Chapter 15
Selling your home
What’s New
Mortgage debt forgiveness. The exclusion from gross income of income realized from a discharge received during 2017 of up to $2 million ($1 million if married filing separately) of qualified personal residence indebtedness is limited to discharges obtained pursuant to a binding written agreement entered into before 2017.
Reminder
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 24.
This chapter explains the tax rules that apply when you sell your main home. In most cases, your main home is the one in which you live most of the time.
If you sold your main home in 2017, 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. Generally, if you can exclude all 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 Form 8949, Sales and Other Dispositions of Capital Assets, and 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 generally 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.
- Figuring gain or loss.
- Basis.
- Excluding the gain.
- Ownership and use tests.
- Reporting the sale.
Other topics include the following.
- Business use or rental of home.
- Recapturing a federal mortgage subsidy.
Useful Items
You may want to see:
Publication
523 Selling Your Home- 530 Tax Information for Homeowners
- 547 Casualties, Disasters, and Thefts
Form (and Instructions)
- Schedule D (Form 1040) Capital Gains and Losses
- 982 Reduction of Tax Attributes Due to Discharge of Indebtedness
- 8828 Recapture of Federal Mortgage Subsidy
- 8949 Sales and Other Dispositions of Capital Assets
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 in most cases 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. However, if you sell vacant land used as part of your main home and that is adjacent to it, you may be able to exclude the gain from the sale under certain circumstances. See Pub. 523 for more information.
Example. 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.
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 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 during the year.
Example 1. You own two homes, one in New York and one in Florida. From 2013 through 2017, you live in the New York home for 7 months and in the Florida residence for 5 months of each year. In the absence of facts and circumstances indicating otherwise, the New York home is your main home. You would be eligible to exclude the gain from the sale of the New York home but not of the Florida home in 2017.
Example 2. You own a house, but you live in another house that you rent. The rented house is your main home.
Example 3. You own two homes, one in Virginia and one in New Hampshire. In 2013 and 2014, you lived in the Virginia home. In 2015 and 2016, you lived in the New Hampshire home. In 2017, you lived again in the Virginia home. Your main home in 2013, 2014, and 2017 is the Virginia home. Your main home in 2015 and 2016 is the New Hampshire home. You would be eligible to exclude gain from the sale of either home (but not both) in 2017.
Property used partly as your main home. If you use only part of the property as your main home, the rules discussed in this publication 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
The selling price is the total amount you receive for your home. It includes money and the fair market value of any other property or any other services you receive and all notes, mortgages, or other debts assumed by the buyer as part of the sale.
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 income on Form 1040, line 7.
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 Form 1040, line 21.
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 services or property other than cash or notes you received or will receive. Instead, box 4 will be checked to indicate your receipt or expected receipt of these items.
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, in most cases 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 generally 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.
Dispositions Other Than Sales
Some special rules apply to other dispositions of your main home.
Foreclosure or repossession. If your home was foreclosed on or repossessed, you have a disposition. See Pub. 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments, to determine if you have ordinary income, gain, or loss.
Abandonment. If you abandon your home, see Pub. 4681 to determine if you have ordinary income, gain, or loss.
Trading (exchanging) 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 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).
Transfer to spouse. If you transfer your home to your spouse or you transfer it to your former spouse incident to your divorce, you in most cases have no gain or loss. This is true even if you receive cash or other consideration for the home. As a result, the rules in this chapter do not apply.
More information. If you need more information, see Pub. 523 and Property Settlements in Pub. 504, Divorced or Separated Individuals.
Involuntary conversion. You have a disposition when your home is destroyed or condemned and you receive other property or money in payment, such as insurance or a condemnation award. This is treated as a sale and you may be able to exclude all or part of any gain from the destruction or condemnation of your home, as explained later under Special Situations.
Determining Basis
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. Generally, 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 generally 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 Pub. 523.
Cost As Basis
The cost of property is the amount you paid for it in cash, debt obligations, other property, or services.
Purchase. If you bought your home, your basis is its cost to you. This includes the purchase price and certain settlement or closing costs. In most cases, 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 Pub. 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, but not 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 (that is, without the need for financing).
Chapter 13 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 Pub. 523 for additional items and a discussion of basis other than cost.
Adjusted Basis
Adjusted basis is your cost or other basis increased or decreased by certain amounts. To figure your adjusted basis, see Pub. 523.
Increases to basis. These include the following.
- Additions and other improvements that have a useful life of more than 1 year.
- Special assessments for local improvements.
- Amounts you spent after a casualty to restore damaged property.
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.
