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2003 Tax Help Archives |
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Tax Help Archives > 2003 > Publications > Publication 523
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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. Personal property.
The selling price of your home does not include amounts you received for personal property sold with your home. Personal
property is property that
is not a permanent part of the home. Examples are furniture, draperies, and lawn equipment. Separately stated amounts you
received for these items
should not be shown on Form 1099–S (discussed later). Any gains from sales of personal property must be included in your income.
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 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, box 2 (gross proceeds) should show the total amount you received for your home.
The amount realized is the selling price minus selling expenses. Selling expenses.
Selling expenses include commissions, advertising fees, legal fees, and loan charges paid by the seller, such as loan
placement fees or
“points.”
While you owned your home, you may have made adjustments (increases or decreases) to the basis. This adjusted basis must be determined before you can figure gain or loss on the sale of your home. For information on how to figure your home's adjusted basis, see Determining Basis, later. 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 publication 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.
Ordinary income.
If you were personally liable for the canceled debt, you may have ordinary income in addition to any gain or loss.
If the canceled debt is more
than the home's fair market value, you have ordinary income equal to the difference. Report that income on line 21, Form 1040.
However, the income
from cancellation of debt is not taxed to you if the cancellation is intended as a gift, or if you are insolvent or bankrupt.
For more information on
insolvency or bankruptcy, see Publication 908, Bankruptcy Tax Guide.
Form 1099–C and Form 1099–A.
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.
More information.
If part of your home is used for business or rental purposes, see Foreclosures and Repossessions in chapter 1 of Publication 544 for
more information. Publication 544 has examples of how to figure gain or loss on a foreclosure or repossession.
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 canceled debt.
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 with an adjusted basis of $41,000. A real estate dealer accepted your old home as a trade-in and allowed you $50,000 toward a new home priced at $80,000. This is treated as a sale of your old home for $50,000 with a gain of $9,000 ($50,000 - $41,000). If the dealer had allowed you $27,000 and assumed your unpaid mortgage of $23,000 on your old home, your sales price would still be $50,000 (the $27,000 trade-in allowed plus the $23,000 mortgage assumed). Transfer to spouse.
If you transfer your home to your spouse, or to your former spouse incident to your divorce, you generally have no
gain or loss (unless the
Exception, discussed next, applies). This is true even if you receive cash or other consideration for the home. Therefore, the rules
explained in this publication do not apply.
Exception.
These transfer rules do not apply if your spouse or former spouse is a nonresident alien. In that case, you generally
will have a gain or loss.
More information.
See Property Settlements in Publication 504, Divorced or Separated Individuals, if you need more information.
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. To figure your adjusted basis, you can use Worksheet 1, shown later. Filled-in examples of that worksheet are included in the Comprehensive Examples, later. 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 later.
Seller-paid points.
If the person who sold you your home paid points on your loan, you may have to reduce your home's basis by the amount
of the points as shown in the
following chart.
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.
Real estate taxes.
Real estate taxes for the year you bought your home may affect your basis, as shown in the following chart.
Construction.
If you contracted to have your house built on land you own, your basis is:
Built by you.
If you built all or part of your house yourself, its basis is the total amount it cost you to complete it. Do not
include in the cost of the house:
Temporary housing.
If a builder gave you temporary housing while your home was being finished, you must reduce your basis by the part
of the contract price that was
for the temporary housing. 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 home.
Cooperative apartment.
Your basis in the apartment is usually the cost of your stock in the co-op housing corporation, which may include
your share of a mortgage on the
apartment building.
You must use a basis other than cost, such as fair market value, if you got your home as a gift, from your spouse, as an inheritance, or in a trade. If you got your home in any of these ways, see the following discussion that applies to you. If you want to figure your adjusted basis using Worksheet 1, see the Worksheet 1 Instructions, later, for help. Fair market value.
Fair market value is the price at which property would change hands between a willing buyer and a willing seller,
neither having to buy or sell,
and both having reasonable knowledge of all necessary facts. Sales of similar property, on or about the same date, may be
helpful in figuring the fair
market value of the property.
Home received as gift.
Use the following chart to find the basis of a home you received as a gift.
Part of federal gift tax due to net increase in value.
