What To Report Now

If the rules in this chapter apply to you, the reporting requirements you may have now are explained here. (The beginning of this chapter explains whether the rules in this chapter apply to you.)

Form 2119. For sales before 1998, Form 2119 was used to report the sale of an old home and any purchase of a new one within the replacement period. You should have filed Form 2119 with your tax return for the year you sold your old home. If you filed your return for that year before buying a new home, you may also have to file a second Form 2119 when you do buy your new home. If you need Form 2119 for that purpose, you can still order it from the IRS. See chapter 5. Form 2119 is also available on the Internet at www.irs.gov.

Recordkeeping. Keep a copy of Form 2119 with your tax records for the year of the sale. Form 2119 is also a supporting document that shows how your new home's basis is decreased by the amount of any postponed gain on the sale of your old home. Therefore, you should also keep a copy of Form 2119 with your records for the basis of your new home.

Loss reported on sale. If you reported a loss on the sale of your home, you do not have to file a second Form 2119 if you later buy a new home. The loss on the sale was not deductible and has no effect on the basis of your new home.

Reporting a taxable gain. Any taxable gain on the sale is reported on Schedule D (Form 1040).

New home purchased after return filed. If you postponed gain from the sale of your old home and you buy and live in a new home after you file your return for the year of the sale but within the replacement period, you should notify the IRS by filing a second Form 2119 and, if necessary, Form 1040X and Schedule D.

Send the form (or forms) to the Internal Revenue Service Center where you will file your next tax return.

New home costs at least as much as adjusted sales price. If your new home costs at least as much as the adjusted sales price of your old home, file the second Form 2119 by itself. This form must include your address, signature, and the date. If you filed a joint return for the year of sale, the form must also include your spouse's signature.

New home costs less. If your new home costs less than the adjusted sales price of the old home, you must file an amended return (Form 1040X) for the year of sale. Attach a second completed Form 2119 to report the purchase and Schedule D (Form 1040) showing the gain you must report. You will have to pay interest on any additional tax due. The interest is generally figured from the due date of the original return.

No new home within replacement period. If you postponed gain on the sale of your old home because you planned to replace it but you do not replace it within the replacement period, you must file a second Form 2119. Attach it to your amended return (Form 1040X) for the year of the sale. Include a Schedule D (Form 1040) to report your gain.

You will have to pay interest on the additional tax due. Interest is generally figured from the due date of the original return.

Divorce after sale. If you are divorced after filing a joint return on which you postponed the gain on the sale of your home, but you do not buy or build a new home (and your former spouse does), you must file an amended joint return to report the tax on your share of the gain. If your former spouse refuses to sign the amended joint return, attach a letter explaining why your former spouse's signature is missing.

Statute of limitations. The 3-year limit for assessing tax on the gain from the sale of your home begins when you give the IRS information that shows:

1. You replaced your old home, and how much the new home cost,
2. You do not plan to buy and occupy a new home within the replacement period, or
3. You did not buy and occupy a new home within the replacement period.

This information may be on the Form 2119 attached to your tax return for the year of the sale, or on a second Form 2119 filed later. File the second Form 2119 with the Service Center where you will file your next tax return. If needed, send an amended return for the year of the sale to include in income the gain that you cannot postpone.

Example

Frank and Evelyn Smith sold their home on May 1, 1997, for $87,000. They spent $500 on fixing-up expenses and paid a commission on the sale of $5,200. Neither Frank nor Evelyn was 55 or older on the date of the sale. They planned to buy a replacement home but had not bought one before they filed their 1997 tax return.

Frank and Evelyn completed Part 1 of Form 2119 and attached it to their 1997 return. Because they planned to buy a replacement home, they did not include the gain on the sale in the income reported on their return.

Frank and Evelyn's replacement period for purchasing a new home was suspended for 2 years while Frank was on extended active duty with the Armed Forces.

On April 20, 2001, (within the extended replacement period), Frank and Evelyn bought and moved into a new home. The cost of the new home was $77,200. This was less than the adjusted sales price of the old home. They figure the gain, the part of the gain on which tax is postponed and the part on which it is not, and the adjusted basis of their new home in the following way:

The Smiths file Form 1040X to amend their 1997 return to include in income the part of their gain on which tax is not postponed. They attach a second Form 2119 and a Schedule D (Form 1040) that includes the taxable part of the gain.

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