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 sun-room, or a new 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 of repairs include repainting your house inside or outside, fixing your gutters or floors, repairing leaks or plastering, and replacing broken window panes.
Decreases to basis. These include the following.
- Discharge of qualified principal residence indebtedness that was excluded from income. See Discharges of qualified principal residence indebtedness, later.
- Some or all of the cancellation of debt income that was excluded due to your bankruptcy or insolvency. For details, see Publication 4681.
- 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.
- Energy-related credits allowed for expenditures made on the residence. (Reduce the increase in basis otherwise allowable for expenditures on the residence by the amount of credit allowed for those expenditures.)
- Adoption credit you claimed for improvements added to the basis of your home.
- Nontaxable payments from an adoption assistance program of your employer you used for improvements you added to the basis of your home.
- 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 primarily designed either to reduce consumption of electricity or natural gas or to improve the management of energy demand for a home.
- District of Columbia first-time homebuyer credit (allowed on the purchase of a principal residence in the District of Columbia beginning on August 5, 1997, and before January 1, 2012).
- General sales taxes (beginning in 2004) claimed as an itemized deduction on Schedule A (Form 1040) that were imposed on the purchase of personal property, such as a houseboat used as your home or a mobile home.
Discharges of qualified principal residence indebtedness. You may be able to exclude from gross income a discharge of qualified principal residence indebtedness. For discharges made during 2017, this exclusion applies only to discharges obtained pursuant to a binding written agreement entered into before 2017. If you choose to exclude this income, you must reduce (but not below zero) the basis of the principal residence by the amount excluded from your gross income.
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 or other computations 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 982 you filed to report any discharge of qualified principal residence indebtedness,
- Any Form 2119, Sale of Your Home, 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, or other source of computations.
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.
See Pub. 523 to figure the amount of your exclusion and your taxable gain, if any.
Maximum Exclusion
You can exclude up to $250,000 of the gain (other than gain allocated to periods of nonqualified use) 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.
For details on gain allocated to periods of nonqualified use, see Periods of nonqualified use, later.
You may be able to exclude up to $500,000 of the gain (other than gain allocated to periods of nonqualified use) 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.
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. However, the maximum amount you may be able to exclude will be reduced. See Reduced Maximum Exclusion, later.
Example 1—home owned and occupied for at least 2 years. Mya bought and moved into her main home in September 2015. She sold the home at a gain in October 2017. During the 5-year period ending on the date of sale in October 2017, she owned and lived in the home for more than 2 years. She meets the ownership and use tests.
Example 2—ownership test met but use test not met. Ayden bought a home, lived in it for 6 months, moved out, and never occupied the home again. He later sold the home for a gain. He owned the home during the entire 5-year period ending on the date of sale. 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 nor do they both 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.
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. The following examples assume that the reduced maximum exclusion (discussed later) does not apply to the sales.
Example 1. David Johnson, who is single, bought and moved into his home on February 1, 2015. Each year during 2015 and 2016, David left his home for a 2-month summer vacation. David sold the house on March 1, 2017. Although the total time David used his home is less than 2 years (21 months), he meets the requirement and may exclude gain. 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.
Example 2. Professor Paul Beard, who is single, bought and moved into a house on August 19, 2014. He lived in it as his main home continuously until January 5, 2016, when he went abroad for a 1-year sabbatical leave. On February 5, 2017, 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.
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. Beginning in 2006, Helen Jones lived in a rented apartment. The apartment building was later converted to condominiums, and she bought her same apartment on December 2, 2014. In 2015, Helen became ill and on April 14 of that year she moved to her daughter’s home. On July 7, 2017, 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 8, 2012, to July 7, 2017, the date she sold the condominium. She owned her condominium from December 2, 2014, to July 7, 2017 (more than 2 years). She lived in the property from July 8, 2012 (the beginning of the 5-year period), to April 14, 2015 (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.
Cooperative apartment. 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:
- 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.
Exceptions To Ownership and Use Tests
The following sections contain exceptions to the ownership and use tests for certain taxpayers.
Exception for individuals with a disability. There is an exception to the use test if:
- 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 during the 5-year period before the sale of your home.
Under this exception, you are considered to live in your home during any time within the 5-year period that you own the home and live in a facility (including a nursing home) 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 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.
Members of the uniformed services or Foreign Service, employees of the intelligence community, or employees or volunteers of the Peace Corps. 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, or as an employee of the intelligence community. You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve outside the United States either as an employee of the Peace Corps on “qualified official extended duty” or as an enrolled volunteer or volunteer leader 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.
For more information about the suspension of the 5-year test period, see Service, Intelligence, and Peace Corps Personnel in Pub. 523.