Figure the part of the federal gift tax paid that is due to the net increase in value of the home by multiplying the
total federal gift tax paid by
a fraction. The numerator (top part) of the fraction is the net increase in the value of the home, and the denominator (bottom
part) is the value of
the home for gift tax purposes after reduction for any annual exclusion and marital or charitable deduction that applies to
the gift. The net increase
in the value of the home is its fair market value minus the donor's adjusted basis.
Home received from spouse.
You may have received your home from your spouse or from your former spouse incident to your divorce.
Transfers after July 18, 1984.
If you received the home after July 18, 1984, there was no gain or loss on the transfer. Your basis in this home is
generally the same as your
spouse's (or former spouse's) adjusted basis just before you received it. This rule applies even if you received the home
in exchange for cash, the
release of marital rights, the assumption of liabilities, or other consideration.
Transfers before July 19, 1984.
If you received your home before July 19, 1984, in exchange for your release of marital rights, your basis in the
home is generally its fair market
value at the time you received it.
More information.
For more information on property received from a spouse or former spouse, see Property Settlements in Publication 504.
Home received as inheritance.
If you inherited your home, your basis is its fair market value on the date of the decedent's death or the later alternate
valuation date if that
date was chosen by the personal representative for the estate. If an estate tax return was filed, the value listed for the
property generally is your
basis. If a federal estate tax return did not 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 half interest that your
spouse owned will be one-half of the fair market value on the date of death (or alternate valuation date). The basis in your
half will remain one-half
of the adjusted basis determined previously. Your new basis is the total of these two amounts.
Community property.
In community property states (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 fair market value of the community property
generally becomes the basis
of the entire property, including the part belonging to the surviving spouse. For this 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.
Home received as trade.
If you acquired your home as a trade for other property, the basis of your home is generally the fair market value
of the other property at the
time of the trade. If you traded one home for another, you have made a sale and purchase. In that case, you may have realized
a gain. See Trading
homes, earlier, for an example of figuring the gain.
Adjusted basis is your basis increased or decreased by certain amounts. To figure your adjusted basis, you can use Worksheet 1, shown later. Filled-in examples of that worksheet are included in Comprehensive Examples, later. Increases to basis.
These include any:
Decreases to basis.
These include any:
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 new garage, is also an improvement.
Improvements no longer part of home.
Your home's adjusted basis does not include the cost of any improvements that are no longer part of the home.
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.
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.
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. The records you should keep include:
You may qualify to exclude from your income all or part of any gain from the sale of your main home. This means that, if you qualify, you will not have to pay tax on the gain up to the limit described under Maximum Exclusion, next. To qualify, you must meet the ownership and use tests described later. You can choose not to take the exclusion by including the gain from the sale in your gross income on your tax return for the year of the sale. This choice can be made (or revoked) at any time before the expiration of a 3-year period beginning on the due date of your return (not including extensions) for the year of the sale. You can use Worksheet 2 to figure the amount of your exclusion and your taxable gain, if any. You can exclude up to $250,000 of the gain on the sale of your main home if all of the following are true.
If you and another person owned the home jointly but file separate returns, each of you can exclude up to $250,000 of gain from the sale of your interest in the home if each of you meets the three conditions just listed. You can exclude up to $500,000 of the gain on the sale of your main home if all of the following are true.
If either spouse does not satisfy all these requirements, the maximum exclusion that can be claimed by the couple is the total of the maximum exclusions that each spouse would qualify for if not married and the amounts were figured separately. For this purpose, each spouse is treated as owning the property during the period that either spouse owned the property. 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 exclude will be reduced. See Reduced Maximum Exclusion, later.
Example 1—home owned and occupied for 3 years. Amanda bought and moved into her main home in September 2000. She sold the home at a gain on September 15, 2003. During the 5-year period ending on the date of sale (September 16, 1998 – September 15, 2003), she owned and lived in the home for 3 years. She meets the ownership and use tests. 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. Example. Susan bought and moved into a house in July 1999. She lived there for 13 months and then moved in with a friend. She moved back into her own house in 2002 and lived there for 12 months until she sold it in July 2003. Susan meets the ownership and use tests because, during the 5-year period ending on the date of sale, she owned the house for 4 years and lived in it for a total of 25 months. Worksheet 1 Instructions. If you use Worksheet 1 to figure the adjusted basis of your home, follow these instructions.
Worksheet 1 Instructions.(Continued)
Worksheet 2. Gain (or Loss), Exclusion, and Taxable Gain
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 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:
Members of the uniformed services or Foreign Service.
