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.
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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.
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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:
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