New Home

Your new home must be your main home. See the explanation of main home in chapter 1.

You must include in income any gain from the sale of your old home if you replace it with property that is not your main home.

New home outside the United States.   A new home outside the United States qualifies as a new home for purposes of postponing gain. You must buy or build and live in the new home as your main home within the time allowed for replacement.

Retirement home.   You have not purchased a new home if you invest in a retirement home project that gives you living quarters and personal care but does not give you any legal interest in the property. Therefore, you must include in income any gain on the sale of your old home. However, if you were age 55 or older on the date of the sale, you may have been able to claim a one-time exclusion (line 14 of Form 2119).

Title to new home not held by you or spouse.   You have not purchased a new home if you invest in a home in which neither you nor your spouse holds any legal interest (for example, a house to which someone else, such as your child, holds the title).

Holding period.   If you postponed tax on any part of the gain from the sale of your old home, you will be considered to have owned your new home for the combined period you owned both the old and the new homes. This may affect how any taxable gain when you sell the new home is reported on Schedule D (Form 1040).

How To Figure Cost of New Home

You need to know the cost of your new home to figure the gain taxed and the gain on which tax is postponed on the sale of your old home. The cost of your new home includes costs incurred during the replacement period for the following items:

1. Buying or building the home,
2. Rebuilding the home, and
3. Capital additions or improvements.

You cannot consider any costs incurred before or after the replacement period. However, if you live outside of the United States or are a member of the Armed Forces, you can include any costs incurred during the suspension period (discussed under Replacement Period, earlier).

Debts on new home.   The cost of a new home includes the debts it is subject to when you buy it (purchase-money mortgage or deed of trust) and the face amount of notes or other liabilities you give for it.

Temporary housing.   If a builder gives you temporary housing while your new home is being finished, you must reduce the contract price to arrive at the cost of the new home. To figure the amount of the reduction, multiply the contract price by a fraction. The numerator is the value of the temporary housing, and the denominator is the sum of the value of the temporary housing plus the value of the new home.

Seller-paid points.   In figuring the cost of your new home, you must subtract any points paid by the seller from your purchase price.

Settlement fees or closing costs.   The cost of your new home includes the settlement fees and closing costs that you can include in your basis. See Settlement fees or closing costs under Basis, in chapter 2.

Settlement fees do not include amounts placed in escrow for the future payment of items such as taxes and insurance.

Real estate taxes.   If you agreed to pay taxes the seller owed on your new home (that is, taxes up to the date of sale), the taxes you paid are treated as part of the cost. For more information, see Real Estate and Transfer Taxes in chapter 2.

New home used partly for business or rental.   If you replace your old home with property used partly as your home and partly for business or rental, you consider only the cost of the part used as your home. You must compare the cost of this part to the adjusted sales price of the old home to determine the amount of gain taxed in the year of sale and the amount of gain on which tax is postponed.

Example.   Your old home had a basis of $50,000. You sold it in February 1997 for a gain of $25,000. Your adjusted sales price is $75,000. Before your replacement period ended, you bought a duplex house for $120,000. You live in half and rent the other half. Because only half of the cost of the duplex ($60,000) is considered an investment in a new main home, you are taxed on $15,000 ($75,000 adjusted sales price - $60,000 cost) of the $25,000 gain on the sale. You must postpone tax on $10,000 of the gain reinvested in your new home. The basis of your new home is $50,000 ($60,000 cost - $10,000 postponed gain). The basis of the rented part of the duplex is $60,000.

Inheritance or gift.   If you receive any part of your new home as a gift or an inheritance, you cannot include the value of that part in the cost of the new home when figuring the gain taxed in the year of sale and the gain on which tax is postponed. However, you include the basis of that part in your adjusted basis to determine any gain when you sell the new home.

Example.   You bought a home in 1992 for $60,000. You sold that home in March 1997 for $65,000, at a gain of $5,000. You had fixing-up expenses of $200.

Later, your father died and you inherited his home. Its basis to you is $62,000. You spent $14,000 to modernize the home, resulting in an adjusted basis to you of $76,000. You moved into the home before your replacement period ended.

To find the gain taxed in the year of the sale, you compare the adjusted sales price of the old home, $64,800 ($65,000 - $200), with the $14,000 you invested in your new home. (For this purpose, you do not include the value of the inherited part of your property, $62,000, in the cost of your new home.) The $5,000 gain is fully taxed because the adjusted sales price of the old home is more than the amount you paid to remodel your new home, and the difference between the two amounts is more than $5,000.

