Home acquired
in like-kind exchange. You
cannot exclude from income a
gain from selling your main home
after October 22, 2004, if you
acquired the home in a like-kind
exchange and sold it during the
5-year period beginning with the
date you acquired the home. For
more information, see
Special Situations,
later.
Reminders
Change of
address. If you change your
mailing address, be sure to
notify the IRS using Form 8822,
Change of Address. Mail it to
the Internal Revenue Service
Center for your old address.
(Addresses for the Service
Centers are on the back of the
form.)
Home sold
with undeducted points. If
you have not deducted all the
points you paid to secure a
mortgage on your old home, you
may be able to deduct the
remaining points in the year of
the sale. See
Mortgage ending early under
Points in chapter
25.
Introduction
This chapter explains the tax
rules that apply when you sell
your main home. Generally, your
main home is the one in which
you live most of the time.
If you sold your main home in
2004, you may be able to exclude
from income any gain up to a
limit of $250,000 ($500,000 on a
joint return in most cases). See
Excluding the Gain,
later. If you can exclude all of
the gain, you do not need to
report the sale on your tax
return.
If you have gain that cannot
be excluded, it is taxable.
Report it on Schedule D (Form
1040). You may also have to
include Form 4797, Sales of
Business Property. See
Reporting the Sale,
later.
If you have a loss on the
sale, you cannot deduct it on
your return.
The main topics in this
chapter are:
Figuring gain or
loss,
Basis,
Excluding the gain,
Ownership and use
tests, and
Reporting the sale.
Other topics include:
Business use or
rental of home, and
Recapturing a
federal mortgage
subsidy.
Useful Items - You
may want to see:
Publication
523
Selling Your Home
530
Tax Information for
First-Time Homeowners
Form
(and Instructions)
Schedule D (Form 1040)
Capital Gains and Losses
8822
Change of Address
8828
Recapture of Federal
Mortgage Subsidy
Main Home
This section explains the
term main
home. Usually, the home
you live in most of the time is
your main home and can be a:
House,
Houseboat,
Mobile home,
Cooperative
apartment, or
Condominium.
To exclude gain under the
rules of this chapter, you
generally must have owned and
lived in the property as your
main home for at least 2 years
during the 5-year period ending
on the date of sale.
Land.
If you sell the land on
which your main home is
located, but not the house
itself, you cannot exclude
any gain you have from the
sale of the land.
Example.
On March 4, 2004, you
sell the land on which
your main home is
located. You buy another
piece of land and move
your house to it. This
sale is not considered a
sale of your main home,
and you cannot exclude
any gain on the sale of
the land.
More than
one home.
If you have more than one
home, you can exclude gain
only from the sale of your
main home. You must include
in income the gain from the
sale of any other home. If
you have two homes and live
in both of them, your main
home is ordinarily the one
you live in most of the
time.
Example 1.
You own and live in a
house in the city. You
also own a beach house,
which you use during
summer months. The house
in the city is your main
home.
Example 2.
You own a house, but
you live in another
house that you rent. The
rented house is your
main home.
Property
used partly as your main
home. If you use only
part of the property as your
main home, the rules
discussed in this chapter
apply only to the gain or
loss on the sale of that
part of the property. For
details, see
Business Use or Rental of
Home, later.
Figuring Gain or
Loss
To figure the gain or loss on
the sale of your main home, you
must know the selling price, the
amount realized, and the
adjusted basis. Subtract the
adjusted basis from the amount
realized to get your gain or
loss.
Selling price
-
Selling expenses
Amount realized
Amount realized
-
Adjusted basis
Gain or loss
Selling
Price
The selling price is the
total amount you receive for
your home. It includes
money, all notes, mortgages,
or other debts assumed by
the buyer as part of the
sale, and the fair market
value of any other property
or any services you receive.
Payment
by employer.
You may have to sell
your home because of a
job transfer. If your
employer pays you for a
loss on the sale or for
your selling expenses,
do not include the
payment as part of the
selling price. Your
employer will include it
as wages in box 1 of
your Form W-2 and you
will include it in your
gross income as wages on
line 7 of Form 1040.
