Avoid Taxes on Selling House in USA

By | May 15, 2019
(Last Updated On: May 16, 2019)

Tax tips for taxpayers to consider when selling their home

The IRS has some good news for taxpayers who are selling their home. When filing their taxes, they may qualify to exclude all or part of any gain from the sale from their income. Here are some things that homeowners should think about when selling a home:

This publication also has worksheets for calculations relating to the sale of your home. It will show you how to:

  1. Determine if you have a gain or loss on the sale of your home,
  2. Figure how much of any gain is taxable, and
  3. Report the transaction correctly on your tax return.

Does Your Home Sale Qualify for the Exclusion of Gain?

The tax code recognizes the importance of home ownership by allowing you to exclude gain when you sell your main home. To qualify for the maximum exclusion of gain ($250,000 or $500,000 if married filing jointly) you must meet the Eligibility Test , explained later. To qualify for a partial exclusion of gain, meaning an exclusion of gain less than the full amount, you must meet one of the situations listed in Does Your Home Qualify for a Partial Exclusion of Gain? , later.

Before considering the Eligibility Test or whether your home qualifies for a partial exclusion, you should consider some preliminary items.

Transfer of your home to a spouse or an ex-spouse.

Generally, if you transferred your home (or share of a jointly owned home) to a spouse or ex-spouse as part of a divorce settlement, you are considered to have no gain or loss. You have nothing to report from the transfer and this entire publication doesn’t apply to you. However, there is one exception to this rule. If your spouse or ex-spouse is a nonresident alien, then you likely will have a gain or loss from the transfer and the tests in this publication apply.

Home’s date of sale.

To determine if you meet the Eligibility Test or qualify for a partial exclusion, you will need to know the home’s date of sale, meaning when you sold it. If you received Form 1099-S, Proceeds From Real Estate Transactions, the date of sale appears in box 1. If you didn’t receive Form 1099-S, the date of sale is either the date the title transferred or the date the economic burdens and benefits of ownership shifted to the buyer, whichever date is earlier. In most cases, these dates are the same.

Sale of your main home 

You may take the exclusion, whether maximum or partial, only on the sale of a home that is your principal residence, meaning your main home. An individual has only one main home at a time. If you own and live in just one home, then that property is your main home. If you own or live in more than one home, then you must apply a “facts and circumstances” test to determine which property is your main home. While the most important factor is where you spend the most time, other factors are relevant as well. They are listed below. The more of these factors that are true of a home, the more likely that it is your main home. 

  • The address listed on your:
    1. U.S. Postal Service address,
    2. Voter Registration Card,
    3. Federal and state tax returns, and
    4. Driver’s license or car registration.
  • The home is near:
    1. Where you work,
    2. Where you bank,
    3. The residence of one or more family members, and
    4. Recreational clubs or religious organizations of which you are a member.

Finally, the exclusion can apply to many different types of housing facilities. A single-family home, a condominium, a cooperative apartment, a mobile home, and a houseboat each may be a main home and therefore qualify for the exclusion.

Eligibility Test

The Eligibility Test determines whether you are eligible for the maximum exclusion of gain ($250,000 or $500,000 if married filing jointly).

Eligibility Step 1—Automatic Disqualification

Determine whether any of the automatic disqualifications apply.

Your home sale isn’t eligible for the exclusion if ANY of the following are true.

  • You acquired the property through a like-kind exchange (1031 exchange), during the past 5 years. See Pub. 544, Sales and Other Dispositions of Assets.
  • You are subject to expatriate tax. For more information about expatriate tax, see chapter 4 of Pub. 519, U.S. Tax Guide for Aliens.

If any of these conditions are true, the exclusion doesn’t apply. Skip to Figuring Gain or Loss , later.

Eligibility Step 2—Ownership

Ownership and use

To claim the exclusion, the taxpayer must meet ownership and use tests. During a five-year period ending on the date of the sale, the homeowner must have owned the home and lived in it as their main home for at least two years.

For a married couple filing jointly, only one spouse has to meet the ownership requirement.

You’re eligible for the exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale. 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. Generally, you’re not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home. Refer to Publication 523 for the complete eligibility requirements, limitations on the exclusion amount, and exceptions to the two-year rule.

Example 1.

Mary bought a home on May 1, 2001. She used it as her main home until August 27, 2004. On August 28, 2004, she went on qualified official extended duty with the Navy. She didn’t live in the house again before selling it on August 1, 2017. Mary chooses to use the entire 10-year suspension period. Therefore, the suspension period would extend back from August 1, 2017, to August 2, 2007, and the 5-year test period would extend back to August 2, 2002. During that period, Mary owned the house all 5 years and lived in it as her main home from August 2, 2002, until August 28, 2004, a period of more than 24 months. She meets the ownership and use tests because she owned and lived in the home for at least 2 years during this test period.

Example 2.

John bought and moved into a home in 2007. He lived in it as his main home for 3½ years. For the next 6 years, he didn’t live in it because he was on qualified official extended duty with the Army. He then sold the home at a gain in 2016. To meet the use test, John 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, John’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 3½ years during this test period.

Eligibility Step 3—Residence

Determine whether you meet the residence requirement.

If you owned the home and used it as your residence for at least 24 months of the previous 5 years, you meet the residence requirement. The 24 months of residence can fall anywhere within the 5-year period, and it doesn’t have to be a single block of time. All that is required is a total of 24 months (730 days) of residence during the 5-year period. Unlike the ownership requirement, each spouse must meet the residence requirement individually for a married couple filing jointly to get the full exclusion.

If you were ever away from home,

you need to determine whether that time counts towards your residence requirement. A vacation or other short absence counts as time you lived at home (even if you rented out your home while you were gone).

If you become physically or mentally unable to care for yourself,

you only need to show that your home was your residence for 12 months out of the 5 years leading up to the date of sale. In addition, any time you spent living in a care facility (such as a nursing home) counts toward your residence requirement, so long as the facility has a license from a state or other political entity to care for people with your condition.

Eligibility Step 4—Look-Back

Determine whether you meet the look-back requirement.