You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse
serve on qualified official
extended duty as a member of the uniformed services or Foreign Service of the United States. This means that you may be able to meet the
2-year
use test even if, because of your service, you did not actually live in your home for at least the required 2 years during
the 5-year period ending on
the date of sale.
Example. David bought and moved into a home in 1995. He lived in it as his main home for 2½ years. For the next 6 years, he did not live in it because he was on qualified official extended duty with the Army. He then sold the home at a gain in 2003. To meet the use test, David chooses to suspend the 5-year test period for the 6 years he was on qualifying official extended duty. This means he can disregard those 6 years. Therefore, David's 5-year test period consists of the 5 years before he went on qualifying official extended duty. He meets the ownership and use tests because he owned and lived in the home for 2½ years during this test period. Period of suspension.
The period of suspension cannot last more than 10 years. You cannot 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.
Uniformed services.
The uniformed services are:
Foreign Service member.
You are a member of the Foreign Service if you are any of the following.
Qualified official extended duty.
You are on qualified official extended duty if you serve on extended duty either:
Claiming a refund for a prior-year home sale.
This rule for members of the uniformed services or the Foreign Service became law in 2003 but applies to any sale
of a main home after May 6, 1997.
Therefore, you may be entitled to a refund if this rule applies to you and you paid tax on a gain from the sale of a home
after that date. If you are
entitled to a refund, complete and file Form 1040X, Amended U.S. Individual Income Tax Return. Identify your claim for refund by writing
“Military Family Tax Relief Act” in red in the top margin of your Form 1040X. Generally, you must file a claim for credit or refund within 3
years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later. However,
the deadline to file a
claim based on this rule for 1997, 1998, 1999, or 2000 has been extended to November 10, 2004.
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:
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.) Example 1 — one spouse sells a home. Emily sells her home in June 2003. She marries Jamie later in the year. She meets the ownership and use tests, but Jamie does not. Emily can exclude up to $250,000 of gain on a separate or joint return for 2003. Example 2 — each spouse sells a home. The facts are the same as in Example 1 except that Jamie also sells a home in 2003. He meets the ownership and use tests on his home. Emily and Jamie can each exclude up to $250,000 of gain. 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 can claim an exclusion, but the maximum amount of gain you can exclude will be reduced if either of the following is true.
Use Worksheet 3 to figure your reduced maximum exclusion. Primary reason.
If certain sets of facts and circumstances (safe harbors) apply to you, the primary reason you sold the home is considered
to be a change in place
of employment, health, or unforeseen circumstances. If your home sale does not qualify under one of these safe harbors, factors
that may be relevant
in determining your primary reason for sale include whether:
The sale of your main home is because of a change in place of employment if your primary reason for the sale is a change in the location of employment of a qualified individual. Qualified individual.
For purposes of the reduced maximum exclusion, a qualified individual is any of the following.
Employment.
For this purpose, employment includes the start of work with a new employer or continuation of work with the same
employer. It also includes the
start or continuation of self-employment.
Distance safe harbor.
A change in place of employment is considered to be the primary reason you sold your home if :
Example. Justin was unemployed and living in a townhouse in Florida that he had owned and used as his main home since 2002. He got a job in North Carolina and sold his townhouse in 2003. Because the distance between Justin's new place of employment and the home he sold is at least 50 miles, the sale satisfies the conditions of the distance safe harbor. Justin's sale of his home is because of a change in place of employment and he is entitled to a reduced maximum exclusion of gain from the sale. The sale of your main home is because of health if your primary reason for the sale is to obtain, provide, or facilitate the diagnosis, cure, mitigation, or treatment of disease, illness, or injury of a qualified individual. For purposes of this reason, a qualified individual includes, in addition to the individuals listed earlier, any of the following.
Example. In 2002, Chase and Lauren, husband and wife, bought a house that they used as their main home. Lauren's father has a chronic disease and is unable to care for himself. In 2003, Chase and Lauren sell their home in order to move into Lauren's father's house to provide care for him. Because the primary reason for the sale of their home was the health of a qualified individual, Chase and Lauren are entitled to a reduced maximum exclusion. Doctor's recommendation safe harbor.
Health is considered to be the primary reason you sold your home if, for one or more of the reasons listed at the
beginning of this discussion, a
doctor recommends a change of residence.
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. Specific event safe harbors.