Option
to buy.
If you grant an option
to buy your home and the
option is exercised, add
the amount you receive
for the option to the
selling price of your
home. If the option is
not exercised, you must
report the amount as
ordinary income in the
year the option expires.
Report this amount on
line 21 of Form 1040.
Form
1099-S.
If you received Form
1099-S, Proceeds From
Real Estate
Transactions, box 2
(gross proceeds) should
show the total amount
you received for your
home.
However, box 2 will
not include the fair
market value of any
property other than cash
or notes, or any
services, you received
or will receive.
Instead, box 4 will be
checked to indicate your
receipt (or expected
receipt) of these items.
If you can exclude the
entire gain, the person
responsible for closing
the sale generally will
not have to report it on
Form 1099-S. If you do
not receive Form 1099-S,
use sale documents and
other records to figure
the total amount you
received for your home.
Amount
Realized
The amount realized is
the selling price minus
selling expenses.
Selling
expenses. Selling
expenses include:
Commissions,
Advertising
fees,
Legal fees,
and
Loan charges
paid by the
seller, such as
loan placement
fees or points.
Adjusted
Basis
While you owned your
home, you may have made
adjustments (increases or
decreases) to the basis.
This adjusted basis must be
determined before you can
figure gain or loss on the
sale of your home. For
information on how to figure
your home's adjusted basis,
see Determining Basis,
later.
Amount of
Gain or Loss
To figure the amount of
gain or loss, compare the
amount realized to the
adjusted basis.
Gain on
sale. If the
amount realized is more
than the adjusted basis,
the difference is a gain
and, except for any part
you can exclude,
generally is taxable.
Loss on
sale. If the
amount realized is less
than the adjusted basis,
the difference is a
loss. A loss on the sale
of your main home cannot
be deducted.
Jointly
owned home.
If you and your spouse
sell your jointly owned
home and file a joint
return, you figure your
gain or loss as one
taxpayer.
Separate returns.
If you file separate
returns, each of you
must figure your own
gain or loss according
to your ownership
interest in the home.
Your ownership interest
is determined by state
law.
Joint owners not
married. If
you and a joint owner
other than your spouse
sell your jointly owned
home, each of you must
figure your own gain or
loss according to your
ownership interest in
the home. Each of you
applies the rules
discussed in this
chapter on an individual
basis.
Other
Dispositions
The following rules apply
to foreclosures and
repossessions, abandonments,
trades, and transfers to a
spouse.
Foreclosure or
repossession.
If your home was
foreclosed on or
repossessed, you have a
sale.
You figure the gain or
loss from the sale in
generally the same way
as gain or loss from any
sale. But the amount of
your gain or loss
depends, in part, on
whether you were
personally liable for
repaying the debt
secured by the home. See
Publication 523 for more
information.
Form 1099-A and Form
1099-C.
Generally, you will
receive Form 1099-A,
Acquisition or
Abandonment of Secured
Property, from your
lender. This form will
have the information you
need to determine the
amount of your gain or
loss and any ordinary
income from cancellation
of debt. If your debt is
canceled, you may
receive Form 1099-C,
Cancellation of Debt.
Abandonment.
If you abandon your
home, you may have
ordinary income. If the
abandoned home secures a
debt for which you are
personally liable and
the debt is canceled,
you have ordinary income
equal to the amount of
the canceled debt. See
Publication 523 for more
information.
Trading
homes.
If you trade your old
home for another home,
treat the trade as a
sale and a purchase.
Example.
You owned and
lived in a home that
had an adjusted
basis of $41,000. A
real estate dealer
accepted your old
home as a trade-in
and allowed you
$50,000 toward a new
home priced at
$80,000. This is
treated as a sale of
your old home for
$50,000 with a gain
of $9,000 ($50,000
$41,000).
If the dealer had
allowed you $27,000
and assumed your
unpaid mortgage of
$23,000 on your old
home, your sales
price would still be
$50,000 (the $27,000
trade-in allowed
plus the $23,000
mortgage assumed).
Transfer to spouse.