If you didn’t sell another home during the 2-year period before the date of sale (or, if you did sell another home during this period, but didn’t take an exclusion of the gain earned from it), you meet the look-back requirement. You may take the exclusion only once during a 2-year period.

Eligibility Step 5—Exceptions to the Eligibility Test

There are some exceptions to the Eligibility Test. If any of the following situations apply to you, read on to see if they may affect your qualification. If none of these situations apply, skip to Step 6.


Separated or divorced taxpayers.

If you were separated or divorced prior to the sale of the home, you can treat the home as your residence if:

  • You are a sole or joint owner, and
  • Your spouse or former spouse is allowed to live in the home under a divorce or separation agreement and uses the home as his or her main home.

If your home was transferred to you by a spouse or ex-spouse (whether in connection with a divorce or not), you can count any time when your spouse owned the home as time when you owned it. However, you must meet the residence requirement on your own.

Widowed taxpayers.

If you are a widowed taxpayer who doesn’t meet the 2-year ownership and residence requirements on your own, consider the following rule. If you sell your home within 2 years of the death of your spouse and you haven’t remarried at the time of the sale, then you may include any time when your late spouse owned and lived in the home, even if without you, to meet the ownership and residence requirements. 

Also, you may be able to increase your exclusion amount from $250,000 to $500,000. You may take the higher exclusion if you meet all of the following conditions.

  1. You sell your home within 2 years of the death of your spouse;
  2. You haven’t remarried at the time of the sale;
  3. Neither you nor your late spouse took the exclusion on another home sold less than 2 years before the date of the current home sale; and
  4. You meet the 2-year ownership and residence requirements (including your late spouse’s times of ownership and residence if need be).

Service, Intelligence, and Peace Corps personnel.

If you or your spouse are a member of the Uniformed Services or the Foreign Service, or an employee of the intelligence community in the United States, you may choose to suspend the 5-year test period for ownership and residence when you’re on qualified official extended duty. This means you may be able to meet the 2-year residence test even if, because of your service, you didn’t actually live in your home for at least the 2 years during the 5-year period ending on the date of sale.

Qualified extended duty.

You are on qualified extended duty if:

  • You are called or ordered to active duty for an indefinite period, or for a definite period of more than 90 days.
  • You are serving at a duty station at least 50 miles from your main home, or you are living in government quarters under government orders.
  • You are one of the following:
    1. A member of the armed forces (Army, Navy, Air Force, Marine Corps, Coast Guard);
    2. A member of the commissioned corps of the National Oceanic and Atmospheric Administration (NOAA) or the Public Health Service;
    3. A Foreign Service chief of mission, ambassador-at-large, or officer;
    4. A member of the Senior Foreign Service or the Foreign Service personnel;
    5. An employee, enrolled volunteer, or enrolled volunteer leader of the Peace Corps serving outside the United States; or
    6. An employee of the intelligence community, meaning:
      1. The Office of the Director of National Intelligence, the Central Intelligence Agency, the National Security Agency, the Defense Intelligence Agency, the National Geospatial-Intelligence Agency, or the National Reconnaissance Office;
      2. Any other office within the Department of Defense for the collection of specialized national intelligence through reconnaissance programs;
      3. Any of the intelligence elements of the Army, the Navy, the Air Force, the Marine Corps, the Federal Bureau of Investigation, the Department of Treasury, the Department of Energy, and the Coast Guard;
      4. The Bureau of Intelligence and Research of the Department of State; or
      5. Any of the elements of the Department of Homeland Security concerned with the analyses of foreign intelligence information.

Period of suspension.

The period of suspension can’t last more than 10 years. Together, the 10-year suspension period and the 5-year test period can be as long as, but no more than, 15 years. You can’t 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.

Vacant land next to home.

You can include the sale of vacant land adjacent to the land on which your home sits as part of a sale of your home if ALL of the following are true.

  • You owned and used the vacant land as part of your home.
  • The sale of the vacant land and the sale of your home occurred within 2 years of each other.
  • Both sales either meet the Eligibility Test or qualify for partial tax benefits, as described earlier.

Also, if your sale of vacant land meets all these requirements, you must treat that sale and the sale of your home as a single transaction for tax purposes, meaning that you may apply the exclusion only once.

However, if you move your home from the land on which it stood (meaning you relocate the actual physical structure), then that land no longer counts as part of your home. For example, if you move a mobile home to a new lot and sell the old lot, then you can’t treat the sale of the old lot as the sale of your home.

Home destroyed or condemned—considerations for benefits.

If an earlier home of yours was destroyed or condemned, you may be able to count your time there towards the ownership and residence test.

If your home was destroyed, see Pub. 547, Casualties, Disasters, or Thefts. If your home was condemned, see Pub. 544, Sales and Other Disposition of Assets.

Remainder interest.

The sale of a remainder interest in your home is eligible for the exclusion only if both of the following conditions are met.

  • The buyer isn’t a “related party.” A related party can be a related person or a related corporation, trust, partnership, or other entity which you control or in which you have an interest.
  • You haven’t previously sold an interest in the home for which you took the exclusion.

Like-kind/1031 exchange.

If you sold a home that you acquired in a like-kind exchange, then the following test applies.

You can’t claim the exclusion if:

  1. Either a. or b. applies:

a. You acquired your home in a like-kind exchange (also known as a section 1031 exchange), or

b. Your basis in your home is determined by reference to a previous owner’s basis, and that previous owner acquired the property in a like-kind exchange (for example, the owner acquired the home and then gave it to you); and

2. You sold the home within 5 years of the date your home was acquired in the like-kind exchange.

For more information about like-kind exchanges, see Pub. 544.

If you relinquished your home in a like-kind exchange, then you should determine if you qualify to exclude gain as you would if you sold the home. Under certain circumstances, you may meet the requirements for both the exclusion of gain from the exchange of a main home and the nonrecognition of gain from a like-kind exchange. For more information, see Revenue Procedure 2005-14, 2005-7 I.R.B. 528, available at IRS.gov/irb/2005-07_IRB#RP-2005-14.


