Real Estate Income Tax: Basis, Gain and the New York Exam

What are basis and amount realized?

Basis begins with the applicable acquisition basis and changes through recognized adjustments. Capital improvements can increase it; allowable depreciation can reduce it. Routine repair expenses are not automatically capital improvements. Gifted and inherited property have special basis rules, so do not assume every owner starts with the latest sale price.

Amount realized generally reflects the sale proceeds with the applicable selling-expense adjustments. The mortgage payoff is not a basis adjustment simply because it appears on the closing statement. Read the question's facts and definitions before subtracting every listed cost.

IRS Publication 523, Figuring Gain or Loss, supplies the home-sale framework. Its worksheets distinguish selling expenses, adjusted basis and gain. That distinction is the foundation of the arithmetic taught here.

New York example: gain and cash proceeds are different

An exercise supplies a $500,000 selling price, $30,000 of recognized selling expenses and $350,000 of adjusted basis. Under those assumptions:

$500,000 - $30,000 = $470,000

$470,000 - $350,000 = $120,000

The first figure is the stated amount realized; the second is gain. If a $200,000 mortgage must also be paid off, the simplified cash remainder is:

$470,000 - $200,000 = $270,000

The $270,000 cash remainder is not the $120,000 gain. Changing the loan balance changes cash proceeds under these facts, not the supplied adjusted basis. No exclusion, additional closing adjustment or tax payment is assumed in those three lines.

When can a home-sale exclusion apply?

The standard federal exclusion can be up to $250,000 of gain for an eligible individual or $500,000 for an eligible married couple filing jointly. Ordinarily the ownership and use requirements involve two years within the five-year period before sale, with a separate two-year look-back restriction. For the full joint exclusion, at least one spouse must satisfy ownership and both must satisfy use and look-back requirements.

These are eligibility rules, not automatic discounts from the sale price. Exceptions, partial exclusions, nonqualified use and depreciation-related gain can change the result. Review Publication 523, Eligibility Test and How Much Is Taxable. A property that was rented for part of its history needs more analysis than the phrase "I lived there once."

Do not promise a client's tax result from an exam summary. The ownership dates, use history, filing status and prior sales belong in a professional review.

Reading is the first step

Can you apply this rule when the facts change?

Try the free Income Tax Issues in Real Estate Transactions practice on this website. In the Pass New York app, you can keep missed questions together and return to them in later sessions. The free app includes unlimited License Law practice; full access opens the question bank across every subject.

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How do depreciation and like-kind exchanges fit?

Tax depreciation recovers the cost of eligible income-producing property under the applicable rules. Land is not depreciable for that purpose. IRS Publication 527, Depreciation of Rental Property, addresses the distinction. Appraisal depreciation instead describes loss in property value; it is not the same computation.

Section 1031 addresses qualifying exchanges of real property held for business or investment. It is tax deferral, not a blanket rule that any home swap permanently eliminates tax. Property held primarily for sale does not qualify simply because it is real estate. The IRS like-kind exchange overview states that qualifying-property boundary.

For a standard deferred exchange, the IRS Form 8824 instructions, Deferred Exchanges, state the 45-day identification period after transfer of the relinquished property and the receipt deadline at the earlier of 180 days after that transfer or the applicable tax-return due date, including extensions. These are not two consecutive periods totaling 225 days. Receipt of cash, other property or debt relief and the exchange structure can affect recognition. Actual exchanges need qualified tax and legal planning before the transaction, not an attempt to retrofit the rules after closing.

Common traps to avoid

• Calling net cash after loan payoff taxable gain.
• Applying the home-sale exclusion to the gross price.
• Depreciating land for federal rental-property tax purposes.
• Calling a 1031 exchange permanently tax-free.
• Assuming every real-estate expense or loss is deductible.

Continue with the income-tax lessons and free topic practice. Keep this federal income-tax topic separate from New York recurring property taxes and transfer taxes.

Frequently asked questions

Does paying off the mortgage reduce the supplied adjusted basis?

No. A loan payoff is a financing and cash-proceeds item, not automatically a basis adjustment. Gain uses amount realized and adjusted basis.

Is every homeowner entitled to a $500,000 exclusion?

No. That maximum concerns eligible joint filers meeting the applicable rules. Other filing situations, exceptions and limitations require separate review.

Does section 1031 apply to any exchange of homes?

No. The qualifying-property and exchange requirements matter. A personal-use home exchange is not automatically eligible.

Official source map

• DOS 77-hour curriculum: Subject 17, basis, gain, exclusions and exchange concepts.
• IRS Publication 523: Eligibility Test and Figuring Gain or Loss for home sales.
• IRS Publication 527: rental-property depreciation and the exclusion of land.
• IRS like-kind exchange overview: qualifying real-property scope.
• IRS Form 8824 instructions: Deferred Exchanges, identification and receipt deadlines measured from transfer of the relinquished property.

Sources and verification notes

The currently available IRS publications identify their own tax years; they are not described here as 2026 filing instructions. Examples omit unstated adjustments. This overview is exam preparation, not a determination of a person's tax liability.