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First-time homebuyer credit. The first-time homebuyer credit has been expanded for homes bought after 2008 and before May 1, 2010 (before July 1, 2010, if you entered into a written binding contract before May 1, 2010). The maximum amount of the credit has been increased, and the recapture rules have changed. You will not have to repay the credit for a home you purchased in 2009 or 2010 if you use it as your main home for the entire 36-month period beginning on the purchase date. (See Reminders , below, and Chapter 37 for details.)
Nonqualified use. Gain from the sale or exchange of a main home cannot be excluded from income if the gain is allocable to periods of nonqualified use. See Periods of nonqualified use , later.
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 23.
Recapturing the first-time homebuyer credit. If you claimed the first-time homebuyer credit in 2008, and you sold the home or the home stopped being your main home in 2009, you generally must repay the credit. You repay the credit by including it as additional tax on the return for the year your home stops being your main home. For details, see chapter 37.
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 2009, 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 complete 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. However, you may need to report it. See Reporting the Sale , later.
The following are main topics in this chapter.
Other topics include the following.
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:
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.
You buy a piece of land and move your main home to it. Then you sell the land on which your main home was located. This sale is not considered a sale of your main home, and you cannot exclude any gain on the sale of the land.
If you have more than one home, you can exclude gain only from the sale of your main home. You must include in income 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.
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.
You own a house, but you live in another house that you rent. The rented house is your main home.
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 |
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.
The amount realized is the selling price minus selling expenses.
Selling expenses include:
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.
To figure the amount of gain or loss, compare the amount realized to the adjusted basis.
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.
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.
If you and your spouse sell your jointly owned home and file a joint return, you figure your gain or loss as one taxpayer.
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.
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.
Some special rules apply to other dispositions of your main home.
This indebtedness is a mortgage you took out to buy, build, or substantially improve your principal residence. It also must be secured by your principal residence.
The exclusion applies only to debt discharged after 2006 and before 2013. The maximum amount you can treat as qualified principal residence indebtedness is $2 million ($1 million if married filing separately). You cannot exclude from gross income discharge of qualified principal residence indebtedness if the discharge was for services performed for the lender or on account of any other factor not directly related to a decline in the value of your residence or to your financial condition.
If you trade your old home for another home, treat the trade as a sale and a purchase.
You owned and lived in a home with 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).
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.
You need to know your basis in your home to figure 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.), your basis is either its fair market value when you received it or the adjusted basis of the previous owner.
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 13 of this publication and in Publication 523.
The cost of property is the amount you pay for it in cash, debt obligations, other property, or services.
Adjusted basis is your cost or other basis increased or decreased by certain amounts. To figure your adjusted basis, you can use Worksheet 1 in Publication 523.
These include the following.
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. For example, 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 new garage, is also an improvement.
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. For example, repainting your house inside or outside, fixing your gutters or floors, repairing leaks or plastering, and replacing broken window panes are examples of repairs.
These include the following.
The records you should keep include:
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.
You can use Worksheet 2 in Publication 523 to figure the amount of your exclusion and your taxable gain, if any.
If you have any taxable gain from the sale of your home, you may have to increase your withholding or make estimated tax payments. See Publication 505, Tax Withholding and Estimated Tax.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 may be able to exclude up to $500,000 of the gain on the sale of your main home if you are married and file a joint return and meet the requirements listed in the discussion of the special rules for joint returns, later, under Married Persons .
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:
Amanda bought and moved into her main home in September 2006. She sold the home at a gain on September 15, 2009. During the 5-year period ending on the date of sale (September 16, 2004–September 15, 2009), she owned and lived in the home for more than 2 years. She meets the ownership and use tests.
Dan bought a home in 2003. 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, 2009. He owned the home during the entire 5-year period ending on the date of sale (June 29, 2004–June 28, 2009). 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).
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 nor do they have to occur at the same time.
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 × 2) during the 5-year period ending on the date of sale.
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. The following examples assume that the reduced maximum exclusion (discussed later) does not apply to the sales.
David Johnson, who is single, bought and moved into his home on February 1, 2007. Each year during 2007 and 2008, David left his home for a 2-month summer vacation. David sold the house on March 1, 2009. Although the total time David used his home is less than 2 years (21 months), he may exclude any gain up to $250,000. The 2-month vacations are short temporary absences and are counted as periods of use in determining whether David used the home for the required 2 years.
Professor Paul Beard, who is single, bought and moved into a house on August 28, 2006. He lived in it as his main home continuously until January 5, 2008, when he went abroad for a 1-year sabbatical leave. On February 6, 2009, 1 month after returning from the leave, Paul 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, because he did not use the residence for the required 2 years.
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.
In 2000, Helen Jones lived in a rented apartment. The apartment building was later converted to condominiums, and she bought her same apartment on December 3, 2006. In 2007, Helen became ill and on April 14 of that year she moved to her daughter's home. On July 12, 2009, while still living in her daughter's home, she sold her condominium.
Helen can exclude gain on the sale of her condominium because she met the ownership and use tests during the 5-year period from July 13, 2004, to July 12, 2009, the date she sold the condominium. She owned her condominium from December 3, 2006, to July 12, 2009 (more than 2 years). She lived in the property from July 13, 2004 (the beginning of the 5-year period), to April 14, 2007 (more than 2 years).
The time Helen lived in her daughter's home during the 5-year period can be counted toward her period of ownership, and the time she lived in her rented apartment during the 5-year period can be counted toward her period of use.
If you sold stock as a tenant-stockholder 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:
The following sections contain exceptions to the ownership and use tests for certain taxpayers.