Eligibility Step 6 Final Determination of Eligibility

If you meet the ownership, residence, and look-back requirements, taking the exceptions into account, then you meet the Eligibility Test. Your home sale qualifies for the maximum exclusion. Skip to Worksheet 1, later.

If you didn’t meet the Eligibility Test, then your home isn’t eligible for the maximum exclusion, but you should continue to Does Your Home Qualify for a Partial Exclusion of Gain? Click here .

Gains 

Taxpayers who sell their main home and have a gain from the sale may be able to exclude up to $250,000 of that gain from their income. Taxpayers who file a joint return with their spouse may be able to exclude up to $500,000.  
Homeowners excluding all the gain do not need to report the sale on their tax return.

Losses 

Some taxpayers experience a loss when their main home sells for less than what they paid for it. This loss is not deductible.

Does Your Home Qualify for a Partial Exclusion of Gain?

If you don’t meet the Eligibility Test, you may still qualify for a partial exclusion of gain. You can meet the requirements for a partial exclusion if the main reason for your home sale was a change in workplace location, a health issue, or an unforeseeable event.

Work-Related Move

You meet the requirements for a partial exclusion if any of the following events occurred during your time of ownership and residence in the home.

  • You took or were transferred to a new job in a work location at least 50 miles farther from the home than your old work location. For example, your old work location was 15 miles from the home and your new work location is 65 miles from the home.
  • You had no previous work location and you began a new job at least 50 miles from the home.
  • Either of the above is true of your spouse, a co-owner of the home, or anyone else for whom the home was his or her residence.

Health-Related Move

You meet the requirements for a partial exclusion if any of the following health-related events occurred during your time of ownership and residence in the home.

  • You moved to obtain, provide, or facilitate diagnosis, cure, mitigation, or treatment of disease, illness, or injury for yourself or a family member.
  • You moved to obtain or provide medical or personal care for a family member suffering from a disease, illness, or injury. Family includes your:
    1. Parent, grandparent, stepmother, stepfather;
    2. Child (including adopted child, eligible foster child, and stepchild), grandchild;
    3. Brother, sister, stepbrother, stepsister, half-brother, half-sister;
    4. Mother-in-law, father-in-law, brother-in-law, sister-in-law, son-in-law, daughter-in-law;
    5. Uncle, aunt, nephew, or niece.
  • A doctor recommended a change in residence for you because you were experiencing a health problem.
  • The above is true of your spouse, a co-owner of the home, or anyone else for whom the home was his or her residence.

Unforeseeable Events

You meet the standard requirements if any of the following events occurred during the time you owned and lived in the home you sold.

  • Your home was destroyed or condemned.
  • Your home suffered a casualty loss because of a natural or man-made disaster or an act of terrorism. (It doesn’t matter whether the loss is deductible on your tax return.)
  • You, your spouse, a co-owner of the home, or anyone else for whom the home was his or her residence:
    1. Died;
    2. Became divorced or legally separated;
    3. Gave birth to two or more children from the same pregnancy;
    4. Became eligible for unemployment compensation;
    5. Became unable, because of a change in employment status, to pay basic living expenses for the household (including expenses for food, clothing, housing, medication, transportation, taxes, court-ordered payments, and expenses reasonably necessary for making an income).

An event is determined to be an unforeseeable event in IRS published guidance.

Other Facts and Circumstances

Even if your situation doesn’t match any of the standard requirements described above, you still may qualify for an exception. You may qualify if you can demonstrate the primary reason for sale, based on facts and circumstances, is work-related, health-related, or unforeseeable. Important factors are:

  • The situation causing the sale arose during the time you owned and used your property as your residence.
  • You sold your home not long after the situation arose.
  • You couldn’t have reasonably anticipated the situation when you bought the home.
  • You began to experience significant financial difficulty maintaining the home.
  • The home became significantly less suitable as a main home for you and your family for a specific reason.

Multiple homes

Taxpayers who own more than one home can only exclude the gain on the sale of their main home. They must pay taxes on the gain from selling any other home.

Reporting the Sale

Taxpayers who don’t qualify to exclude all of the taxable gain from their income must report the gain from the sale of their home when they file their tax return. Anyone who chooses not to claim the exclusion must report the taxable gain on their tax return.  Taxpayers who receive Form 1099-S Proceeds From Real Estate Transaction Click here  must report the sale on their tax return even if they have no taxable gain.

Additionally, you must report the sale of the home if you can’t exclude all of your capital gain from income. Use Form 1040, Schedule D.pdfCapital Gains and Losses and Form 8949.pdfSales and Other Dispositions of Capital Assets when required to report the home sale.

Refer to Publication 523 for the rules on reporting your sale on your income tax return.

Mortgage debt 

Generally, taxpayers must report forgiven or canceled debt as income on their tax return. This includes people who had a mortgage workout, foreclosure, or other canceled mortgage debt on their home. Taxpayers who had debt discharged after Dec. 31, 2017, can’t exclude it from income as qualified principal residence indebtedness unless a written agreement for the debt forgiveness was in place before January 1, 2018.

Possible exceptions


There are exceptions to these rules for some individuals, including persons with a disability, certain members of the military, intelligence community and Peace Corps workers.

Suspension of the Five-Year Test Period

If you or your spouse are on qualified official extended duty in the Uniformed Services, the Foreign Service or the intelligence community, you may elect to suspend the five-year test period for up to 10 years. An individual is on qualified official extended duty if for more than 90 days or for an indefinite period, the individual is:

  • At a duty station that’s at least 50 miles from his or her main home, or
  • Residing under government orders in government housing.

Refer to Publication 523 Click here for more information about this special rule to suspend the 5-year test.

Installment Sales

If you sold your home under a contract that provides for all or part of the selling price to be paid in a later year, you made an installment sale. If you have an installment sale, report the sale under the installment method unless you elect out. Even if you use the installment method to defer some of the gain, the exclusion of gain under Section 121 remains available. Refer to Publication 537 Click hereInstallment SalesForm 6252.pdfInstallment Sale Income, and Topic No. 705Installment Sales, for more information on installment sales.