Unforeseen circumstances are considered to be the primary reason you sold your home if any of the following events
occurred while you owned and
used the property as your main home.
Reasonable basic living expenses.
Reasonable basic living expenses for your household include the following expenses.
Worksheet 3. Reduced Maximum Exclusion
More Than One Home Sold During 2-Year Period 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:
For details about this exception, see Reduced Maximum Exclusion, earlier. Example 1. In September 2001, Paul and Nadine bought a new home. In November 2001, they sold their old home at a $40,000 gain. They had owned and lived in the old home for 4 years. They excluded the gain on the sale. On October 1, 2003, Paul and Nadine sold the home they purchased in September 2001 at a $15,000 gain. The sale was not due to a change in place of employment, health, or unforeseen circumstances as defined in this publication. Because Paul and Nadine had excluded gain on the sale of another home within the 2-year period ending on October 1, 2003, they cannot exclude the gain on this sale. Example 2. The facts are the same as in Example 1 except that Paul and Nadine did not sell the home purchased in September 2001 until December 3, 2003. Because they had not excluded gain on the sale of another home within the 2-year period ending on December 3, 2003, they can exclude the gain on this sale. Business Use or Rental of Home 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 following table.
Amy can exclude gain up to $250,000. However, 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 for renting the house, as explained next. Depreciation after May 6, 1997.
If you were entitled to take depreciation deductions because you used your home for business purposes or as rental
property, you cannot exclude the
part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997. If you can
show by adequate records or
other evidence that the depreciation deduction allowed was less than the amount allowable, the amount you cannot exclude is
the amount allowed.
Example.
Dan sold his main home in 2003 at a $10,000 gain. He meets the ownership and use tests to exclude the gain from his
income. However, he used one
room of the home for business in 2002 and claimed $1,000 depreciation. He can exclude $9,000 ($10,000 – $1,000) of his gain.
He has a taxable
gain of $1,000.
Property Used Partly for Business or Rental If you use property partly as a home and partly for business or to produce rental income, the treatment of any gain on the sale depends partly on whether the business or rental part of the property is part of your home or separate from it. Part of Home Used for Business or Rental If the part of your property used for business or to produce rental income is within your home, such as a room used as a home office for a business, you do not need to allocate the basis of the property and the amount realized between the business part of the property and the part used as a home. In addition, you do not need to report the sale of the business or rental part on Form 4797. This is true whether or not you were entitled to claim any depreciation deductions. However, you cannot exclude the part of any gain equal to any depreciation deductions allowed or allowable after May 6, 1997. See Depreciation after May 6, 1997 earlier. Example 1. Ray sold his main home in 2003 at a $30,000 gain. He meets the ownership and use tests to exclude the gain from his income. However, he used part of the home as a business office in 2002 and claimed $500 depreciation. Because the business office was part of his home (not separate from it), he does not have to allocate the basis and amount realized between the business part of the property and the part used as a home. In addition, he does not have to report any part of the gain on Form 4797. He reports his gain, exclusion, and taxable gain of $500 on schedule D (Form 1040). Example 2. The facts are the same as in Example 1 except that Ray was not entitled to claim depreciation deductions for the business use of his home. Since Ray did not claim any depreciation deductions, he can exclude the entire $30,000 gain. Separate Part of Property Used for Business or Rental You may have used part of your property as your home and a separate part of it for business or to produce rental income. Examples are:
Use test not met for business part.
You cannot exclude gain on the separate part of your property used for business or to produce rental income unless
you owned and lived in that part
of your property for at least 2 years during the 5-year period ending on the date of the sale. If you do not meet the use
test for the business or
rental part of the property, you must allocate the basis of the property and the amount realized upon its sale between the
business or rental part and
the part used as a home. See Example 5, later, for an example of how to do this. You must report the sale of the business or rental part on
Form 4797.
Example 3. In 1999, Lew bought property that consisted of a house and a stable. He used the house as his main home and used the stable in his business for the next 4 years. He sold the entire property in 2003 at a $10,000 gain. Lew met the ownership and use tests for the house but did not meet the use test for the stable. Lew must allocate the basis of the property and the amount realized between the part of the property he used for his home and the part he used for his business, since the business part was separate from his home. Lew must report the gain on the business part of his property on Form 4797. He can exclude the gain on the part of the property that was his main home. Example 4. In 1998, Mary bought property that consisted of a house and a barn. Mary used the house as her main home and used the barn in her antiques business. In 2002, Mary moved out of the house and rented it to tenants. She claimed depreciation deductions on the house while renting it in 2002 and 2003. She continued to use the barn in her business. Mary sold the entire property in 2003 for a $21,000 gain. Mary must allocate the basis of the property and amount realized between the home and business parts of the property since the barn is separate from her home. She must report the entire gain from the barn on Form 4797 since she did not meet the use test for the barn. She must also report gain on the home to the extent of the depreciation she claimed for the rental. Use test met for business part (business use in year of sale).
