Publication 17: Your Federal Income Tax; Selling Your Home

This is archived information that pertains only to the 2003 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.

Important Reminders

Change of address. If you change your mailing address, be sure to notify the IRS using Form 8822, Change of Address. Mail it to the Internal Revenue Service Center for your old address. (Addresses for the Service Centers are on the back of the form.)

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 25.

Introduction

This chapter explains the tax rules that apply when you sell your main home. Generally, your main home is the one in which you live most of the time.

If you sold your main home in 2003, you may be able to exclude from income any gain up to a limit of $250,000 ($500,000 on a joint return in most cases). See Excluding the Gain, later. If you can exclude all of the gain, you do not need to report the sale on your tax return.

If you have gain that cannot be excluded, it is taxable. Report it on Schedule D (Form 1040). You may also have to include Form 4797, Sales of Business Property. See Reporting the Sale, later.

Useful Items - You may want to see:

This section explains the term “main home.” Usually, the home you live in most of the time is your main home and can be a:

To exclude gain under the rules of this chapter, you generally must have owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date of sale.

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.

Example.

On March 4, 2003, you sell the land on which your main home is located. You buy another piece of land and move your house to it. 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 the 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.

Example 1.

You own and live in a house in the city. You also own a beach house, which you use during summer months. The house in the city is your main home.

Example 2.

You own a house, but you live in another house that you rent. The rented house is your main home.

Property used partly as your main home.

If you use only part of the property as your main home, the rules discussed in this chapter 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.

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.

The selling price is the total amount you receive for your home. It includes money, all notes, mortgages, or other debts assumed by the buyer as part of the sale, and the fair market value of any other property or any services you receive.

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 gross income as wages on line 7 of Form 1040.

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 line 21 of Form 1040.

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 property other than cash or notes, or any services, you received or will receive. Instead, box 4 will be checked to indicate your receipt (or expected receipt) of these items.

If you can exclude the entire gain, the person responsible for closing the sale generally will not have to report it on Form 1099–S. If you do not receive Form 1099–S, use sale documents and other records to figure the total amount you received for your home.

Selling expenses.

Selling expenses include:

Commissions,
Advertising fees,
Legal fees, and
Loan charges paid by the seller, such as loan placement fees or “points.”

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 Adjusted Basis under Determining Basis later.

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, generally 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 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.

The following rules apply to foreclosures and repossessions, abandonments, trades, and transfers to a spouse.

Foreclosure or repossession.

If your home was foreclosed on or repossessed, you have a sale.

You figure the gain or loss from the sale in generally the same way as gain or loss from any sale. But the amount of your gain or loss depends, in part, on whether you were personally liable for repaying the debt secured by the home. See Publication 523 for more information.

Form 1099–A and Form 1099–C.

Generally, you will receive Form 1099–A, Acquisition or Abandonment of Secured Property, from your lender. This form will have the information you need to determine the amount of your gain or loss and any ordinary income from cancellation of debt. If your debt is canceled, you may receive Form 1099–C, Cancellation of Debt.

Abandonment.

If you abandon your home, you may have ordinary income. If the abandoned home secures a debt for which you are personally liable and the debt is canceled, you have ordinary income equal to the amount of the canceled debt. See Publication 523 for more information.

Trading 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 that had 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 to your former spouse incident to your divorce, you generally have no gain or loss. This is true even if you receive cash or other consideration for the home. Therefore, the rules in this chapter do not apply.

More information.

If you need more information, see Transfer to spouse in Publication 523 and Property Settlements in Publication 504, Divorced or Separated Individuals.

You need to know your basis in your home to determine any gain or loss when you sell it. Your basis in your home is determined by how you got the home. Your basis is its cost if you bought it or built it. If you got it in some other way (inheritance, gift, etc.), its basis is either its fair market value when you got it or the adjusted basis of the person you got it from.

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 14 of this publication and in Publication 523.

The cost of property is the amount you pay for it in cash, debt obligations, other property, or services.

Purchase.

If you buy your home, your basis is its cost to you. This includes the purchase price and certain settlement or closing costs. Generally, 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 Publication 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. You cannot include in your basis 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.

Chapter 14 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 Publication 523 for additional items and a discussion of basis other than cost.

Increases to basis.

These include any:

Additions and other improvements that have a useful life of more than 1 year,
Special assessments for local improvements, and
Amounts you spent after a casualty to restore damaged property.

Decreases to basis.