Worksheets


Worksheets included in Publication 523 Click here  can help taxpayers figure the adjusted basis of the home sold, the gain or loss on the sale, and the excluded gain on the sale.

Worksheet 1. Find Your Exclusion Limit

Use this worksheet only if no automatic disqualifications apply, and take all exceptions into account.

A) Determine if you are eligible for the maximum exclusion limit.
StatusYou are eligible for the maximum exclusion if…Maximum exclusionIf you’re not eligible for the maximum exclusion limit, then you should…
Married filing jointlyBoth spouses meet the residence and look-back requirements and one or both spouses meet the ownership requirement.$500,000Determine if either spouse is eligible for the full limit as a single person. If not, determine if either spouse is eligible for a partial exclusion.
Single, married filing separatelyYou meet the residence, ownership, and look-back requirements.$250,000Determine if you are eligible for a partial exclusion.
Widowed
  1. You sell your home within 2 years of the death of your spouse.

  2. You haven’t remarried at the time of the sale.

  3. Neither you nor your late spouse took the exclusion on another home sold less than 2 years before the date of the current home sale.

  4. You meet the 2-year ownership and residence requirements (including your late spouse’s times of ownership and residence if need be).

$500,000Determine if you are eligible for the full limit as a single person. If not, determine if you are eligible for a partial exclusion.
B) Complete this section only if you have determined that you aren’t eligible for the maximum exclusion but are eligible for a partial exclusion. If you are eligible for a partial exclusion, use this section to determine your exclusion limit.
Step 1Determine the shortest of the following 3 periods:
1. Your time of residence in the home during the 5-year period leading up to the sale
2. Your time of ownership of the home leading up to the sale
3. The time that has elapsed between the sale and the date you last sold a home for which you took the exclusion
Step 2Take the smallest period from Step 1 (you may use days or months) and divide that number by 730 (if using days) or 24 (if using months)
Step 3Multiply the result from Step 2 by $250,000. Stop here if not married filing jointly
Step 4Repeat Steps 1–3 for your spouse and add the two results
C) Your exclusion limit is $___________. Unless you have taxable gain from business or rental use (see Business or Rental Use of Home ), only gain in excess of this amount is taxable.

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
Adjusted basis
Gain or loss

A positive number indicates a gain; a negative number indicates a loss.

Certain events during your ownership, such as use of your home for business purposes or your making improvements to it, can affect your gain or loss. They are explained in this section.

See Worksheet 2, later, for steps you should follow to figure your gain or loss.

Basis Adjustments—Details and Exceptions

You should include many, but not all, costs associated with the purchase and maintenance of your home in the basis of your home. For more information on determining basis, see Pub. 551, Basis of Assets.

Fees and Closing Costs

Some settlement fees and closing costs you can include in your basis are:

  • Abstract fees (abstract of title fees),

  • Charges for installing utility services,

  • Legal fees (including fees for the title search and preparing the sales contract and deed),

  • Recording fees,

  • Survey fees,

  • Transfer or stamp taxes, and

  • Owner’s title insurance.

Some settlement fees and closing costs you can’t include in your basis are:

  • Fire insurance premiums,

  • Rent for occupancy of the house before closing,

  • Charges for utilities or other services related to occupancy of the house before closing,

  • Any fee or cost that you deducted as a moving expense (allowed for certain fees and costs before 1994),

  • Charges connected with getting a mortgage loan, such as:

    1. Mortgage insurance premiums (including funding fees connected with loans guaranteed by the Department of Veterans Affairs),

    2. Loan assumption fees,

    3. Cost of a credit report,

    4. Fee for an appraisal required by a lender, and

  • Fees for refinancing a mortgage.

Construction.

If you contracted to have your house built on the land you own, your basis is:

  • The cost of the land, plus

  • The amount it cost you to complete the house, including:

    1. The cost of labor and materials,

    2. Any amounts paid to a contractor,

    3. Any architect’s fees,

    4. Building permit charges,

    5. Utility meter and connection charges, and

    6. Legal fees directly connected with building the house.

Your cost includes your down payment and any debt such as a first or second mortgage or notes you gave the seller or builder. It also includes certain settlement or closing costs. In addition, generally you must reduce your basis by points the seller paid you.

If you built all or part of your house yourself, its basis is the total amount it cost you to complete it. Don’t include in the cost of the house:

  • The value of your own labor, or

  • The value of any other labor for which you didn’t pay.

Costs owed by the seller that you paid.

You can include in your basis any amounts the seller owes that you agree to pay (as long as the seller doesn’t reimburse you), such as:

  • Any real estate taxes owed up through the day before the sale date,

  • Back interest owed by the seller,

  • The seller’s title recording or mortgage fees,

  • Charges for improvements or repairs that are the seller’s responsibility (for example, lead paint removal), and

  • Sales commissions (for example, payment to the seller’s real estate agent).

Improvements

Improvements add to the value of your home, prolong its useful life, or adapt it to new uses. You add the cost of additions and improvements to the basis of your property.

The following chart lists some examples of improvements.

Examples of Improvements That Increase Basis

Additions
Bedroom
Bathroom
Deck
Garage
Porch
Patio

Lawn & Grounds
Landscaping
Driveway
Walkway
Fence
Retaining wall
Swimming pool
Systems
Heating system
Central air conditioning
Furnace
Duct work
Central humidifier
Central vacuum
Air/water filtration systems
Wiring
Security system
Lawn sprinkler system


Exterior
Storm windows/doors
New roof
New siding
Satellite dish

Insulation
Attic
Walls
Floors
Pipes and duct work

Plumbing
Septic system
Water heater
Soft water system
Filtration system

Interior
Built-in appliances
Kitchen modernization
Flooring
Wall-to-wall carpeting
Fireplace

Repairs done as part of larger project.

You can include repair-type work if it is done as part of an extensive remodeling or restoration job. For example, replacing broken windowpanes is a repair, but replacing the same window as part of a project of replacing all the windows in your home counts as an improvement.