If you transfer your
home to your spouse, or
to your former spouse
incident to your
divorce, you generally
have no gain or loss.
This is true even if you
receive cash or other
consideration for the
home. Therefore, the
rules in this chapter do
not apply.
More information.
If you need more
information, see
Transfer to spouse
in
Publication 523 and
Property Settlements
in
Publication 504,
Divorced or Separated
Individuals.
Determining
Basis
You need to know your
basis in your home to
determine any gain or loss
when you sell it. Your basis
in your home is determined
by how you got the home.
Your basis is its cost if
you bought it or built it.
If you got it in some other
way (inheritance, gift,
etc.), its basis is either
its fair market value when
you got it or the adjusted
basis of the person you got
it from.
While you owned your
home, you may have made
adjustments (increases or
decreases) to your home's
basis. The result of these
adjustments is your home's
adjusted basis, which is
used to figure gain or loss
on the sale of your home.
See Adjusted Basis,
later.
You can find more
information on basis and
adjusted basis in chapter 14
of this publication and in
Publication 523.
Cost As
Basis
The cost of property
is the amount you pay
for it in cash, debt
obligations, other
property, or services.
Purchase. If
you buy your home,
your basis is its
cost to you. This
includes the
purchase price and
certain settlement
or closing costs.
Generally, your
purchase price
includes your down
payment and any
debt, such as a
first or second
mortgage or notes
you gave the seller
in payment for the
home. If you build,
or contract to
build, a new home,
your purchase price
can include costs of
construction, as
discussed in
Publication 523.
Settlement fees or
closing costs.
When you bought
your home, you may
have paid settlement
fees or closing
costs in addition to
the contract price
of the property. You
can include in your
basis some of the
settlement fees and
closing costs you
paid for buying the
home. You cannot
include in your
basis the fees and
costs for getting a
mortgage loan. A fee
paid for buying the
home is any fee you
would have had to
pay even if you paid
cash for the home.
Chapter 14 lists
some of the
settlement fees and
closing costs that
you can include in
the basis of
property, including
your home. It also
lists some
settlement costs
that cannot be
included in basis.
Also see
Publication 523 for
additional items and
a discussion of
basis other than
cost.
Adjusted
Basis
Adjusted basis is
your basis increased or
decreased by certain
amounts.
Increases to basis.
These include any:
Additions
and other
improvements
that have a
useful life
of more than
1 year,
Special
assessments
for local
improvements,
and
Amounts
you spent
after a
casualty to
restore
damaged
property.
Decreases to basis.
These include any:
Gain you
postponed
from the
sale of a
previous
home before
May 7, 1997,
Deductible
casualty
losses,
Insurance
payments you
received or
expect to
receive for
casualty
losses,
Payments
you received
for granting
an easement
or
right-of-way,
Depreciation
allowed or
allowable if
you used
your home
for business
or rental
purposes,
Residential
energy
credit
(generally
allowed from
1977 through
1987)
claimed for
the cost of
energy
improvements
that you
added to the
basis of
your home,
Adoption
credit you
claimed for
improvements
added to the
basis of
your home,
Nontaxable
payments
from an
adoption
assistance
program of
your
employer
that you
used for
improvements
you added to
the basis of
your home,
First-time
homebuyer
credit
(allowed to
certain
first-time
buyers of a
home in the
District of
Columbia),
and
Energy
conservation
subsidy
excluded
from your
gross income
because you
received it
(directly or
indirectly)
from a
public
utility
after 1992
to buy or
install any
energy
conservation
measure. An
energy
conservation
measure is
an
installation
or
modification
that is
primarily
designed
either to
reduce
consumption
of
electricity
or natural
gas or to
improve the
management
of energy
demand for a
home.
Improvements.
These add to the
value of your home,
prolong its useful
life, or adapt it to
new uses. You add
the cost of
additions and other
improvements to the
basis of your
property.
Examples.
Putting a
recreation room
or another
bathroom in your
unfinished
basement,
putting up a new
fence, putting
in new plumbing
or wiring,
putting on a new
roof, or paving
your unpaved
driveway are
improvements. An
addition to your
house, such as a
new deck, a
sunroom, or a
garage, is also
an improvement.
