If your family member cannot find a copy of the 1978 form, you may want to start at zero and see if there is a tax implication to the sale after the allowed tax-free $250,000 (or $500,000 if married filing jointly).
Here's how you calculate the adjusted basis on a home:
Start with the purchase price of your home (as described above)
- Or, if you filed Form 2119 when you originally acquired your old home to postpone gain on the sale of a previous home (back in 1997 or earlier), use the adjusted basis of the new home calculated on your Form 2119. (See Postponed Gains Under the Old "Rollover" Rules section.)
To that starting basis add:
- The cost of any improvements that added value to your home, prolonged its useful life, or gave it a new or different use
- Any special tax assessments you paid
- Amounts spent after a casualty (a disaster such as a hurricane or tornado) to restore damaged property
From that upwardly adjusted basis subtract:
- Certain settlement fees or closing costs
- Depreciation allowed for any business use portion of your home
- Residential energy credits claimed for capital improvements
- Payments received for easements or right-of-ways
- Insurance reimbursements for casualty losses
- Casualty losses (from accidents and natural disasters) that you deducted on your tax return
- Adoption credits or nontaxable adoption assistance payments for improvements added to the basis of your home
- First-time homebuyer credit
- Energy conservation subsidies excluded from your gross income
- Any mortgage debt on your principal residence that was discharged after 2006 but before 2016, if you excluded this amount from your gross income. This can also apply to debt that is discharged in 2017 provided that there was a written agreement entered into in 2016.
The result of all these calculations is the adjusted basis that you will subtract from the selling price to determine your gain or loss. This adjusted basis is what's considered to be your cost of the home for tax purposes.
Tax-free Profit
Depending on how long you owned and lived in the home before the sale and how much profit you made. If you owned and lived in the place for two of the five years before the sale, then up to $250,000 of profit is tax-free.
If you are married and file a joint return, the tax-free amount doubles to $500,000. The law lets you "exclude" this much otherwise taxable profit from your taxable income. (If you sold for a loss, though, you can't take a deduction for that loss.)
You can use this exclusion every time you sell a primary residence, as long as you owned and lived in it for two of the five years leading up to the sale, and haven't claimed the exclusion on another home in the last two years.
If your profit exceeds the $250,000 or $500,000 limit, the excess is reported as a capital gain on Schedule D.