Examples of improvements you CAN’T include in your basis.

You can’t include:

  • Any costs of repairs or maintenance that are necessary to keep your home in good condition but don’t add to its value or prolong its life. Examples include painting (interior or exterior), fixing leaks, filling holes or cracks, or replacing broken hardware.

  • Any costs of any improvements that are no longer part of your home (for example, wall-to-wall carpeting that you installed but later replaced).

  • Any costs of any improvements with a life expectancy, when installed, of less than 1 year.

Exception.

The entire job is considered an improvement if items that would otherwise be considered repairs are done as part of an extensive remodeling or restoration of your home. For example, if you have a casualty and your home is damaged, increase your basis by the amount you spend on repairs that restore the property to its pre-casualty condition.

Energy credits and subsidies.

If you included in your basis the cost of any energy-related improvements (such as a solar energy system), and you received any tax credits or subsidies related to those improvements, you must subtract those credits or subsidies from your total basis. Examples include:

  • 1977–1987: Credit for home energy improvements,

  • 1992–present: Direct or indirect subsidy from a public utility for installations or modifications aimed at lowering a home’s electricity or natural gas usage or better managing its energy demand,

  • 2006–present: Credit for home energy efficiency improvements,

  • 2006–present: Credit for qualified solar electric property expenditures and qualified solar water heating property expenditures available, and

  • 2006–2007 and 2009–2017: Credit for energy improvements to non-business properties.

Home Acquired Through a Trade

Traded for another home.

When you trade your home for a new one, you are treated as having sold your home and purchased a new one. Your sale price is the trade-in value you received for your home plus any mortgage or other debt that the person taking your home as a trade-in assumed (took over) from you as part of the deal.

Traded for other property.

If you paid for your home by trading other property for it, the starting basis of your home is usually the fair market value of the property you traded.

Home Foreclosed, Repossessed, or Abandoned

If your home was foreclosed on, repossessed, or abandoned, you may have ordinary income, gain, or loss. See Pub. 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.

If you used part of your home for business or rental purposes, see “Foreclosures and Repossessions” in chapter 1 of Pub. 544, for examples of how to figure gain or loss.

Home Destroyed or Condemned

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 that you have. If your home was destroyed, see Pub. 547. If your home was condemned, see Pub. 544.

Home Received in Divorce

Home acquired after July 18, 1984.

If your former spouse was the sole owner, your starting basis is the same as your former spouse’s adjusted basis just before you received the home. If you co-owned the home with your spouse, add the adjusted basis of your spouse’s half-share in the home to the adjusted basis of your own half-share to get your starting basis. (In most cases, the adjusted basis of the two half-shares will be the same.) The rules apply whether or not you received anything in exchange for the home.

Home acquired on or before July 18, 1984.

Your starting basis will usually be the home’s fair market value at the time you acquired it from your spouse or ex-spouse.

For more information, see Pub. 504, Divorced or Separated Individuals. If you or your spouse or ex-spouse lived in a community property state, see Pub. 555, Community Property.

Home Received as a Gift

If you received your home as a gift, you should keep records of the date you received it. Record the adjusted basis of the donor at the time of the gift and the fair market value of the home at the time of the gift. Also, ask if the donor paid any gift tax. As a general rule, you will use the donor’s adjusted basis at the time of the gift as your basis. However, see Table 2 below to determine if any exceptions to this rule listed in the “IF” column apply

Table 2. Exceptions to Using a Donor’s Adjusted Basis for a Home Received as a Gift

IF…AND…THEN…
at the time of the gift, the donor’s adjusted basis in the home was more than the home’s fair market value,your usage of the donor’s adjusted basis as your basis results in a loss,you must use the fair market value of the home at the time of the gift as your basis (if using the fair market value results in a gain for you, then you don’t need to recognize that gain).
at the time of the gift, the donor’s adjusted basis in the home was less than the home’s fair market value,the donor paid gift tax on the gift of the home,you figure your basis by starting with the donor’s adjusted basis at the time of the gift and adding the federal gift tax paid due to the increase in value of the home (see Regulations section 1.1015-5 for further details on this calculation).

Home Inherited

Home acquired from a decedent who died before or after 2010.

If you inherited your home from a decedent who died before or after 2010, your basis is the fair market value of the property on the date of the decedent’s death (or the later alternate valuation date chosen by the personal representative of the estate). If an estate tax return was filed or required to be filed, the value of the property listed on the estate tax return is your basis. If a federal estate tax return didn’t have to be filed, your basis in the home is the same as its appraised value at the date of death, for purposes of state inheritance or transmission taxes.

Surviving spouse.

If you are a surviving spouse and you owned your home jointly, your basis in the home will change. The new basis for the interest your spouse owned will be its fair market value on the date of death (or alternate valuation date). The basis in your interest will remain the same. Your new basis in the home is the total of these two amounts.

If you and your spouse owned the home either as tenants by the entirety or as joint tenants with right of survivorship, you will each be considered to have owned one-half of the home.

Example.

Your jointly owned home (owned as joint tenants with right of survivorship) had an adjusted basis of $50,000 on the date of your spouse’s death, and the fair market value on that date was $100,000. Your new basis in the home is $75,000 ($25,000 for one-half of the adjusted basis plus $50,000 for one-half of the fair market value)

Community property.

In community property states (including Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), each spouse is usually considered to own half of the community property. When either spouse dies, the total fair market value of the community property becomes the basis of the entire property, including the part belonging to the surviving spouse. For this rule to apply, at least half the value of the community property interest must be includible in the decedent’s gross estate, whether or not the estate must file a return.

For more information about community property, see Pub. 555, Community Property.

Caution :

If you are selling a home in which you acquired an interest from a decedent who died in 2010, see Pub. 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, available at IRS.gov/pub/irs-prior/p4895–2011.pdf, to determine your basis.

Business or Rental Use of Home

This section applies only if you used a portion of your home for business or rental purposes during your ownership. This type of usage may affect your gain or loss calculations. For more information about using any part of your home for business or as a rental property, see Pub. 587, Business Use of Your Home, and Pub. 527, Residential Rental Property.