Repairs. These
maintain your home
in good condition
but do not add to
its value or prolong
its life. You do not
add their cost to
the basis of your
property.
Examples.
Repainting
your house
inside or
outside, fixing
your gutters or
floors,
repairing leaks
or plastering,
and replacing
broken window
panes are
examples of
repairs.
Recordkeeping. You should keep
records to prove your
home's adjusted basis.
Ordinarily, you must
keep records for 3 years
after the due date for
filing your return for
the tax year in which
you sold your home. But
if you sold a home
before May 7, 1997, and
postponed tax on any
gain, the basis of that
home affects the basis
of the new home you
bought. Keep records
proving the basis of
both homes as long as
they are needed for tax
purposes.
The records you
should keep include:
Proof of the
home's purchase
price and
purchase
expenses,
Receipts and
other records
for all
improvements,
additions, and
other items that
affect the
home's adjusted
basis,
Any
worksheets you
used to figure
the adjusted
basis of the
home you sold,
the gain or loss
on the sale, the
exclusion, and
the taxable
gain,
Any Form
2119, Sale of
Your Home, that
you filed to
postpone gain
from the sale of
a previous home
before May 7,
1997, and
Any
worksheets you
used to prepare
Form 2119, such
as the
Adjusted
Basis of Home
Sold Worksheet
or
the
Capital
Improvements
Worksheet from the
Form 2119
instructions.
Excluding the Gain
You may qualify to exclude
from your income all or part of
any gain from the sale of your
main home. This means that, if
you qualify, you will not have
to pay tax on the gain up to the
limit described under
Maximum Exclusion,
next. To qualify, you must meet
the ownership and use tests
described later.
You can choose not to take
the exclusion by including the
gain from the sale in your gross
income on your tax return for
the year of the sale.
Maximum
Exclusion
You can exclude up to
$250,000 of the gain on the
sale of your main home if
all of the following are
true.
You meet the
ownership test.
You meet the use
test.
During the
2-year period ending
on the date of the
sale, you did not
exclude gain from
the sale of another
home.
You can exclude up to
$500,000 of the gain on the
sale of your main home if
all of the following are
true.
You are married
and file a joint
return for the year.
Either you or
your spouse meets
the ownership test.
Both you and
your spouse meet the
use test.
During the
2-year period ending
on the date of the
sale, neither you
nor your spouse
excluded gain from
the sale of another
home.
Ownership
and Use Tests
To claim the exclusion,
you must meet the ownership
and use tests. This means
that during the
5-year
period ending on
the date of the sale, you
must have:
Owned the home
for at least 2 years
(the ownership
test), and
Lived in the
home as your main
home for at least 2
years (the use
test).
Exception. If you
owned and lived in the
property as your main
home for less than 2
years, you can still
claim an exclusion in
some cases. The maximum
amount you can claim
will be reduced. See
Reduced Maximum
Exclusion,
later.
Example 1home owned and
occupied for 3 years.
Amanda bought and
moved into her main home
in September 2001. She
sold the home at a gain
on September 15, 2004.
During the 5-year period
ending on the date of
sale (September 16, 1999
September 15, 2004),
she owned and lived in
the home for 3 years.
She meets the ownership
and use tests.
Example 2met ownership
test but not use test.
Dan bought a home in
1998. After living in it
for 6 months, he moved
out. He never lived in
the home again and sold
it at a gain on June 28,
2004. He owned the home
during the entire 5-year
period ending on the
date of sale (June 29,
1999 June 28, 2004).
However, he did not live
in it for the required 2
years. He meets the
ownership test but not
the use test. He cannot
exclude any part of his
gain on the sale, unless
he qualified for a
reduced maximum
exclusion (explained
later).
Period of
Ownership
and Use
The required 2 years
of ownership and use
during the 5-year period
ending on the date of
the sale do not have to
be continuous.
You meet the tests if
you can show that you
owned and lived in the
property as your main
home for either 24 full
months or 730 days (365
Χ 2) during the 5-year
period ending on the
date of sale.
