It is the calculation behind the tax bill on every home sale — and most owners meet it for the first time in the year they sell, when the records are hardest to gather. This page is general information, not tax advice — talk to a CPA or tax professional on your own facts. The companion guides are Do you pay capital gains tax when you sell your house? and What is a stepped-up basis?
Basis is the figure the tax system treats as what your home cost you, and it is set out in IRS Publication 523, Selling Your Home and Publication 551, Basis of Assets. For a home you bought, the starting basis is its cost — the purchase price, including any debt you assumed — plus the settlement costs the rules allow into basis. For a home you built, it is the cost of the land plus the cost to build. That starting figure then adjusts over the years — improvements push it up, certain deductions pull it down — and the result is your adjusted basis. At a sale, the gain is the amount realized minus the adjusted basis, and the Section 121 main-home exclusion is applied to that gain afterward, under its own tests, as the capital gains guide explains.
The settlement sheet splits in two. Costs you paid to acquire the home itself enter basis: abstract fees, recording fees, legal fees connected with the purchase, survey costs, transfer taxes and owner's title insurance are the standard examples the IRS lists. Costs you paid to get the loan never enter basis, however large they were: points, origination fees, the lender's appraisal fee, credit report fees and mortgage insurance premiums stay out. Prepaid items that belong to ownership — the first insurance premium, prepaid interest — are not basis either; they are expenses of their own year. The Closing Disclosure from your purchase is the document that shows which line was which, which is why it belongs in the home's permanent file from the week you buy.
Over the years you own the home, capital improvements add to basis at what they cost: an addition, a new roof, a replaced heating or cooling system, new plumbing or wiring, a finished basement, a deck or patio, storm windows, insulation — work that adds to the home, adapts it to a new use or extends its life. Ordinary repairs and maintenance do not add to basis while the home is your residence: fixing a leak, repainting, patching — they keep the home in ordinary working condition rather than improving it. The line is the nature of the work, not its price tag, and a large repair bill is still a repair. Record each improvement when it happens — contractor, date, what was done, what it cost, proof of payment — because at sale time an improvement you cannot document is an improvement you cannot honestly count.
Basis also moves down. Depreciation you claimed — or were entitled to claim — for a home office or for a period when the home was rented reduces basis, whether or not claiming it felt important at the time. A casualty loss deduction you took after damage reduces basis, as do certain energy credits and subsidies the rules require to be subtracted, and any amount you received for granting an easement. These subtractions are the ones owners most often miss, because each one happened in a different tax year from the sale: the depreciation schedule and the casualty claim are part of the home's record, and they belong in the same file as the closing disclosure and the improvement invoices.
Cost is the starting point only for a home you bought or built. A home you received as a gift during the giver's life generally takes the giver's basis — a carryover basis — so the giver's purchase and improvement records become your records. A home you inherited generally starts at its fair market value on the date the previous owner died — the stepped-up basis, covered in its own guide, resting on a documented date-of-death valuation. A home received in a divorce transfer generally also carries over the basis the couple held. The acquisition route is therefore the first question in any basis calculation: it decides which stack of records the number is built from.
A basis is only as good as its records. Keep the purchase Closing Disclosure, every improvement contract and invoice with proof of payment, the depreciation schedules for any business or rental years, and — for a gifted or inherited home — the giver's records or the date-of-death valuation, for as long as you own the home and the years after a sale when the return can still be examined. In Homeowner HQ, the same habit runs the monthly record: correct the facts about your home — its systems, updates and condition — through your agent's fix-my-facts record, so the improvement history a basis calculation needs is already gathered in one place when a sale year comes, instead of reconstructed from memory.
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Start with what you paid, then adjust it for the years you owned the home. The starting basis of a home you bought is its cost: the purchase price, including any mortgage or other debt you assumed, plus the settlement costs the tax rules allow into basis — abstract fees, recording fees, legal fees connected with the purchase, survey costs, transfer taxes and owner's title insurance, as IRS Publications 523 and 551 list them. The costs of getting the loan itself never enter basis: points, origination fees, the lender's appraisal fee and mortgage insurance premiums stay out. If you had the home built, the starting basis is the cost of the land plus what the home cost to build. From there the basis moves: capital improvements add to it, and the subtractions in the next answer take away from it. The result is your adjusted basis, and gain on a sale is figured against it. How you got the home can replace the starting figure entirely — a home received as a gift generally carries over the giver's basis, and an inherited home generally starts at its fair market value on the date the previous owner died. This page is general information, not tax advice.
Capital improvements raise it: an addition, a new roof, a replaced heating or cooling system, a finished basement, a deck — work that adds to the home, adapts it or extends its life, figured at what it cost. Ordinary repairs and maintenance do not raise basis while the home is your residence; they keep the home in its ordinary working state rather than improving it. Basis falls by the deductions and credits tied to the home: depreciation you claimed — or were entitled to claim — for a home office or a rental period, casualty loss deductions you took, and certain energy credits or subsidies that the rules require to reduce basis. It also falls by any amount you received for an easement or similar grant. The discipline is to record each change when it happens — the improvement invoice, the depreciation schedule, the casualty claim — because a basis figured from memory years later at sale time is a basis that cannot be proved, and an unprovable improvement cannot honestly be counted.
The closing file and the improvement file. Keep the Closing Disclosure — or the older HUD-1 settlement statement — from your purchase: it shows the price and every settlement cost the basis starts from. Keep the contract and invoices for every capital improvement, with proof of payment, for as long as you own the home and for the years after a sale when the return can still be examined. For a home you built, keep the land purchase file and the construction contracts and receipts. For a gifted home, keep the giver's records of their own basis if you can get them — your basis depends on theirs. For an inherited home, keep the date-of-death valuation; it is the document the stepped-up basis rests on. In Homeowner HQ, the same habit runs the monthly record: the facts about your home — its systems, updates and condition — are corrected through your agent's fix-my-facts record, so when a sale year comes the improvement history a basis calculation needs is already gathered in one place instead of hunted for.