If you used a separate part of your property for business or to produce rental income in the year of sale, you should
treat the sale of the
property as the sale of two properties, even if you met the use test for the business or rental part. You must report the
sale of the business or
rental part on Form 4797.
Excluding gain on the business or rental part of your property.
You generally can exclude gain on the part of your property used for business or rental if you owned and lived in that part as your main
home for at least 2 years during the 5-year period ending on the date of the sale. If you used a separate Worksheet 2 (Part 2) to figure
the exclusion for the business or rental part, do not fill out lines 10 and 11 of that Worksheet 2. Fill it out only through line 9. Then
fill out Form 4797. Enter the exclusion for the business or rental part on Form 4797 as explained in the Form 4797 instructions.
(Also see
Example 5, next.)
Example 5. In January 1999, you bought and moved into a 4-story townhouse. In December 2001, you converted the basement level, which has a separate entrance, into a separate apartment by installing a kitchen and bathroom and removing the interior stairway that led from the basement to the upper floors. After you completed the conversion, your townhouse had a rental unit that was separate from the part of your house used as your home. You lived in the first, second, and third levels of the townhouse and rented the basement level to tenants until December 2003. You claimed depreciation deductions of $2,000 for the basement apartment. You sold the entire townhouse in December 2003 for a $16,000 gain. Your records show the following.
Because you met the ownership and use tests for both the basement apartment and the part of the house you used as your home, you can claim an exclusion for both parts. However, you must allocate your basis, selling price, and selling expenses between the part of the property you used as a main home and the part you rented out to tenants. You start by finding the adjusted basis of each part. You determine that three-fourths (75%) of your purchase price was for the part used as your home; one-fourth (25%) was for the rental part.
Next, you figure the gain on each part, dividing your selling price and selling expenses between the two parts.
Then, to figure your taxable gain and exclusion, you decide to fill out a separate Worksheet 2 (Part 2) for each part, dividing your maximum exclusion between the two parts. You are single, so the maximum exclusion is $250,000.
Do not report the gain from the part used as your home, because you can exclude all of it. You report the gain from the rental part ($5,500) in Part III of Form 4797. You enter your exclusion ($3,500) on line 2 of Form 4797. Your taxable gain from the rental part is $2,000 ($5,500 – $3,500). Use test met for business part (no business use in year of sale).
If you have used a separate part of your property for business or to produce rental income (though not in the year
of sale) but meet the use test
for both the business or rental part and the part you use as a home, you do not need to treat the transaction as the sale
of two properties. Also, you
do not need to file Form 4797. You generally can exclude gain on the entire property.
Example 6. Assume the same facts as in Example 5, except that in March 2003, you combined the two separate dwelling units by eliminating the basement kitchen and building a new interior stairway to the upper floors. You used the entire townhouse as your main home for the rest of 2003. The entire townhouse was used as your main home for at least 2 years during the 5-year period ending on the date of the sale. You report the gain ($16,000) and the allowable exclusion ($14,000) on Part II of Schedule D (Form 1040). Since your $2,000 taxable gain is from depreciation, it is unrecognized section 1250 gain, so you must also enter it on line 12 of the Unrecaptured Section 1250 Gain Worksheet in the Schedule D (Form 1040) instructions. You have no other amounts to enter on that worksheet, so you also enter $2,000 on line 19 of Schedule D. You then figure your tax using the Schedule D Tax Worksheet. Do not report the 2003 sale of your main home on your tax return unless:
If you have any taxable gain on the sale of your main home that cannot be excluded, report the entire gain realized (line 5 of Worksheet 2) 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 (line 9 of Worksheet 2), 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). See Business Use or Rental of Home, earlier. 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.
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 the next
discussion.
Individual taxpayer identification number (ITIN).