Exceptions.

The following situations of business or rental usage don’t affect your gain or loss calculations.

  • Space within the living area. If the space you used for business of rental purposes was within the living area of the home, then your usage doesn’t affect your gain or loss calculations. Examples of spaces within the living area include a rented spare bedroom and attic space used as a home office. In contrast, business or rental spaces not within the living area affect your gain/loss calculations. Examples of space not within the living area include a first-floor storefront with an attached residence; a rented apartment in a duplex; or a working farm with a farmhouse on the property.

  • Space formerly used for business or rental. Space that was once used for business or rental purposes may be considered as residence space at the time of sale. A space formerly used for business is considered residence space if ALL of the following are true.

    • You weren’t using the space for business or rental at the time you sold the property,

    • You didn’t earn any business or rental income from the space in the year you sold your home, and

    • You used the space as residence space for 2 years out of the 5 years leading up to the sale.

If your space is considered as residence space at the time of the sale, then your former business usage DOESN’T affect your gain/loss calculations.

Business or rental usage calculations.

If you have used part of the home (not within the home’s living area) for solely business or rental purposes for more than 2 of the last 5 years, you need to make separate gain/loss calculations for the business and residence portions of your property. Make three copies of all pages ofWorksheet 2. Label one copy “Total,” one copy “Home,” and one copy “Business or Rental.”

Complete your “Total” worksheet using the figures for your property as a whole. Include the total amount you received, all of your basis adjustments, etc. Include the cost of all improvements, whether you made them to the business space or the residential space.

Determine your “business or rental percentage,” meaning the percentage of your property that you used for business or rental. If you took depreciation on your home on past tax returns, use the same business or rental percentage that you used in determining how much depreciation to take. If you didn’t take depreciation on your home on past tax returns, compare the size of your business or rental space to the size of the whole property and express this as a percentage. For example, if you have a building with three equal-sized stories, and you live in the top two stories and use the ground floor for a store, then you are using 1/3 of the property and your business percentage is 33.3%.

For each number on your “Total” worksheet, figure the business-related portion of that number and enter it on your “Business or Rental” worksheet. You may use different methods to determine the business portion of different numbers. Here are the three possible methods and the circumstances under which each method applies.

  • Dollar-amount method. Where a figure consists of specific dollar amounts that relate to either the residence portion or the business portion of the property, the figure must be broken down by these dollar amounts. For example, if the figure for improvements to the property was $100,000, and all of that applied to the residence portion, then the business portion of the improvements would be zero.

  • “100% rule” for depreciation. The first two items under line 5a and line 5b in Worksheet 2 are business depreciation items. Any figure for these two items is 100% a business figure.

  • Percentage method. Where a figure applies to the property as a whole (such as the sale price), the business or rental portion is the figure multiplied by the business portion percentage you described earlier. Use the percentage method for all items that don’t require the dollar-amount or depreciation methods.

The total you get on line 7 on your “Business” copy of Worksheet 2 is the gain or loss related to the business or rental portion of the property you sold.

Next, complete your “Home” worksheet. For each number, take the number from your “Total” worksheet, subtract the number from your “Business or Rental” worksheet, and enter the result in your “Home” worksheet (for example, subtract the number on line 1f of the “Business or Rental” worksheet from the number on line 1f of your “Total” worksheet), and enter the result on your “Home” worksheet).

Now figure the totals on your “Home” worksheet. The total you get on line 7 on the “Home” copy of Worksheet 2 is the gain or loss related to the home portion of the property you sold.

Review the results of your “Home” and “Business” worksheets to determine your next step. When you have completed each worksheet, you will know whether you have a gain or loss on each part of your property. It is possible to have a gain on both parts, a loss on both parts, or a gain on one part and a loss on the other. See Table 1 to determine your next steps.

Table 1. Does Your Home or Business Show a Gain or a Loss?

IF…THEN…
your “Home” worksheet shows a loss,follow the instructions at the end of line 7, under Worksheet 2 for “If the number is negative.”
your “Home” worksheet shows a gain,skip to How Much Is Taxable? and Worksheet 3 to find out how much of the gain on your “Home” worksheet is taxable.
your “Business” worksheet shows a loss,DON’T follow the instructions at the end of line 7, under Worksheet 2. Instead, report the loss from your “Business” worksheet on Form 4797, Sales of Business Property.
your “Business” worksheet shows a gain,you can’t exclude any of the gain shown on your “Business” worksheet. DON’T follow the instructions at the end of line 7, under Worksheet 2. Instead, report the gain from your “Business” worksheet on Form 4797.

How Much Is Taxable?

Review of the Eligibility Test.

Generally, your home sale qualifies for the maximum exclusion, if all of the following conditions are true.

  • You didn’t acquire the property through a like-kind exchange in the past 5 years.

  • You aren’t subject to the expatriate tax.

  • You owned the home for 2 of the last 5 years and lived in the home for 2 (1 if you become disabled) of the last 5 years leading up to the date of the sale.*

  • For the 2 years before the date of the current sale, you didn’t sell another home on which you claimed the exclusion.

  • The sale doesn’t involve the transfer of vacant land or a remainder interest.**

*If this condition isn’t met, your home sale may qualify for a partial exclusion. The sale must involve one of the following events experienced by you, your spouse, or a co-owner: a work-related move, a health-related move, a death, a divorce, a pregnancy with multiple children, a change in employment status, a change in unemployment compensation eligibility, or other unusual event.

**The transfer of vacant land or of a remainder interest may qualify for the maximum exclusion, but special rules apply in those situations.

For a step-by-step guide to determining whether your home sale qualifies for the maximum exclusion, see Does Your Home Sale Qualify for the Exclusion of Gain? above.

If you qualify for an exclusion on your home sale, up to $250,000 ($500,00 if married and filing jointly) of your gain will be tax-free. If your gain is more than that amount, or if you qualify only for a partial exclusion, then some of your gain may be taxable. This section contains step-by-step instructions for figuring out how much of your gain is taxable. See Worksheet 3, later, for assistance in determining your taxable gain.