These include any:

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,
Residential energy credit (generally allowed from 1977 through 1987) claimed for the cost of energy improvements that you added to the basis of your home,
Adoption credit you claimed for improvements added to the basis of your home,
Nontaxable payments from an adoption assistance program of your employer that you used for improvements you added to the basis of your home,
First-time homebuyer credit (allowed to certain first-time buyers of a home in the District of Columbia), and
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 that is primarily designed either to reduce consumption of electricity or natural gas or to improve the management of energy demand for a home.

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.

Examples.

Putting a recreation room or another bathroom in your unfinished basement, putting up a new fence, putting in new plumbing or wiring, putting on a new roof, or paving your unpaved driveway are improvements. An addition to your house, such as a new deck, a sunroom, or a 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.

Repainting your house inside or outside, fixing your gutters or floors, repairing leaks or plastering, and replacing broken window panes are examples of repairs.

Recordkeeping. You should keep records to prove your home's adjusted basis. Ordinarily, you must keep records for 3 years after the due date for filing your return for the tax year in which you sold your home. But if you sold a home before May 7, 1997, and postponed tax on any gain, the basis of that home affects the basis of the new home you bought. Keep records proving the basis of both homes as long as they are needed for tax purposes.

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. In that case, you must include the gain from the sale in your gross income on your tax return for the year of the sale.

You can exclude up to $250,000 of the gain on the sale of your main home if all of the following are true.

You can exclude the entire gain on the sale of your main home up to $500,000 if all of the following are true.

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:

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. The maximum amount you can claim will be reduced. See Reduced Maximum Exclusion, later.

Example 2—met ownership test but not use test.

Dan bought a home in 1997. After living in it for 6 months, he moved out. He never lived in the home again and sold it at a gain on June 28, 2003. He owned the home during the entire 5-year period ending on the date of sale (June 29, 1998 – June 28, 2003). However, he did not live in it for the required 2 years. He meets the ownership test but not the use test. He cannot exclude any part of his gain on the sale, unless he qualified for a reduced maximum exclusion (explained later).

The required 2 years of ownership and use during the 5-year period ending on the date of the sale do not have to be continuous.

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.

Example.

Professor Paul Beard, who is single, bought and moved into a house on August 28, 2000. He lived in it as his main home continuously until January 5, 2002, when he went abroad for a 1-year sabbatical leave. During part of the period of leave, the house was unoccupied, and during the rest of the period, he rented it. On January 6, 2003, he 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, unless he qualifies for a reduced maximum exclusion (explained later). Even if he does qualify for a reduced maximum exclusion, he cannot exclude the part of the gain equal to the depreciation he claimed or should have claimed while renting the house. See Depreciation after May 6, 1997, later.

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.

In 1994, Helen Jones lived in a rented apartment. The apartment building was later changed to a condominium, and she bought her apartment on December 1, 2000. In 2001, Helen became ill and on April 14 of that year she moved to her daughter's home. On July 10, 2003, while still living in her daughter's home, she sold her apartment.

Helen can exclude gain on the sale of her apartment because she met the ownership and use tests. Her 5-year period is from July 11, 1998, to July 10, 2003, the date she sold the apartment. She owned her apartment from December 1, 2000, to July 10, 2003 (more than 2 years). She lived in the apartment from July 11, 1998 (the beginning of the 5-year period), to April 14, 2001 (more than 2 years).

Cooperative apartment.

If you sold stock 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.

Exception for individuals with a disability.

There is an exception to the use test if during the 5-year period before the sale of your home:

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.

Under this exception, you are considered to live in your home during any time that you own the home and live in a facility (including a nursing home) that is 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 home on which 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.

If you and your spouse file a joint return for the year of sale, you can exclude gain if either spouse meets the ownership and use tests. (But see Maximum Exclusion, earlier.)

Death of spouse before sale.

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.

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.

You can claim an exclusion, but the maximum amount of gain you can exclude will be reduced, if either of the following is true.

You did not meet the ownership and use tests, but the primary reason you sold the home was:
1. A change in place of employment,
2. Health, or
3. Unforeseen circumstances (as defined later).
Your exclusion would have been disallowed because of the rule described in More Than One Home Sold During 2-Year Period, later, except that the primary reason you sold the home was:
1. A change in place of employment,
2. Health, or
3. Unforeseen circumstances (as defined next).

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 did not anticipate before buying and occupying your main home. For more information on unforeseen circumstances, see Publication 523.

You cannot exclude gain on the sale of your home if, during the 2-year period ending on the date of the sale, you sold another home at a gain and excluded all or part of that gain. If you cannot exclude the gain, you must include it in your income.