Temporary absence.
Short temporary
absences for
vacations or other
seasonal absences,
even if you rent out
the property during
the absences, are
counted as periods
of use.
Example.
Professor Paul
Beard, who is
single, bought and
moved into a house
on August 28, 2001.
He lived in it as
his main home
continuously until
January 5, 2003,
when he went abroad
for a 1-year
sabbatical leave.
During part of the
period of leave, the
house was
unoccupied, and
during the rest of
the period, he
rented it. On
January 6, 2004, he
sold the house at a
gain.
Because his leave
was not a short
temporary absence,
he cannot include
the period of leave
to meet the 2-year
use test. He cannot
exclude any part of
his gain, unless he
qualifies for a
reduced maximum
exclusion (explained
later). Even if he
does qualify for a
reduced maximum
exclusion, he cannot
exclude the part of
the gain equal to
the depreciation he
claimed while
renting the house.
See
Depreciation
after May 6, 1997,
later.
Ownership and use
tests met at
different times.
You can meet the
ownership and use
tests during
different 2-year
periods. However,
you must meet both
tests during the
5-year period ending
on the date of the
sale.
Example.
In 1995,
Helen Jones
lived in a
rented
apartment. The
apartment
building was
later changed to
a condominium,
and she bought
her apartment on
December 3,
2001. In 2002,
Helen became ill
and on April 14
of that year she
moved to her
daughter's home.
On July 12,
2004, while
still living in
her daughter's
home, she sold
her apartment.
Helen can
exclude gain on
the sale of her
apartment
because she met
the ownership
and use tests.
Her 5-year
period is from
July 13, 1999,
to July 12,
2004, the date
she sold the
apartment. She
owned her
apartment from
December 3,
2001, to July
12, 2004 (more
than 2 years).
She lived in the
apartment from
July 13, 1999
(the beginning
of the 5-year
period), to
April 14, 2002
(more than 2
years).
Cooperative
apartment.
If you sold stock
in a cooperative
housing corporation,
the ownership and
use tests are met
if, during the
5-year period ending
on the date of sale,
you:
Owned
the stock
for at least
2 years, and
Lived in
the house or
apartment
that the
stock
entitles you
to occupy as
your main
home for at
least 2
years.
Members of the
uniformed services
or Foreign Service.
You can choose to
have the 5-year test
period for ownership
and use suspended
during any period
you or your spouse
serve on qualified
official extended
duty as a
member of the
uniformed services
or Foreign Service
of the United
States. This means
that you may be able
to meet the 2-year
use test even if,
because of your
service, you did not
actually live in
your home for at
least the required 2
years during the
5-year period ending
on the date of sale.
If this helps you
qualify to exclude
gain, you can choose
to have the 5-year
test period
suspended by filing
a return for the
year of sale that
does not include the
gain.
Example.
David bought and
moved into a home in
1996. He lived in it
as his main home for
2½ years. For the
next 6 years, he did
not live in it
because he was on
qualified official
extended duty with
the Army. He then
sold the home at a
gain in 2004. To
meet the use test,
David chooses to
suspend the 5-year
test period for the
6 years he was on
qualifying official
extended duty. This
means he can
disregard those 6
years. Therefore,
David's 5-year test
period consists of
the 5 years before
he went on
qualifying official
extended duty. He
meets the ownership
and use tests
because he owned and
lived in the home
for 2½ years during
this test period.
Period of
suspension.
The period of
suspension cannot
last more than 10
years. You cannot
suspend the 5-year
period for more than
one property at a
time. You can revoke
your choice to
suspend the 5-year
period at any time.
For more
information about
the suspension of
the 5-year test
period, see
Members of the
uniformed services
or Foreign Service
in
Publication 523.
Exception for
individuals with a
disability.
There is an
exception to the use
test if during the
5-year period before
the sale of your
home:
You
become
physically
or mentally
unable to
care for
yourself,
and
You
owned and
lived in
your home as
your main
home for a
total of at
least 1
year.