There is an exception to the use test if, during the 5-year period before the sale of your home:
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.
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 replacement home on whose sale 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.
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, as an employee of the intelligence community, or as an employee or volunteer of the Peace Corps. 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.
David bought and moved into a home in 2001. 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 2009. To meet the use test, David chooses to suspend the 5-year test period for the 6 years he was on qualified 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 qualified 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.
For more information about the suspension of the 5-year test period, see Members of the uniformed services or Foreign Service, employees of the intelligence community, or employees or volunteers of the Peace Corps in Publication 523.
If you and your spouse file a joint return for the year of sale and one spouse meets the ownership and use test, you can exclude up to $250,000 of the gain. (But see Special rules for joint returns , next.)
You can exclude up to $500,000 of the gain on the sale of your main home if all of the following are true.
Emily sells her home in June 2009. She marries Jamie later in the year. She meets the ownership and use tests, but Jamie does not. Emily can exclude up to $250,000 of gain on a separate or joint return for 2009. The $500,000 maximum exclusion for certain joint returns does not apply because Jamie does not meet the use test.
The facts are the same as in Example 1 except that Jamie also sells a home in 2009 before he marries Emily. He meets the ownership and use tests on his home, but Emily does not. Emily and Jamie can each exclude up to $250,000 of gain from the sale of their individual homes. The $500,000 maximum exclusion for certain joint returns does not apply because Emily and Jamie do not jointly meet the use test for the same home.
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. If you meet all of the following requirements, you may qualify to exclude up to $500,000 of any gain from the sale or exchange of your main home.
Harry has owned and used a house as his main home since 2006. Harry and Wilma marry on July 1, 2009, and from that date they use Harry's house as their main home. Harry died on August 15, 2009, and Wilma inherited the property. Wilma sold the property on September 1, 2009, at which time she had not remarried. Although Wilma owned and used the house for less than 2 years, Wilma is considered to have satisfied the ownership and use tests because her period of ownership and use includes the period that Harry owned and used the property before death.
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.
You are considered to have used property as your main home during any period when:
If you fail to meet the requirements to qualify for the $250,000 or $500,000 exclusion, you may still qualify for a reduced exclusion. This applies to those who:
.
In both cases, to qualify for a reduced exclusion, the sale of your main home must be due to one of the following reasons.
You may be able to exclude 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.
On May 29, 2003, Amy bought a house. She moved in on that date and lived in it until May 31, 2005, when she moved out of the house and put it up for rent. The house was rented from June 1, 2005, to March 31, 2007. Amy moved back into the house on April 1, 2007, and lived there until she sold it on January 30, 2009. During the 5-year period ending on the date of the sale (January 31, 2004–January 30, 2009), Amy owned and lived in the house for more than 2 years as shown in the following table.
| Five Year Period | Used as Home | Used as Rental | ||
| 1/31/04 – 5/31/05 | 16 months | |||
| 6/1/05 – 3/31/07 | 22 months | |||
| 4/1/07 – 1/30/09 | 22 months | |||
| 38 months | 22 months |
Amy can exclude gain up to $250,000. However, she cannot exclude the part of the gain equal to the depreciation she claimed or could have claimed for renting the house, as explained later under Depreciation after May 6, 1997 .
William owned and used a house as his main home from 2003 through 2006. On January 1, 2007, he moved to another state. He rented his house from that date until April 30, 2009, when he sold it. During the 5-year period ending on the date of sale (May 1, 2004–April 30, 2009), William owned and lived in the house for 32 months (more than 2 years). He must report the sale on Form 4797 because it was rental property at the time of sale. Because he met the ownership and use tests, he can exclude gain up to $250,000. However, he cannot exclude the part of the gain equal to the depreciation he claimed or could have claimed for renting the house, as explained next.
Do not report the 2009 sale of your main home on your tax return unless:
If you have any taxable gain on the sale of your main home that cannot be excluded, report the entire gain on Schedule D (Form 1040). Report it in column (f) of line 1 or line 8 of Schedule D, as short-term or long-term capital gain 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. Enter “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 have a loss on the sale of your main home for which you received a Form 1099-S, you must report the loss on Schedule D even though the loss is not deductible. Report the transaction on line 1 or 8, as above. Complete columns (a) through (e). Enter -0- in column (f).
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). See Business Use or Rental of Home in Publication 523 and the Instructions for Form 4797.
The situations that follow may affect your exclusion.
You cannot claim the exclusion if:
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 maximum exclusion) can be postponed under the rules explained in:
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.
You cannot exclude gain from the sale of a remainder interest in your home to a related person. Related persons include your brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.). Related persons also include certain corporations, partnerships, trusts, and exempt organizations.
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 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.
The recapture applies to loans that:
The recapture also applies to assumptions of these loans.
Recapture of the federal mortgage subsidy applies only if you meet both of the following conditions.
Recapture does not apply in any of the following situations.
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.
If you claimed the first-time homebuyer credit in 2008, and you sold the home or the home stopped being your main home in 2009, you generally must repay the credit. You repay the credit by including it as additional tax on the return for the year your home stops being your main home. For details, see chapter 37.
Your Federal Income Tax - Introduction
Tax Withholding and Estimated Tax
Wages, Salaries, and other Benefits
Dividends and other Corporate Distributions
Retirement Plans, Pensions, and Annuities
Social Security and Equivalent Railroad Retirement Benefits
Selling Your Home
Individual Retirement Arrangements (IRAs)
Nonbusiness Casualty And Theft Losses
Car Expenses And Other Employee Business Expenses
Tax Benefits For Work-Related Education
Tax On Investment Income Of Certain Minor Children
Child And Dependent Care Credit
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