Married Persons
If you and your spouse file a joint return for the year of sale and one spouse meets the ownership and use tests, you can exclude up to $250,000 of the gain. (But see Special rules for joint returns, next.)
Special rules for joint returns. 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.
If either spouse does not satisfy all these requirements, the maximum exclusion that can be claimed by the couple is the total of the maximum exclusions that each spouse would qualify for if not married and the amounts were figured separately. For this purpose, each spouse is treated as owning the property during the period that either spouse owned the property.
Example 1—one spouse sells a home. Emily sells her home in June 2017 for a gain of $300,000. 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 2017. The $500,000 maximum exclusion for certain joint returns does not apply because Jamie does not meet the use test.
Example 2—each spouse sells a home. The facts are the same as in Example 1 except that Jamie also sells a home in 2017 for a gain of $200,000 before he marries Emily. He meets the ownership and use tests on his home, but Emily does not. Emily can exclude $250,000 of gain and Jamie can exclude $200,000 of gain on the respective sales of their individual homes. However, Emily cannot use Jamie’s unused exclusion to exclude more than $250,000 of gain. Therefore, Emily and Jamie must recognize $50,000 of gain on the sale of Emily’s home. The $500,000 maximum exclusion for certain joint returns does not apply because Emily and Jamie do not both meet the use test for the same home.
Sale of main home by surviving spouse. 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.
- The sale or exchange took place after 2008.
- The sale or exchange took place no more than 2 years after the date of death of your spouse.
- You have not remarried.
- You and your spouse met the use test at the time of your spouse’s death.
- You or your spouse met the ownership test at the time of your spouse’s death.
- Neither you nor your spouse excluded gain from the sale of another home during the last 2 years.
Example. Harry owned and used a house as his main home since 2013. Harry and Wilma married on July 1, 2017, and from that date they used Harry’s house as their main home. Harry died on August 15, 2017, and Wilma inherited the property. Wilma sold the property on September 2, 2017, 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.
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
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:
- Fail to meet the ownership and use tests, or
- Have used the exclusion within 2 years of selling their current home.
In both cases, to qualify for a reduced exclusion, the sale of your main home must be due to one of the following reasons.
- A change in place of employment.
- Health.
- Unforeseen circumstances.
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.
See Pub. 523 for more information.
Business Use or Rental of Home
You may be able to exclude gain from the sale of a home you have used for business or to produce rental income. But you must meet the ownership and use tests.
Periods of nonqualified use. In most cases, gain from the sale or exchange of your main home will not qualify for the exclusion to the extent that the gains are allocated to periods of nonqualified use. Nonqualified use is any period after 2008 during which neither you nor your spouse (or your former spouse) used the property as a main home with the following exceptions.
Exceptions. A period of nonqualified use does not include:
- Any portion of the 5-year period ending on the date of the sale or exchange after the last date you (or your spouse) use the property as a main home;
- Any period (not to exceed an aggregate period of 10 years) during which you (or your spouse) are serving on qualified official extended duty:
- As a member of the uniformed services;
- As a member of the Foreign Service of the United States; or
- As an employee of the intelligence community; and
- Any other period of temporary absence (not to exceed an aggregate period of 2 years) due to change of employment, health conditions, or such other unforeseen circumstances as may be specified by the IRS.
The gain resulting from the sale of the property is allocated between qualified and nonqualified use periods based on the amount of time the property was held for qualified and nonqualified use. Gain from the sale or exchange of a main home allocable to periods of qualified use will continue to qualify for the exclusion for the sale of your main home. Gain from the sale or exchange of property allocable to nonqualified use will not qualify for the exclusion.
Calculation. To figure the portion of the gain allocated to the period of nonqualified use, multiply the gain by the following fraction:
Example 1. On May 24, 2011, Amy, who is unmarried for all years in this example, bought a house. She moved in on that date and lived in it until May 31, 2013, when she moved out of the house and put it up for rent. The house was rented from June 1, 2013, to March 31, 2015. Amy claimed depreciation deductions in 2013 through 2015 totaling $10,000. Amy moved back into the house on April 1, 2015, and lived there until she sold it on January 28, 2017, for a gain of $200,000. During the 5-year period ending on the date of the sale (January 29, 2012–January 28, 2017), 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 |
| 1/29/12 –5/31/13 | 16 months | |
| 6/1/13 –3/31/15 | 22 months | |
| 4/1/15 –1/28/17 | 22 months | |
| 38 months | 22 months |
Next, Amy must figure how much of her gain is allocated to nonqualified use and how much is allocated to qualified use. During the period Amy owned the house (2,076 days), her period of nonqualified use was 669 days. Amy divides 669 by 2,076 and obtains a decimal (rounded to at least three decimal places) of 0.322. To figure her gain attributable to the period of nonqualified use, she multiplies $190,000 (the gain not attributable to the $10,000 depreciation deduction) by 0.322. Because the gain attributable to periods of nonqualified use is $61,180, Amy can exclude $128,820 of her gain.