Under this
exception, you are
considered to live
in your home during
any time that you
own the home and
live in a facility
(including a nursing
home) that is
licensed by a state
or political
subdivision to care
for persons in your
condition.
If you meet this
exception to the use
test, you still have
to meet the
2-out-of-5-year
ownership test to
claim the exclusion.
Previous home
destroyed or
condemned.
For the ownership
and use tests, you
add the time you
owned and lived in a
previous home that
was destroyed or
condemned to the
time you owned and
lived in the home on
which you wish to
exclude gain. This
rule applies if any
part of the basis of
the home you sold
depended on the
basis of the
destroyed or
condemned home.
Otherwise, you must
have owned and lived
in the same home for
2 of the 5 years
before the sale to
qualify for the
exclusion.
Married
Persons
If you and your
spouse file a joint
return for the year of
sale, you can exclude
gain if either spouse
meets the ownership and
use tests. (But see
Maximum Exclusion,
earlier.)
Example 1 one
spouse sells a home.
Emily sells her
home in June 2004.
She marries Jamie
later in the year.
She meets the
ownership and use
tests, but Jamie
does not. She can
exclude up to
$250,000 of gain on
a separate or joint
return for 2004.
Example 2 each
spouse sells a home.
The facts are the
same as in
Example 1 except that
Jamie also sells a
home in 2004. He
meets the ownership
and use tests on his
home. Emily and
Jamie can each
exclude up to
$250,000 of gain.
Death of spouse
before sale.
If your spouse
died and you did not
remarry before the
date of sale, you
are considered to
have owned and lived
in the property as
your main home
during any period of
time when your
spouse owned and
lived in it as a
main home.
Home transferred
from spouse.
If your home was
transferred to you
by your spouse (or
former spouse if the
transfer was
incident to
divorce), you are
considered to have
owned it during any
period of time when
your spouse owned
it.
Use
of home after
divorce.
You are considered
to have used
property as your
main home during any
period when:
You
owned it,
and
Your
spouse or
former
spouse is
allowed to
live in it
under a
divorce or
separation
instrument
and uses it
as his or
her main
home.
Reduced
Maximum
Exclusion
You can claim an
exclusion, but the maximum
amount of gain you can
exclude will be reduced, if
either of the following is
true.
You did not meet
the ownership and
use tests, but the
reason you sold the
home was:
A change
in place of
employment,
Health,
or
Unforeseen
circumstances
(as defined
later).
Your exclusion
would have been
disallowed because
of the rule
described in
More Than One
Home Sold During
2-Year Period,
later, except that
the reason you sold
the home was:
A change
in place of
employment,
Health,
or
Unforeseen
circumstances
(as defined
next).
Use
Worksheet 3 in
Publication 523 to figure
your reduced maximum
exclusion.
Unforeseen
circumstances. The
sale of your main home
is because of an
unforeseen circumstance
if your primary reason
for the sale is the
occurrence of an event
that you could not
reasonably have
anticipated before
buying and occupying
your main home. For more
information on
unforeseen
circumstances, see
Publication 523.
More Than
One Home Sold
During 2-Year
Period
You cannot exclude gain
on the sale of your home if,
during the 2-year period
ending on the date of the
sale, you sold another home
at a gain and excluded all
or part of that gain. If you
cannot exclude the gain, you
must include it in your
income.
Exception. You
still can claim an
exclusion, but the
maximum amount of gain
you can exclude will be
reduced, if the reason
you sold the home was:
A change in
place of
employment,
Health, or
Unforeseen
circumstances
(as defined
earlier).
For more information
about this exception,
see
More Than One Home
Sold During 2-Year
Period in
Publication 523.
Business Use or
Rental of Home
You may be able to exclude
your gain from the sale of a
home that you have used for
business or to produce rental
income. But you must meet the
ownership and use tests.
Example
1.
On May 29, 1998, Amy
bought a house. She moved in
on that date and lived in it
until May 31, 2000, when she
moved out of the house and
put it up for rent. The
house was rented from June
1, 2000, to March 31, 2002.
Amy moved back into the
house on April 1, 2002, and
lived there until she sold
it on January 30, 2004.