If either you or the buyer of your home is a nonresident or resident alien who does not have and is not eligible to
get an SSN, the IRS will issue
you (or the buyer) an ITIN. To apply for an ITIN, file Form W–7, Application for IRS Individual Taxpayer Identification Number, with
the IRS.
More information.
For more information on installment sales, see Publication 537, Installment Sales.
Example 1. Peter and Betty Clark married and bought a home in 1962. They lived in it as their main home until they sold it in February 2003 and moved into a retirement community. The Clarks can exclude gain on the sale of their home because they owned and lived in it for at least 2 years of the 5-year period ending on the date of sale. Their records show the following:
The Clarks use Worksheet 1 to figure the adjusted basis of the home they sold ($42,250). They use Worksheet 2 to figure the gain on the sale ($327,750) and the amount of their exclusion ($327,750). Their completed Worksheets 1 and 2 follow. Since the Clarks are married and file a joint return for the year, they qualify to exclude the full amount of their gain. Because they choose to exclude the gain, they do not report the sale of the home on their return. Worksheet 1. Adjusted Basis of Home Sold —
Worksheet 2. Gain (or Loss), Exclusion, and Taxable Gain —
Example 2. The facts are the same as in Example 1, except that Peter and Betty Clark sold their home for $695,000 and they had no selling expenses. Their gain on the sale is $652,750. Since they are married, meet the ownership and use tests and file a joint return for the year, they qualify to exclude $500,000 of the gain. They report the remaining gain of $152,750 ($652,750 – $500,000) on Schedule D (Form 1040). Their completed Worksheet 2 appears next. (Worksheet 1 remains the same as shown in Example 1.) The front page of the Clarks' Schedule D follows.
This image is too large to be displayed in the current screen.
Please click the link to view the image. Schedule D for Pete and Betty Clark
Example 3. Emily White, a single person, bought a home in 1992. She lived in the home until May 31, 2001, when she moved out of the house and put it up for rent. Emily rented her home until May 31, 2002. She moved back into the house and lived there until she sold it on January 10, 2003. Emily can exclude gain on the sale of her home because she owned and lived in the home for at least 2 years of the 5-year period ending on the date of the sale. Emily's records show the following:
Emily uses Worksheet 1 to figure the adjusted basis of the home she sold ($52,459). She uses Worksheet 2 to figure the gain on the sale ($127,541) and the amount of her exclusion ($125,750). Emily cannot exclude $1,791, the part of her gain equal to the depreciation deduction claimed while the house was rented. Emily reports her gain and exclusion in Part II of Schedule D (Form 1040). She enters $1,791 on line 12 of the Unrecaptured Section 1250 Gain Worksheet in the Schedule D (Form 1040) instructions. She has no other amounts to enter on that worksheet so, after completing it, she also enters $1,791 on line 19 of Schedule D. She then figures her tax using the Schedule D Tax Worksheet. Emily's completed Worksheet 1 appears next. Her completed Worksheet 2 and the front page of her Schedule D follow. Page 2 of Schedule D and her Unrecaptured Section 1250 Gain Worksheet are not shown.
Worksheet 1. Adjusted Basis of Home Sold —
Worksheet 2. Gain (or Loss), Exclusion, and Taxable Gain —
This image is too large to be displayed in the current screen.
Please click the link to view the image. Schedule D for Emily White
The situations that follow may affect your exclusion. 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.
Sale of remainder interest.
Subject to the other rules in this publication, 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.
When you sell your main home, treat real estate and transfer taxes on that home as discussed in this section. Real estate taxes.
You and the buyer must deduct the real estate taxes on your home for the year of sale according to the number of days
in the real property tax year
that each owned the home.
Example. The 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 1. They sold the home on May 7. Dennis and Beth are considered to have paid a proportionate share of the real estate taxes on the home even though they did not actually pay them to the taxing authority. Dennis and Beth owned their home during the real property tax year for 126 days (January 1 to May 6, the day before the sale). They figure their deduction for taxes as follows.
Since the buyers paid all of the taxes, Dennis and Beth also include the $214 in the home's selling price. The buyers add the $214 to their basis in the home. The buyers can deduct $406 ($620 – $214), the taxes for the part of the year they owned the home. Form 1099–S.
If the person responsible for closing the sale (generally the settlement agent) must file Form 1099–S, the information
reported on the form
to you and the IRS must include (in box 5) the part of any real estate tax that the buyer can deduct. If you actually paid
the taxes for the year of
sale, you must subtract the amount shown in box 5 of Form 1099–S from the amount you paid. The result is the amount you can
deduct.