See worksheet 15.1 for Taxable Gain on Sale of Home—Completed Example 1 for Amy, earlier, for how to figure Amy’s taxable gain and exclusion.
Worksheet 15.1 Taxable Gain on Sale of Home—Completed Example 1 for Amy
Example 2. William owned and used a house as his main home from 2011 through 2014. On January 1, 2015, he moved to another state. He rented his house from that date until April 29, 2017, when he sold it. During the 5-year period ending on the date of sale (April 30, 2012–April 29, 2017), William owned and lived in the house for more than 2 years. He must report the sale on Form 4797 because it was rental property at the time of sale. Because the period of nonqualified use does not include any part of the 5-year period after the last date William lived in the house, he has no period of nonqualified use. 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.
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 or allowable as a deduction for periods after May 6, 1997. If you can show by adequate records or other evidence that the depreciation allowed was less than the amount allowable, then you may limit the amount of gain recognized to the depreciation allowed. See Pub. 544 for more information.
Property used partly for business or rental. If you used property partly as a home and partly for business or to produce rental income, see Pub. 523.
Reporting the Sale
Do not report the 2017 sale of your main home on your tax return unless:
- You have a gain and don’t qualify to exclude all of it,
- You have a gain and choose not to exclude it, or
- You received Form 1099-S.
If any of these conditions apply, report the entire gain or loss. For details on how to report the gain or loss, see the Instructions for Schedule D (Form 1040) and the Instructions for Form 8949.
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 Pub. 523 and the Instructions for Form 4797 for additional information.
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 in most cases consist of both interest and principal. You must separately report as interest income the interest you receive as part of each payment. 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 Schedule B (Form 1040A or 1040). 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 either you or the buyer does not have and is not eligible to get an SSN, see Social Security Number (SSN) in chapter 1.
More information. For more information on installment sales, see Pub. 537, Installment Sales.
Special Situations
The situations that follow may affect your exclusion.
Sale of home acquired in a 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), or your basis in your home is determined by reference to the basis of the home in the hands of the person who acquired the property in a like-kind exchange (for example, you received the home from that person as a gift), and
- You sold the home during the 5-year period beginning with the date your home was acquired in the like-kind exchange.
Gain from a like-kind exchange is not taxable at the time of the exchange. This means that gain will not be taxed until you sell or otherwise dispose of the property you receive. 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 Pub.544, Sales and Other Dispositions of Assets.
Home relinquished in a like-kind exchange. If you use your main home partly for business or rental purposes and then exchange the home for another property, see Pub. 523.
Expatriates. You cannot claim the exclusion if the expatriation tax applies to you. The expatriation tax applies to certain U.S. citizens who have renounced their citizenship (and to certain long-term residents who have ended their residency). For more information about the expatriation tax, see Expatriation Tax in chapter 4 of Pub. 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 maximum exclusion) can be postponed under the rules explained in:
- Pub. 547, in the case of a home that was destroyed, or
- Pub. 544, chapter 1, 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, 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.
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 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 recapture applies. 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 within the first 9 years after the date you close 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. Recapture does not apply in any of the following situations.
- Your mortgage loan was a qualified home improvement loan (QHIL) of not more than $15,000 used for alterations, repairs, and improvements that protect or improve the basic livability or energy efficiency of your home.
- Your mortgage loan was a QHIL of not more than $150,000 in the case of a QHIL used to repair damage from Hurricane Katrina to homes in the hurricane disaster area; a QHIL funded by a qualified mortgage bond that is a qualified Gulf Opportunity Zone Bond; or a QHIL for an owner-occupied home in the Gulf Opportunity Zone (GO Zone), Rita GO Zone, or Wilma GO Zone. For more information, see Pub. 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma. Also see Pub. 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas.
- 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 replace it on its original site within 2 years after the end of the tax year when the destruction happened. The replacement period is extended for main homes destroyed in a federally declared disaster area, a Midwestern disaster area, the Kansas disaster area, and the Hurricane Katrina disaster area. For more information, see Replacement Period in Pub. 547.
- You refinance your mortgage loan (unless you later meet the conditions listed previously under When 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. 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.