling expenses, is more than your adjusted basis in your home, you have a capital gain on the sale.

Your adjusted basis is generally your cost in acquiring your home plus the cost of any capital improvements you made, less casualty loss amounts and other decreases. For more information on basis and adjusted basis, refer to Publication 523, Selling Your Home. If you financed the purchase of the house by obtaining a mortgage, include the mortgage proceeds in determining your adjusted cost basis in your residence.  

You may be able to exclude from income all or a portion of the gain on your home sale. If you can exclude all of the gain, you don't need to report the sale on your tax return, unless you received a Form 1099-S, Proceeds From Real Estate Transactions. To determine the amount of the gain you may exclude from income or for additional information on the tax rules that apply when you sell your home, refer to Publication 523. You must report on your return as taxable income the capital gain that you can't exclude.

How do I report the sale of my second residence?

Answer:

Your second home (such as a vacation home) is considered a personal capital asset. Use Schedule D (Form 1040), Capital Gains and Losses, and Form 8949, Sales and Other Dispositions of Capital Assets, to report sales, exchanges, and other dispositions of capital assets.

How do I figure the cost basis when the shares I'm selling were purchased at various times and at different prices?

Answer:

The basis of stocks or bonds you own generally is the purchase price plus the costs of purchase, such as commissions and recording or transfer fees. When selling securities, you should be able to identify the specific shares you are selling.

If you can identify which shares of stock you sold, your basis generally is:

  • What you paid for the shares sold plus any costs of purchase.

If you can't adequately identify the shares you sold and you bought the shares at various times for different prices, the basis of the stock sold is:

  • The basis of the shares you acquired first, then the basis of the stock later acquired, and so forth (first-in first-out). Except for certain mutual fund shares and certain dividend reinvestment plans, you can't use the average basis per share to figure gain or loss on the sale of stock.

Each security you buy is considered a covered security. The broker is required to provide you basis information on the Form 1099-B, Proceeds From Broker and Barter Exchange Transactions. For each sale of a covered security for which you receive a Form 1099-B, the broker will provide you the following information: the date of acquisition (box 1b), whether the gain or loss is short-term or long-term (box 2), cost or other basis (box 1e), and the loss disallowed due to a wash sale or the amount of accrued market discount (box 1g).

The law requires you to keep and maintain records that identify the basis of all capital assets.

I purchased stock from my employer under a § 423 employee stock purchase plan and received a Form 1099-B for selling it. How do I report this?

Answer:

Under a § 423 employee stock option plan, you have taxable income or a deductible loss when you sell the stock. Your income or loss is the difference between the amount you paid for the stock (the option price) and the amount you receive when you sell it. You generally treat this amount as capital gain or loss, but you may also have ordinary income to report.

You must account for and report this sale on your tax return. You have indicated that you received a Form 1099-B, Proceeds From Broker and Barter Exchange Transactions. You must report all 1099-B transactions on Schedule D (Form 1040), Capital Gains and Losses, and you may need to use Form 8949, Sales and Other Dispositions of Capital Assets. This is true even if there's no net capital gain subject to tax.

You must first determine if you meet the holding period. You meet the holding period requirement if you don't sell the stock until the end of the:

  • The 1-year period after the stock was transferred to you, and
  • The 2-year period after the option was granted.

If you meet the holding period requirement:

  • You can generally treat the sale of stock as giving rise to capital gain or loss. You may have ordinary income if the option price was below the stock's fair market value (FMV) at the time the option was granted.

If you don't meet the holding period requirement:

  • The ordinary income that you should report in the year of the sale is the amount by which the FMV of the stock at the time of purchase (or vesting, if later) exceeds the exercise price. Treat any additional gain or loss as capital gain or loss.

If you meet the holding period requirement but the option exercise price is below the FMV of the stock at the time the option was granted:

  • You report as ordinary income (wages) on line 7 of Form 1040, U.S. Individual Income Tax Return, the lesser of (1) the amount by which the stock's FMV on the date of grant exceeds the option price or (2) the amount by which the stock's FMV on the date of sale or other disposition exceeds the option price. Your employer should report the ordinary income to you as wages in box 1 of Form W-2, Wage and Tax Statement. If your employer (or former employer) doesn't provide you with a Form W-2, or if the Form W-2 doesn't include the income in box 1, you must still report the income as wages on line 7 of Form 1040 for the year of sale or other disposition.
  • If your gain is more than the amount you report as ordinary income, the remainder is a capital gain reported on Schedule D (Form 1040) and, if required, on Form 8949.