If you determined in Does Your Home Sale Qualify for the Exclusion of Gain? , earlier, that your home sale doesn’t qualify for any exclusion (either full or partial), then your entire gain is taxable. If you don’t have a gain, you owe no tax on the sale. In either case, you don’t need to complete Worksheet 3 and you can skip to Reporting Your Home Sale , later.

Recapturing Depreciation

If you used all or part of your home for business or rental after May 6, 1997, you may need to pay back (“recapture”) some or all of the depreciation you were entitled to take on your property. “Recapturing” depreciation means you must include it as ordinary income on your tax return.

Worksheet 3. Determine If You Have Taxable Gain

If you completed “Business” and “Home” versions of your gain/loss worksheet as described in Business or Rental Use of Home , earlier, complete this worksheet only for the “Home” version.

Section A. Determine your net gain. Complete this section only if you used any part of your home for business or rental purposes between May 6, 1997, and the date of sale. Otherwise, skip to Section B.
Step 1Enter your gain from line 7 of Worksheet 2.
Step 2List the total of all depreciation deductions that you took or could have taken for the use of your home for business or rental purposes between May 6, 1997, and the date of sale
Step 3Subtract the sum of Step 2 from the amount listed in Section A, Step 1. This is your net gain
Section B. Determine your non-qualified use gain. Complete this section only if there is a period, after the year 2008, when neither you nor your spouse (or your former spouse) used the property as a main home, and that period of non-use occurred during the 5-year period prior to the date of sale and before the time when you or your spouse (or your former spouse) used the property as a main home.* Otherwise, skip to Section C.
*Note: If the period of non-use was for 1) 2 years or less and due to a change in employment, a health condition, or other “unforeseen circumstance” described in Does Your Home Qualify for a Partial Exclusion of Gain? , earlier; or 2) for 10 years or less and due to a “stop the clock” exception for certain military, intelligence, and Peace Corps personnel described in Service, Intelligence, and Peace Corps Personnel , earlier, then you may skip Section B.
Step 1Enter the amount from Section A, Step 1 or, if you skipped Section A, your gain from line 7 of Worksheet 2
Step 2Enter the total number of days after 2008 when neither you nor your spouse (or former spouse) used the home as a main residence. This number is your non-use days
Step 3Enter the total number of days you owned your home (counting all days, not just days after 2008). This number is your number of days owned
Step 4Divide the non-use days by the days owned. This number is your non-residence factor
Step 5Multiply the decimal from Section B, Step 4, by the amount listed in Section B, Step 1. This number is your non-qualified use gain.

Worksheet 3. Determine If You Have Taxable Gain Continued p. 2

Section C. Determine your gain that is eligible for exclusion.
IF…THEN your gain that is eligible for exclusion is …
you skipped Sections A and Byour gain from line 7, under Worksheet 2.
you completed Section A but skipped Section Byour net gain, from Section A, Step 3.
you completed Section B (regardless of whether you completed Section A)your non-qualified use gain, from Section B, Step 5.
Your gain that is eligible for exclusion is $ _______________
Section D. Determine if you have taxable gain.
IF…THEN …
your gain that is eligible for exclusion from Section C is less than or equal to your exclusion limit from Worksheet 1, Section Cyour entire gain is excludible from your income and you have no gain to report on your tax return. The Reporting Your Home Sale section doesn’t apply to you.
your gain that is eligible for exclusion from Section C is greater than your exclusion limit from Worksheet 1, Section Csome of your gain isn’t excludible, and you may owe tax on it. See Reporting Your Home Sale for instructions on how to report the gain on your tax return.

Reporting Your Home Sale

This section tells you how to report taxable gain, take deductions relating to your home sale, and report income other than the gain that you may have received from your home sale.

This section also covers special circumstances that appl

What records to keep. Any time you buy real estate, you should keep records to document the property’s adjusted basis. In general, keep these records until 3 years after the due date for your tax return for the year in which you sold your home.

Reporting Gain or Loss on Your Home Sale

Determine whether you need to report the gain from your home.

You need to report the gain if ANY of the following is true.

  • You have taxable gain on your home sale (or on the residential portion of your property if you made separate calculations for home and business) and don’t qualify to exclude all of the gain.

  • You received a Form 1099-S. If so, you must report the sale even if you have no taxable gain to report.

  • You wish to report your gain as a taxable gain even though some or all of it is eligible for exclusion. You may wish to do this if, for example, you plan to sell another main home within the next 2 years and are likely to receive a larger gain from the sale of that property. If you choose to report, rather than exclude, your taxable gain, you can undo that choice by filing an amended return within 3 years of the due date of your return for the year of the sale, excluding extensions.

If NONE of the three bullets above is true, you don’t need to report your home sale on your tax return. If you didn’t make separate home and business calculations on your property, skip to Reporting Deductions Related to Your Home Sale , later.

If ANY of the three bullets above is true, skip to Determine whether your home sale is an installment sale , later.

If you made separate gain/loss calculations for business and residence portions of your property,

you may have to use Form 4797 to report the sale of the business or rental part. See Business or Rental Use of Home , earlier.

Determine whether your home sale is an installment sale.

If you finance the buyer’s purchase of your home (you hold a note, mortgage, or other financial agreement), you probably have an installment sale. You may be able to report any non-excludable gain on an installment basis. Use Form 6252, Installment Sale Income, to report the sale.

For more information, see Pub. 537, Installment Sales.

Report any interest you receive from the buyer.

If the buyer is making payments to you over time (as when you provide seller financing), then you generally must report part of each payment as interest on your tax return. Report the interest portion of the payment as ordinary income on Form 1040, line 2b. If the buyer is using the property as a first or second home, also report the interest on Schedule B (Form 1040), Interest and Ordinary Dividends, to Form 1040 and provide the buyer’s name, address, and social security number. There is a $50 penalty per requirement for failing to meet any of these requirements.

