Sale of Second Home - Capital Gain or Loss Reporting

[syoung123]

Hello, my wife had a house that was used as second home.  She sold her house in 2021.  We are filing a joint return and I am trying to figure out the followings:

1.  She put in a new roof and new driveway in 2014.  According to page 9 of pub 523, both the roof and driveway are improvements that can be added to the cost basis.  Total was about $10,000.  Would I add the full $10M to the cost basis, or would I need to use the depreciated amount, i.e., $10,000 minus $2,500 (for the last 6 years, estimated) = $7,500?

2.  As a divorce settlement, she paid her ex-husband $11,000, to get the house fully in her name.  If the original price of the house was $90,000 when they jointly purchased the house, what can she use as the cost basis of the house?  Can she add the $11,000 that she paid her ex to the $90M original purchase price to increase the cost basis?

3.  It appears the repair and cleaning costs done by outside companies, and the supplies that we purchased on our own were part of the sales expenses?  If so, how do we report them, as adjustment to costs in column g of Form 8949?

3.  My wife, her sister, and I all spent time to repair and clean the house for it to be ready to sell.  Can we report the time that we spent as part of the cost basis?  If so, what should I use as the hourly rate?

3.  I looked at the TurboxTax software (schedule D and form 8949), it does not appear to have an input option for sale of second home (it does for main home), where and how do I input the sale of second home?

Thank you for your help in advance.

[DianeW777 · Accepted solution]

1. Yes for question one you will add the new roof and driveway at the full cost of $10,000, to the cost basis of the second home.

2. Normally transfers between spouses in a divorce settlement are not taxable by the recipient and not deductible by the payer.  If this was fees to transfer the property in the name of your spouse it will not be part of the cost basis of the second home.  Her cost basis will be the original cost they paid for it.  The basis in property received from your spouse (or former spouse, if incident to your divorce) is the same as your spouse's adjusted basis. This applies for determining either gain or loss when you later dispose of the property.

3. Cleaning and repairs are normal maintenance and not allowed to be used as selling expenses. Expenses you incur that physically affect the home are not deductible from the sales proceeds, even if they help sell the property. For example, you can't deduct the cost of cleaning the carpets in your home, repainting, or hiring a lawncare. .You can use any settlement fees such as commissions, legal fees as part of your sales expenses.

4. My wife, her sister, and I all spent time to repair and clean the house for it to be ready to sell.  Can we report the time that we spent as part of the cost basis?   No, the IRS specifically states that your own labor is not allowed to be used for any tax purpose.

5. The second home sale can be entered into TurboTax CD or Desktop version by following the steps below. (See the third image)

1. Open your TurboTax account > Wages & Income 
2. Scroll to Investment Income > Select Stocks, Mutual Funds, Bonds, Other > Start or Update
3. Select the type of sale (see image below)
4. Enter the details of the property sold - Select Second Home from the dropdown continue to enter your information
5. Continue to finish your sale.  
6. See the images below.

The gain from the sale will be fully taxable because a second home is not eligible for the home sale exclusion. See the image below for assistance. Whether you specifically select Second Home is not relevant for the tax return itself.

[Mike9241]

assuming this was not your spouse's principal residence for 2 out of 5 years before the sale, there is no hone sale exclusion. however, if it was her main home for 2 out 5 years, then the home sale exclusion may be available.

[syoung123]

Thank you both for your replies.  Several more questions:

1.  Some of the repairs done were as the result of the home inspection by the purchaser required by their lender.  Since these were remedies, can the expenses be included in the cost basis?

2.  Can the utilities, property taxes, house insurance, and mortgage interests during the period from the date the house was listed for sale and the closing date be included to the cost basis?

3.  What publication and instructions (in addition to pub 544) can I use to read up on sale of the second home?

Thank you.

[DaveF1006 · Accepted solution]

It depends.

1. Repairs are generally not deductible and cannot be added to the cost basis of a home. It depends though on the nature of the repair. The IRS indicates what constitutes a real property capital improvement as follows:

• Fixing a defect or design flaw 
• Creating an addition, physical enlargement or expansion
• Creating an increase in capacity, productivity or efficiency
• Rebuilding property after the end of its economic useful life
• Replacing a major component or structural part of the property
• Adapting property to a new or different use.

If any of the repairs  fall into any of these categories, then the repair could actually be classified an improvement and be added to the cost basis of the house.

       2. Of the things listed in your second question, only the mortgage interest and property taxes can be deducted as itemized deductions in your return if you are able to itemized. These are only deductible if you paid for these while waiting for your house to close.

       3. As far as IRS publications go, this link addresses the sale of a second home and how it is treated. Also within this link are additional links to research that maybe helpful to you.

       4.  Also this Turbo Tax source addresses how to report the sale of a second home. 

[jr65]

If I borrow a HELOC from my current house, and used it to buy another house I'll live in later.  When I sale my current house, can the HELOC interest be counted as part of Total Basis?   

Thanks

Jenny

[DianeW777 · Accepted solution]

No.  Mortgage interest, in any loan including the HELOC, is never added to the cost basis of the home.  It is not a sales or a purchase expense.

Mortgage interest is only a deduction on your tax return if you itemize deductions and it is your main home or second home.

• Can I deduct mortgage interest?
• Can I deduct mortgage interest on a second home?

The principal used to purchase the second home is included in the purchase price of the second home as well as any closing costs that are not currently deductible (mortgage interest and property taxes).  Recording fees, sales commission, transfer taxes are examples of items you can add to the cost basis of your second home from the settlement statement.  You will also include any capital improves to the structure such as a complete remodel, a completely new roof, etc.  Repairs are not added to the cost of a home.