Exception.

You can still claim an exclusion, but the maximum amount of gain you can exclude will be reduced, if the primary reason you sold the home was:

A change in place of employment,
Health, or
Unforeseen circumstances (as defined earlier).

For more information about this exception, see More Than One Home Sold During 2-Year Period, in Publication 523.

You may be able to exclude your gain from the sale of a home that you have used for business or to produce rental income. But you must meet the ownership and use tests.

Example 1.

On May 30, 1997, Amy bought a house. She moved in on that date and lived in it until May 31, 1999, when she moved out of the house and put it up for rent. The house was rented from June 1, 1999, to March 31, 2001. Amy moved back into the house on April 1, 2001, and lived there until she sold it on January 31, 2003. During the 5-year period ending on the date of the sale (February 1, 1998 – January 31, 2003), Amy owned and lived in the house for more than 2 years as shown in the table below.

Five Year Period	Used as Home	Used as Rental
2/1/98 – 5/31/99	16 months
6/1/99 – 3/31/01		22 months
4/1/01 – 1/31/03	22 months
	38 months	22 months

Amy can exclude gain up to $250,000. But she cannot exclude the part of the gain equal to the depreciation she claimed, or should have claimed, for renting the house, as explained after Example 2.

Example 2.

William owned and used a house as his main home from 1997 through 2000. On January 1, 2001, he moved to another state. He rented his house from that date until April 30, 2003, when he sold it. During the 5-year period ending on the date of sale (May 1, 1998 – April 30, 2003), William owned and lived in the house for 32 months (more than 2 years). He can exclude gain up to $250,000. However, he cannot exclude the part of the gain equal to the depreciation he claimed, or should 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 as a deduction for periods after May 6, 1997. If you can show by adequate records or other evidence that the depreciation deduction allowed was less than the amount allowable, the amount you cannot exclude is the amount allowed.

Property used partly for business or rental.

If you used property partly as a home and partly for business or to produce income, see Publication 523.

Do not report the 2003 sale of your main home on your tax return unless:

You have a gain and you do not qualify to exclude all of it, or
You have a gain and you choose not to exclude it.

If you have any taxable gain on the sale of your main home that cannot be excluded, report the entire gain realized on Schedule D (Form 1040). Report it in column (f) of line 1 or line 8 of Schedule D, depending on how long you owned the home. If you sold the home after May 5, 2003, also report the gain in column (g). If you qualify for an exclusion, show it on the line directly below the line on which you report the gain. Write “Section 121 exclusion” in column (a) of that line and show the amount of the exclusion in column (f) as a loss (in parentheses). If you sold the home after May 5, 2003, also show the exclusion in column (g).

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 in that year). See Business Use or Rental of Home in Publication 523.

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 generally consist of both interest and principal. You must report the interest you receive as part of each payment separately as interest income. 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 either Schedule B (Form 1040) or Schedule 1 (Form 1040A). 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 you or the buyer does not have and is not eligible to get an SSN, see Social Security Number in chapter 1.

More information.

For more information on installment sales, see Publication 537, Installment Sales.

Expatriates.

You cannot claim the exclusion if the expatriation tax applies to you. The expatriation tax applies to U.S. citizens who have renounced their citizenship (and long-term residents who have ended their residency) if one of their principal purposes was to avoid U.S. taxes. See chapter 4 of Publication 519, U.S. Tax Guide for Aliens, for more information about expatriation tax.

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 limit) may be postponed under the rules explained in:

Publication 547, Casualties, Disasters, and Thefts, in the case of a home that was destroyed, or
Chapter 1 of Publication 544, Sales and Other Dispositions of Assets, 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 and sisters, half-brothers and half-sisters, spouse, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.). Related persons also include certain corporations, partnerships, trusts, and exempt organizations.

If you financed your home under a federally subsidized program (loans from tax-exempt qualified mortgage bonds or loans with mortgage credit certificates), you may have to recapture (pay back) 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 the recapture applies.

The recapture of the federal mortgage subsidy applies only if you meet both of the following conditions.

You sell or otherwise dispose of your home:
1. At a gain, and
2. During the first 9 years after the date you closed 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.

The recapture does not apply if any of the following situations apply to you:

Your mortgage loan was a qualified home improvement loan of not more than $15,000,
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 repair it or replace it on its original site within 2 years after the end of the tax year when the destruction happened, or
You refinance your mortgage loan (unless you later meet all of the conditions listed previously under When the recapture applies).