If you’re a nonresident or resident alien who doesn’t have and isn’t eligible to get a social security number,

you may be issued an individual taxpayer identification number (ITIN). If you don’t have an ITIN, apply for one by filing Form W-7, Application for IRS Individual Taxpayer Identification Number. If needed, a nonresident or resident alien buyer can apply for an ITIN as well.

Complete Form 8949, Sales and Other Dispositions of Capital Assets.

Use Form 8949 to report gain from the sale or disposition of the personal use portion of your home if you can’t exclude the gain.

If you have gain that can’t be excluded, you generally must report it on Form 8949, Sales and Other Dispositions of Capital Assets, and Schedule D (Form 1040), Capital Gains and Losses. Report the sale on Part I or Part II of Form 8949 as a short-term or long-term transaction, depending on how long you owned the home. In addition, you may be able to temporarily defer capital gains invested in a Qualified Opportunity Fund (QOF). You may also be able to permanently exclude capital gains from the sale or exchange of an investment in a QOF if the investment is held for at least 10 years. For more information, see the Instructions for Form 8949.

Complete Schedule D (Form 1040), Capital Gains and Losses.

Using the information on Form 8949, report on Schedule D (Form 1040) the gain or loss on your home as a capital gain or loss. Follow the Instructions for Schedule D when completing the form.

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 Pub. 505, Tax Withholding and Estimated Tax.

Reporting Deductions Related to Your Home Sale

If you aren’t itemizing deductions on your return for the year in which you sold your home, skip to Reporting Other Income Related to Your Home Sale , later.

There is no tax deduction for transfer taxes, stamp taxes, or other taxes, fees, and charges you paid when you sold your home. However, if you paid these amounts as the seller, you can treat these taxes and fees as selling expenses. If you pay these amounts as the buyer, include them in your cost basis of the property.

Determine the amount of real estate tax deductions associated with your home sale.

Depending on your circumstances, you may need to figure your real estate tax deductions differently. See the discussion that follows for more information.

If you didn’t receive a Form 1099-S,

use the following method to compute your real estate tax deduction, which may be different from the amount of real estate tax you actually paid.

  • Divide the number of days you owned the property during the year of sale, not counting the date of sale by 365 (or 366 for a leap year).

  • Multiply that figure by the amount of real estate tax due on the home during the 12-month billing cycle that contains the date of sale. The result is the amount of real estate tax you can deduct as an itemized deduction

Example.

The real estate tax on Dennis and Beth White’s home was $620 for the year. Their real property tax year was the calendar year, with payment due August 3, 2017. They sold the home on May 6, 2017. Dennis and Beth are considered to have paid a proportionate share of the real estate taxes on the home even though they didn’t actually pay them to the taxing authority.

Dennis and Beth owned their home during the 2017 real property tax year for 125 days (January 1 to May 5, the day before the sale). They figure their deduction for taxes as follows.

1.Total real estate taxes for the real property tax year$620
2.Number of days in the real property tax year that you owned the property125
3.Divide line 2 by 365 (366 if leap year)0.342
4.Multiply line 1 by line 3. This is your deduction. Enter it on line 5b of Schedule A (Form 1040)$212

Since the buyers paid all of the taxes, Dennis and Beth also include the $212 in the home’s selling price. The buyers add the $212 to their basis in the home. The buyers can deduct $408 ($620 – $212) as an itemized deduction, the taxes for the part of the year they owned the home.

If you received a Form 1099-S,

start with the amount of real estate tax you actually paid in the year of sale. Subtract the buyer’s share of real estate tax as shown in box 6. The result is the amount you can deduct as an itemized deduction.

If you didn’t already deduct all your mortgage points on an earlier tax return,

you may be able to deduct them on your tax return for the year of sale. See Pub. 936, Home Mortgage Interest Deduction.

Report on Schedule A (Form 1040), Itemized Deductions, any itemized real estate deduction.

Follow the Instructions for Schedule A when completing the form

Reporting Other Income Related to Your Home Sale

Report as ordinary income on Form 1040 any amounts received from selling personal property.

If you sold furniture, drapes, lawn equipment, a washer/dryer, or other property that wasn’t a permanent part of your home, report the amount you received for the items as ordinary income. Report this amount on Schedule 1 (Form 1040), line 21 or 1040NR, line 21. The selling price of your home doesn’t include amounts you received for personal property sold with your home.

Report as ordinary income on Form 1040 any amounts received for sales of expired options to purchase your property.

If you granted someone an option to buy your home and it expired in the year of sale, report the amount you received for the option as ordinary income. Report this amount on Schedule 1 (Form 1040), line 21 or 1040NR, line 21.

Report as ordinary income on Form 1040 applicable canceled or forgiven mortgage debt.

If you went through a mortgage workout, foreclosure, or other process in which a lender forgave or canceled mortgage debt on your home, then generally you must report the amount of forgiven or canceled debt as income on your tax return. If you had a written agreement for the forgiveness of the debt in place before January 1, 2018, then you might be able to exclude the forgiven amount from your income.

Paying Back Credits and Subsidies

If you received any homebuyer credits or federal mortgage subsidies, you may have to pay back (“recapture”) some or all of the amount by increasing your tax payment.

Determine any amounts you may have claimed as a first-time homebuyer tax credit.

If you bought your home in 2008, you must pay back the credit unless you qualify for an exception.

See Form 5405, Repayment of the First-Time Homebuyer Credit, to find out how much to pay back, or if you qualify for any exceptions. If you do have to repay the credit, file Form 5405 with your tax return.

Determine any amounts you may have received in federal mortgage subsidies in the 9 years leading up to the date of sale.

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 upon the sale or other transfer of ownership 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 doesn’t affect the recapture tax.

See Form 8828, Recapture of Federal Mortgage Subsidy, to find out how much to repay, or whether you qualify for any exceptions.

If you didn’t receive any federal mortgage subsidies, you must file Form 8828 with your tax return whether you sold your home at a loss or a gain. If you had a loss, you won’t have to pay back any subsidy.

Capital Gain and losses

Topic No. 409 covers general capital gain and loss information.

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