[tedtompkins]

where/how do I report the sale of a second home?  reporting capital gains?

[DMarkM1]

You can enter the sale of a second home under the "Investments and savings" topic as you would a sale of stock.

1. "Show More"
2. "Start/revisit"  the "Stocks, mutual funds..." topic 
3. "Add an Investment"
4. "Continue"
5. "Enter another way"
6. Select "Other (second home)" tile
7. Select "Second Home" in the "Type of Investment" dropdown

[syoung123]

Hello I am using the CD window version of TurboTax Premier and cannot find the way to input second home.  Under the "wages and income" -> "investment income" -> "stocks, mutual funds, bonds, other", I first put in the stock sales, there is a "add more sales" button on the bottom.  When I clicked on it, it asks if I got a 1099B, so I said no since this is a house sale and I got a 1099S.  And then the screen showed "tell us about this sale" with lines such as description, date sold, sales process etc.  In the drop-down box on on the bottom, I can choose box C or F.  When I chose box F, it went to the next screen with lines such as "accrued market discount" and the bottom button says "done".  Whe I clicked done, it went to a couple more screens, but  I cannot see an option for second home as the instruction in your reply indicated.  Please advise.  Thank you. 

[PatriciaV]

Yes, you are correct. The interview experience in TurboTax CD/Download is different from the steps outlined above, which is for TurboTax Online.

The process you describe will correctly report the sale of your second home. Be sure you include any selling expenses that may not be included in Form 1099-S. Also, check the blue hyperlinks on the entry pages (Sale proceeds, for example) if you need more information. 

[syoung123]

Thank you for your reply.  The sale of second home had a net loss.  When I did what I described by inputting the transactions as Part II, Box F, with sale proceed and cost basis, column h showed a negative amount.  I think column h is supposed to be zero, since loss is not allowed on second home sale.  Or do I manually input the net loss as a positive amount adjustment on column g to make column h to show 0.  If so, what do I put in as the code on column f?  It doesn't appear the TurboxTax does it automatically.  Please advise.  

[GeorgeM777]

Because you sold the home for a loss, and it appears the home was not a rental property or investment property, then the loss is a personal loss and thus not deductible on your return.  As an alternative to your current process, you might try going to Wages & Income (TurboTax desktop), scroll down the page to Less common income, select Sale of Home, and answer the few questions that follow.  After about four pages, because you sold the home for a loss, you will see a TurboTax message indicating that the loss is not deductible as it is a personal loss.

In TurboTax online, the above process is essentially the same.  Because this is a personal loss, there will be nothing to report on your return.  

@syoung123

[syoung123]

Hello, I input the second home sale transaction in "Sale of Home" under the "Less Common Income" section per your suggestion and found the following:

1.  The Sale of Home section did not ask me whether it was a main home or second home, and apparently it just treated the input as a main home sale.

2.  I then put in the following data - sale proceed $150,000, sale expense (closing cost items) $11,000, cost basis (original purchase price, original purchase closing costs, and improvements) $144,000.  In theory, it is supposed to show a loss of $150,000 - $11,000 - $144,000 = ($5,000).  The TurboTax (premier version) screen said that I had a personal loss that is not deductible, so that was right.  However, when I looked at the printed form 8949, it showed $150,000 in column (d), which is ok; $144,000 (only the cost basis, it did not include the sales expense that I input) in column (e); code E and L in column (f); and negative $6,000 in column (g).  From what I read, form 8949 showed that I had a gain of $6,000 ($150,000 - $144,000) and it subtracted the $6,000 in column (g) to derive $0 in column (h).  The form did not show the $11,000 sales expense that I input.  I think column (g) should show a positive $5,000 to offset the net loss of $5,000 (150,000-11,000-144,000) to calculate out $0 in column (h).

3.  Also, when I tried to use the "Stocks, Mutual Funds, Other" under the "Investment Income" section to input the sale of second home as an alternative, the only choice that I had was to select Box F (non 1099B), and it did not appear to allow me to input the transaction specifically as second home sale.  I put in $150,000 as sale proceed, and $155,000 as cost basis (sales expense plus improvements).  Form 8949 showed the $150,000 in column (d), $155,000 in column (e), column f and g were blank, and negative $5,000 in column (h) to allow the loss, which is not correct for sale of second home.

I have the CD window version of TurboTax Premier.  Please advise.  Thank you.

[DaveF1006]

It depends. I created a scenario in my CD software just like you mentioned and here were my results. I used your second option that you listed above, which is the correct and only way to report this.

1. First of all, there is a screen that informs you that since you have a lose, you do not need to include the sale in your tax return but if you wish to include it anyway, then indicate with a check mark.
2. The 8949 that I generated shows $150,000 in line D, $155,000 in line E, $5000 Line G, and 0 in line h. The $11,000 is reflected in the $155,000 in line E, which is your basis. ($144,000 + $11,000).

It appears that Line D and line E are correct. Line F should have a Code L and Line G should have a $5000 adjustment.  Line H is zero.

What i think happened with you is that you tried the third option, which was incorrect and that is why your 8949 is incorrect. you need to go to federal>wages and income>investment income>stocks and bonds and other and delete the entry you made. In addition, unless you get the results that I mentioned above, you might delete your home sale and then reenter the information. The 8949 that will be created will or should be correct. Just remember on the 8949, the $11,000 expenses will be added on the basis creating a loss and then the adjustment in line G.

Using you third step listed, the program thought this was a stock sale thus was allowing a $5000 loss. This is incorrect.

[ Edited 02/25/22|02:00 PM PST]