Transfer taxes.
You cannot deduct transfer taxes, stamp taxes, and other incidental taxes and charges on the sale of a home as itemized
deductions. However, if you
pay these amounts as the seller of the property, they are expenses of the sale and reduce the amount you realize on the sale.
If you pay these amounts
as the buyer, include them in your cost basis of the property.
If you financed your home under a federally subsidized program (loans from tax-exempt qualified mortgage bonds or loans with mortgage credit certificates), you may have to recapture all or part of the benefit you received from that program when you sell or otherwise dispose of your home. You recapture the benefit by increasing your federal income tax for the year of the sale. You may have to pay this recapture tax even if you can exclude your gain from income under the rules discussed earlier; that exclusion does not affect the recapture tax. Loans subject to recapture rules.
The recapture applies to loans that:
Federal subsidy benefit.
If you received a mortgage loan from the proceeds of a tax-exempt bond, you received the benefit of a lower interest
rate than was customarily
charged on other mortgage loans. If you received a mortgage credit certificate with your mortgage loan, you were able to reduce
your federal income
taxes by a mortgage interest tax credit. Both of these benefits are federal mortgage subsidies.
Sale or other disposition.
The sale or other disposition of your home includes an exchange, involuntary conversion, or any other disposition.
When the recapture applies.
The recapture of the federal mortgage subsidy applies only if you meet both of the following conditions.
When recapture does not apply.
The recapture does not apply if any of the following situations apply to you:
Notice of amounts.
At or near the time of settlement of your mortgage loan, you should receive a notice that provides the federally subsidized
amount and other
information you will need to figure your recapture tax.
How to figure and report the recapture.
The recapture tax is figured on Form 8828.
If you sell your home and your mortgage loan is subject to the recapture rules, you must file Form 8828 even if you do
not owe a recapture tax. Attach Form 8828 to your Form 1040. For more information, see Form 8828 and its instructions.
You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get more information from the IRS in several ways. By selecting the method that is best for you, you will have quick and easy access to tax help. Contacting your Taxpayer Advocate.
If you have attempted to deal with an IRS problem unsuccessfully, you should contact your Taxpayer Advocate.
Free tax services.
To find out what services are available, get Publication 910, Guide to Free Tax Services. It contains a list of free tax publications
and an index of tax topics. It also describes other free tax information services, including tax education and assistance
programs and a list of
TeleTax topics.
Internet. You can access the IRS web site 24 hours a day, 7 days a week at www.irs.gov to:
You can also reach us using File Transfer Protocol at ftp.irs.gov.
Fax. You can get over 100 of the most requested forms and instructions 24 hours a day, 7 days a week, by fax. Just call 703–368–9694 from your fax machine. Follow the directions from the prompts. When you order forms, enter the catalog number for the form you need. The items you request will be faxed to you. For help with transmission problems, call 703–487–4608. Long-distance charges may apply.
Phone. Many services are available by phone.
Walk-in. Many products and services are available on a walk-in basis.
Mail. You can send your order for forms, instructions, and publications to the Distribution Center nearest to you and receive a response within 10 workdays after your request is received. Use the address that applies to your part of the country.
CD-ROM for tax products. You can order IRS Publication 1796, Federal Tax Products on CD-ROM, and obtain:
Buy the CD-ROM from National Technical Information Service (NTIS) on the Internet at www.irs.gov/cdorders for $22 (no handling fee) or call 1–877–233–6767 toll free to buy the CD-ROM for $22 (plus a $5 handling fee). The first release is available in early January and the final release is available in late February.
CD-ROM for small businesses. IRS Publication 3207, Small Business Resource Guide, is a must for every small business owner or any taxpayer about to start a business. This handy, interactive CD contains all the business tax forms, instructions and publications needed to successfully manage a business. In addition, the CD provides an abundance of other helpful information, such as how to prepare a business plan, finding financing for your business, and much more. The design of the CD makes finding information easy and quick and incorporates file formats and browsers that can be run on virtually any desktop or laptop computer. It is available in early April. You can get a free copy by calling 1–800–829–3676 or by visiting the web site at www.irs.gov/smallbiz. Publications Index | 2003 Tax Help Archives | Tax Help Archives | Home © 2005, UncleFed.com
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