Certain Sales by Married Persons

This section explains how married persons figure their postponed gain in certain situations.

Home owned separately by one spouse.   You may be able to postpone gain from the sale of your old home even if:

• You or your spouse owned the old home separately, but title to the new one is in both your names as joint tenants, or
• You and your spouse owned the old home as joint tenants, and either you or your spouse owns the new home separately.

You and your spouse can figure the postponed gain, which reduces the basis of the new home, as if the two of you owned both homes jointly. To do this, both of you must meet both of the following requirements.

• You used the old home as your main home and you use the new home as your main home.
• You sign a statement that says: We agree to reduce the basis of the new home by the gain from selling the old home.

Both of you must sign the statement. You can make the statement in the bottom margin on page 1 of Form 2119 or on an attached sheet. If either of you does not sign the statement, you must report the gain in the regular way, as explained in the following example.

Example.   In April 1997, you sold a home that you owned separately but that both you and your spouse used as your main home. The adjusted sales price was $98,000, the adjusted basis was $86,000, and the gain on the sale was $12,000. Before the replacement period ends, you and your spouse buy a new home for $100,000. You move in immediately. The title is held jointly, and under state law, you each have a one-half interest. If you both sign the statement to reduce the basis of the new home, you postpone the gain on the sale as if you had owned both the old and new homes jointly. You and your spouse will each have an adjusted basis of $44,000 ($50,000 cost minus $6,000 postponed gain) in the new home.

If either of you does not sign the statement, your entire gain of $12,000 will be currently taxed, not postponed. This is because the adjusted sales price of the old home ($98,000) is greater than your part of the cost of the new home ($50,000). You and your spouse will each have a basis of $50,000 in the new home.

Deceased spouse.   If your spouse dies after you sell your old home and before you buy and occupy a new home, you can postpone the gain from the sale of the old home if the basic requirements are met, and:

1. You were married on the date your spouse died, and
2. You use the new home as your main home.

This applies whether title to the old home is in one spouse's name or held jointly.

Separate homes replaced by single home.   If you and your spouse both had gains from the sales of homes that had been your separate main homes before your marriage, you may have to postpone the tax on both gains. This can happen if all of the following are true.

• You jointly purchase a new home.
• Each spouse's share of the cost of the new home is at least as much as the adjusted selling price of that spouse's old home. (Each spouse's share of the cost of the new home is the part equal to his or her interest in the home under state law, generally one-half.)
• Each spouse occupies the new home within the replacement period.

Home replaced by two homes of spouses living apart.   If you and your spouse sell a jointly-owned home and each of you then buys and lives in separate new homes, the postponement provisions apply separately to your gain and to your spouse's gain.

You report the sale of your home as if two separate properties were sold. You each report half of the sales price.

Only one spouse buys a new home.   Even if your spouse does not buy a new home within the replacement period, you still should report only your share of any gain from the sale of the old home. You postpone your share of the gain if you meet all the requirements to do so, even though your spouse cannot postpone his or her share.

If you and your spouse originally filed a joint return for the year of sale, you and your spouse must file an amended joint return to report your spouse's share of the gain, which cannot be postponed. See Divorce after sale, under What To Report Now, later in this chapter.

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:

Gain On Sale
a)	Selling price of old home	$87,000
b)	Minus: Selling expenses	5,200
c)	Amount realized on sale		$81,800
d)	Minus: Adjusted basis of old home		63,000
e)	Gain on sale		18,800
Gain Taxed in 1997
f)	Amount realized on sale	81,800
g)	Minus: Fixing-up expenses	500
h)	Adjusted sales price		81,300
i)	Minus: Cost of new home		77,200
j)	Excess of adjusted sales price over cost of new home		4,100
k)	Gain taxed in 1997 [lesser of (e) or (j)]		4,100
Gain Not Taxed in 1997
l)	Gain on sale [line (e)]	18,800
m)	Minus: Gain taxed in 1997 [line (k)]	4,100
n)	Gain not taxed in 1997		14,700
Adjusted Basis of New Home
o)	Cost of new home [line (i)]	77,200
p)	Minus: Gain not taxed in 1997 [line (n)]	$14,700
q)	Adjusted basis of new home		$62,500

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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