During the 5-year period
ending on the date of the
sale (January 31, 1999
January 30, 2004), Amy owned
and lived in the house for
more than 2 years as shown
in the table below.
Five Year Period
Used as Home
Used as Rental
1/31/99
5/31/00
16 months
6/1/00
3/31/02
22 months
4/1/02
1/30/04
22 months
38 months
22 months
Amy can exclude gain up
to $250,000. But she cannot
exclude the part of the gain
equal to the depreciation
she claimed for renting the
house, as explained after
Example 2.
Example
2.
William owned and used a
house as his main home from
1998 through 2001. On
January 1, 2002, he moved to
another state. He rented his
house from that date until
April 30, 2004, when he sold
it. During the 5-year period
ending on the date of sale
(May 1, 1999 April 30,
2004), William owned and
lived in the house for 32
months (more than 2 years).
He must report the sale on
Form 4797. He can exclude
gain up to $250,000.
However, he cannot exclude
the part of the gain equal
to the depreciation he
claimed for renting the
house, as explained next.
Depreciation after May 6,
1997.
If you were entitled to
take depreciation deductions
because you used your home
for business purposes or as
rental property, you cannot
exclude the part of your
gain equal to any
depreciation allowed as a
deduction for periods after
May 6, 1997. If you can show
by adequate records or other
evidence that the
depreciation deduction
allowed was less than the
amount allowable, the amount
you cannot exclude is the
amount allowed.
Property
used partly for business or
rental. If you used
property partly as a home
and partly for business or
to produce income, see
Publication 523.
Reporting the Sale
Do not report the 2004
sale of your main home on
your tax return unless:
You have a gain
and you do not
qualify to exclude
all of it, or
You have a gain
and you choose not
to exclude it.
If you have any taxable
gain on the sale of your
main home that cannot be
excluded, report the entire
gain realized on Schedule D
(Form 1040). Report it in
column (f) of line 1 or line
8 of Schedule D, depending
on how long you owned the
home. If you qualify for an
exclusion, show it on the
line directly below the line
on which you report the
gain. Write Section
121 exclusion in
column (a) of that line and
show the amount of the
exclusion in column (f) as a
loss (in parentheses).
If you used the home for
business or to produce
rental income, you may have
to use Form 4797 to report
the sale of the business or
rental part (or the sale of
the entire property if used
entirely for business or
rental in that year). See
Business Use or Rental of
Home in
Publication 523.
Installment sale.Some sales are made
under arrangements that
provide for part or all
of the selling price to
be paid in a later year.
These sales are called installment
sales. If you
finance the buyer's
purchase of your home
yourself, instead of
having the buyer get a
loan or mortgage from a
bank, you probably have
an installment sale. You
may be able to report
the part of the gain you
cannot exclude on the
installment basis.
Use Form 6252,
Installment Sale Income,
to report the sale.
Enter your exclusion on
line 15 of Form 6252.
Seller-financed
mortgage.
If you sell your home
and hold a note,
mortgage, or other
financial agreement, the
payments you receive
generally consist of
both interest and
principal. You must
report the interest you
receive as part of each
payment separately as
interest income. If the
buyer of your home uses
the property as a main
or second home, you must
also report the name,
address, and social
security number (SSN) of
the buyer on line 1 of
either Schedule B (Form
1040) or Schedule 1
(Form 1040A). The buyer
must give you his or her
SSN and you must give
the buyer your SSN.
Failure to meet these
requirements may result
in a $50 penalty for
each failure. If you or
the buyer does not have
and is not eligible to
get an SSN, see
Social Security
Number in
chapter 1.
More information.
For more information
on installment sales,
see Publication 537,
Installment Sales.
Special Situations
The situations that follow
may affect your exclusion.
Home
acquired in like-kind
exchange.
You cannot claim the
exclusion if:
You acquired
your home in a
like-kind exchange
(also known as a
section 1031
exchange), and
You sold the
home:
After
October 22,
2004, and
During
the 5-year
period
beginning
with the
date you
acquired the
home.