If you don't satisfy the holding period requirement and sell the stock for less than the amount you paid for it, your loss is a capital loss but you still may have ordinary income.

You should receive a Form 3922, Transfer of Stock Acquired Through an Employee Stock Purchase Plan Under Section 423(c), from your employer when the employer has recorded the first transfer of legal title of stock you acquired pursuant to your exercise of the option. This form will assist you in tracking your holding period and figuring your cost basis for the stock purchased through your qualifying plan.

Do I need to pay taxes on the additional stock that I received as the result of a stock split?

Answer:

No. In a stock split, the corporation issues additional shares to current shareholders, but your total basis doesn't change. Following a stock split, you must reallocate your basis between the original shares and the shares newly acquired in the stock split.

  • Stock splits don't create a taxable event; you merely receive more stock evidencing the same ownership interest in the corporation that issued the stock. You don't report income until you sell the stock.
  • Your overall basis doesn't change as a result of a stock split, but your per share basis changes. You'll need to adjust your basis per share of the stock.
    • For example, you own 100 shares of stock in a corporation with a $15 per share basis for a total basis of $1,500. In a 2-for-1 stock split, the corporation issues an additional share of stock to the shareholder for each share the shareholder owns. You now own 200 shares, but your total basis is still $1,500. Following the stock split, you must reallocate your basis between the original shares and the shares newly acquired in the stock split. Your basis per share is now $7.50 ($1,500 divided by 200) for each of the 200 shares.
How do I calculate the average basis for the sale of mutual fund shares?

Answer:

In order to figure your gain or loss using an average basis, you must have acquired the shares at various times and prices.

To calculate average basis:

  • Add up the cost of all the shares you own in the mutual fund.
  • Divide that result by the total number of shares you own. This gives you your average per share.
  • Multiply the average per share by the number of shares sold.

You may no longer use the double-category method for figuring your average basis. If you were using that method for shares acquired before April 1, 2011 and you sell, exchange, or otherwise dispose of those shares on or after April 1, 2011, you must figure the average basis of those shares by averaging together all identical shares in the account on April 1, 2011, without regard for the holding period.

If you wish to use the average basis to figure the gain on the sale of mutual fund shares, you must elect to do so. To choose the election, there are two separate processes for making the election for average basis method for covered and noncovered securities. See Publication 550, Investment Income and Expenses (Including Capital Gains and Losses), for information on how to make these elections.

I received a 1099-DIV showing a capital gain. Why do I have to report capital gains from my mutual funds if I never sold any shares?

Answer:

A mutual fund is a regulated investment company that pools funds of investors allowing them to take advantage of a diversity of investments and professional asset management.

You own shares in the mutual fund but the fund owns capital assets, such as shares of stock, corporate bonds, government obligations, etc. One of the ways the fund makes money for you is to sell these assets at a gain.

If the mutual fund held the capital asset for more than one year, the nature of the income is capital gain, and the mutual fund passes it on to you as a capital gain distribution. Form 1099-DIV, Dividends and Distributions, distinguishes this from other types of income, such as ordinary dividends.

Consider capital gain distributions as long-term capital gains no matter how long you've owned shares in the mutual fund.

Report the amount shown in box 2a of Form 1099-DIV on line 13 of Schedule D (Form 1040), Capital Gains and Losses. If you have no requirement to use Schedule D (Form 1040), report this amount on line 13 of Form 1040, U.S. Individual Income Tax Return, and check the box, or on line 10 of Form 1040A, U.S. Individual Income Tax Return. Review the Instructions for Form 1040 and the Instructions for Form 1040A for more information.

Is the loss on the sale of my home deductible?

Answer:

A loss on the sale or exchange of personal use property, including a capital loss on the sale of your home used by you as your personal residence at the time of sale, isn't deductible. Only losses associated with property used in a trade or business and investment property (for example, stocks) are deductible.

I own stock that became worthless last year. Is this a bad debt? How do I report my loss?

Answer:

If you own securities, including stocks, and they become totally worthless, you have a capital loss but not a deduction for bad debt. Treat a stock or other security as totally worthless when it has no value and you must abandon it. To abandon a security, you must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for it.

  • Treat worthless securities as though they were capital assets sold or exchanged on the last day of the tax year.
  • Report worthless securities on Form 8949, Part I or Part II, whichever applies. Indicate as a worthless security deduction by writing Worthless in the applicable column of Form 8949.

Frequently Asked Question Subcategories for Capital Gains, Losses, and Sale of Home