To defer gain from a
like-kind exchange, you must
have exchanged business or
investment property for
business or investment
property of a like kind. For
more information about
like-kind exchanges, see
Publication 544.
Expatriates.
You cannot claim the
exclusion if the
expatriation tax applies to
you. The expatriation tax
applies to U.S. citizens who
have renounced their
citizenship (and long-term
residents who have ended
their residency) if one of
their principal purposes was
to avoid U.S. taxes. For
more information about the
expatriation tax, see
chapter 4 of Publication
519, U.S. Tax Guide for
Aliens.
Home
destroyed or condemned.
If your home was destroyed
or condemned, any gain (for
example, because of
insurance proceeds you
received) qualifies for the
exclusion.
Any part of the gain that
cannot be excluded (because
it is more than the limit)
may be postponed under the
rules explained in:
Publication 547,
Casualties,
Disasters, and
Thefts, in the case
of a home that was
destroyed, or
Chapter 1 of
Publication 544,
Sales and Other
Dispositions of
Assets, in the case
of a home that was
condemned.
Sale of
remainder interest.
Subject to the other rules
in this chapter, you can
choose to exclude gain from
the sale of a remainder
interest in your home. If
you make this choice, you
cannot choose to exclude
gain from your sale of any
other interest in the home
that you sell separately.
Exception for sales to
related persons.
You cannot exclude gain
from the sale of a remainder
interest in your home to a
related person. Related
persons include your
brothers and sisters,
half-brothers and
half-sisters, spouse,
ancestors (parents,
grandparents, etc.), and
lineal descendants
(children, grandchildren,
etc.). Related persons also
include certain
corporations, partnerships,
trusts, and exempt
organizations.
Recapturing (Paying
Back) a Federal
Mortgage Subsidy
If you financed your home
under a federally subsidized
program (loans from tax-exempt
qualified mortgage bonds or
loans with mortgage credit
certificates), you may have to
recapture (pay back) all or part
of the benefit you received from
that program when you sell or
otherwise dispose of your home.
You recapture the benefit by
increasing your federal income
tax for the year of the sale.
You may have to pay this
recapture tax even if you can
exclude your gain from income
under the rules discussed
earlier; that exclusion does not
affect the recapture tax.
Loans
subject to recapture rules.
The recapture applies to
loans that:
Came from the
proceeds of
qualified mortgage
bonds, or
Were based on
mortgage credit
certificates.
The recapture also applies
to assumptions of these
loans.
When the
recapture applies. The
recapture of the federal
mortgage subsidy applies
only if you meet both of the
following conditions.
You sell or
otherwise dispose of
your home:
At a
gain, and
During
the first 9
years after
the date you
closed your
mortgage
loan.
Your income for
the year of
disposition is more
than that year's
adjusted qualifying
income for your
family size for that
year (related to the
income requirements
a person must meet
to qualify for the
federally subsidized
program).
When
recapture does not apply.
The recapture does not
apply if any of the
following situations apply
to you:
Your mortgage
loan was a qualified
home improvement
loan of not more
than $15,000,
The home is
disposed of as a
result of your
death,
You dispose of
the home more than 9
years after the date
you closed your
mortgage loan,
You transfer the
home to your spouse,
or to your former
spouse incident to a
divorce, where no
gain is included in
your income,
You dispose of
the home at a loss,
Your home is
destroyed by a
casualty, and you
repair it or replace
it on its original
site within 2 years
after the end of the
tax year when the
destruction
happened, or
You refinance
your mortgage loan
(unless you later
meet all of the
conditions listed
previously under
When the
recapture applies).
Notice of
amounts. At or near
the time of settlement of
your mortgage loan, you
should receive a notice that
provides the federally
subsidized amount and other
information you will need to
figure your recapture tax.
How to
figure and report the
recapture.The recapture tax is
figured on Form 8828,
Recapture of Federal
Mortgage Subsidy. If you
sell your home and your
mortgage is subject to
recapture rules, you must
file Form 8828 even if you
do not owe a recapture tax.
Attach Form 8828 to your
Form 1040. For more
information, see Form 8828
and its instructions.
