2003 Tax Help Archives  
  Home > Tax Help Archives > 2003 > Tax Topics & FAQs > FAQ Keyword 189

Keyword: Sale of 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.


1.1 IRS Procedures: General Procedural Questions


How long do I need to keep certain records?

Records such as receipts, canceled checks, and other documents that prove an item of income or a deduction appearing on your return should be kept at least until the statute of limitations expires for that return. Usually this is three years from the date the return was due or filed, or two years from the date the tax was paid, whichever is later. There is no period of limitations when a return is false or fraudulent or when no return is filed. You should keep some records indefinitely, such as property records, since you may need them to determine the basis of the property if it to prove the amount of gain or loss if the property is sold. For more details, refer to Publication 552 Recordkeeping for Individuals, or Tax Topic 305 on Recordkeeping.

If you are an employer, you must keep all your employment tax records for at least four years after the tax is due or paid, whichever is later. For additional information, refer to Publication 583, Starting a Business and Keeping Records. People in business often have expenses for travel, entertainment, and gifts. The documentation you should keep for each of these expenses can be found in Publication 463, Travel, Entertainment, Gift and Car Expenses.

References:

4.4 Interest/Dividends/Other Types of Income: 1099 Information Returns (All Other)


My house was foreclosed on and the lender has sent me a Form 1099. What do I do? Must I report this?

You may have received either a Form 1099A (PDF), Acquisition or Abandonment of Secured Property, or Form 1099C (PDF), Cancellation of Debt, or both. You may not have to report gain on the sale of property and, depending on the circumstances, you may have cancellation of indebtedness as well. You have cancelled debt income if the debt cancelled, as a result of the foreclosure and it exceeds the fair market value of the property at the time of he transfer. Cancelled debt income is taxable as other income on line 21 (other income) of Form 1040 (PDF). Refer to Publication 544, Sales and Other Disposition of Assets. Complete Table 1-2, Worksheet for Foreclosure & Repossessions to determine if there is income from cancellation of debt or gain or loss from foreclosure or repossession.

You may be able to exclude all or part of the cancelled debt income if all or part of the debt was discharged in bankruptcy; if you were insolvent immediately before the transfer; or if the debt is a qualified farm debt or qualified real property indebtedness. Refer to Publication 908, Bankruptcy Tax Guide.

You may be required to compute gain on the disposition of the property and, under certain circumstances, may be eligible to claim a loss as well. The tax treatment of he disposition may be affected by whether the debt was recourse or nonrecourse.

If the debt was nonrecourse (you were not personally liable for payment), the amount realized for purposes of computing gain is the sum of the amount of money received, the fair market value of any other property received incident to the transfer of the property subject to foreclosure, and the amount of any nonrecourse debt on the property. The difference between the amount realized and your basis is your gain or loss. No portion of the gain on property subject only to nonrecourse debt is income from discharge of indebtedness.

If the debt was recourse (you could have been held personally liable for payment), the proper treatment depends on the amount of the debt and whether you were discharged as a result of the transaction. If the debt was less than the fair market value of the property, the amount realized is equal to the sum of the amount received and the fair market value of any other property received incident to the transfer of the property subject to foreclosure, and the amount of any debt discharged as the result of the transaction. On the other hand, if the debt was more than the fair market value of the property and it was discharged as result of the transaction, for example, if you gave the creditor a deed in lieu of foreclosure, then the difference between the FMV of the property and the amount of the debt up to the FMV of the property is considered to be the amount realized and the excess debt is considered to be income from discharge of indebtedness. Your gain or loss would be computed by the difference between the FMV of the property and your basis; the balance would be ordinary income reportable on Line 21. If the debt was not discharged because of the foreclosure and the creditor could collect the difference from you, there would be no discharge of indebtedness income until such time as the debt was actually discharged or the statute of limitations expired. In such case, you might only have to report your gain on the disposition of the property.

References:

4.7 Interest/Dividends/Other Types of Income: Gifts & Inheritances


Is the money received from the sale of inherited property considered taxable income?

To determine if the sale of inherited property is taxable, you must first determine your basis in the property. The basis of inherited property is generally one of the following:

(1) The fair market value (FMV) of the property on the date of the decedent's death.

(2) The FMV of the property on the alternate valuation date if the executor of the estate chooses to use alternate valuation. See Form 706 (PDF), United States Estate (and Generation-Skipping Transfer) Tax Return.

(3) The special use valuation for estate tax purposes of qualified real property used for farming purposes or in a trade or business other than farming. However, if an interest in such property is disposed of or ceases to be used in a qualified use during the 10 year period following the decedent's death, additional estate tax is imposed. If the qualified heir elects to pay interest on the additional estate tax, the adjusted basis of the property will be deemed to have been increased, immediately before disposition, by an amount equal to the excess of its fair market value on the date of the decedent's death over its special use value. See Form 706 (PDF), U.S. Estate (and Generation-Skipping Transfer) Tax Return and section 2032A of Internal Revenue Code.

(4) If an election is made to exclude a portion of the value of land from a decedent's gross estate section 2031 (c) (regarding the transfer of qualified conservation easement), the decedent's adjusted basis in the land to the extent the value of the land was excluded from the decedent's gross estate under 2031(c) by reason of the transfer of a qualified conservation easement plus the fair market value of the land to the extent the value of the land was included in the gross estate. For more information on qualified conservation easement see the Instructions for Form 706, U. S. Estate (and Generation-Skipping Transfer) Tax Returnand section 2031(c) of the Internal Revenue Code.

If you or your spouse gave the property to the descendent within one year of their death, see Publication 551, Basis of Assets.

Report the sale on Form 1040, Schedule D (PDF), Capital Gain and Losses. If you sell the property for more than your basis, you have a taxable gain. For information on how to report the sale on Schedule D, please see Publication 550, Investment Income and Expenses.

References:

10.1 Capital Gains, Losses/Sale of Home: Property (Basis, Sale of Home, etc.)


I sold my home last year. Do I have to report the sale?

Report the sale of your main home on your tax return only if you have a gain and at least part of it is taxable, or you have a gain and choose not to exclude it. Report any taxable gain on Form 1040, Schedule D (PDF), Capital Gains and Losses. Form 2119, Sale of Your Home is obsolete beginning in 1998. For more information, refer to Publication 523, Selling Your Home.

References:

I sold my principal residence this year. What form do I need to file?

If you meet the ownership and use tests, you will generally only need to report the sale of your home if your gain is more than $250,000 ($500,000 if married filing a joint return). This means that during the 5-year period ending on the date of the sale, you must have:

  • Owned the home for at least 2 years (the ownership test), and
  • Lived in the home as your main home for at least 2 years (the use test).
    • If you owned and lived in the property as your main home for less than 2 years, you may still be able to claim an exclusion in some cases. The maximum amount you can exclude will be reduced. If you are required or choose to report a gain, it is reported on Form 1040, Schedule D (PDF), Capital Gains and Losses .

    If you were on qualified extended duty in th U.S. Armed Services or the Foreign Service you may suspend the five-year test period for up to 10 years. You are on qualified extended duty when:

  • At a duty station that is at least 50 miles from the residence sold, or
  • When residing under orders in government housing, for more than 90 days or for an indefinite period.

    • This change applies to home sales after May 6, 1997. You may use this provision for only one property at a time and one sale every two years.

    For additional information on selling your home, refer to Publication 523, Selling Your Home .

    References:

    If I sell my home and use the money I receive to pay off the mortgage, do I have to pay taxes on that money?

    It is not the money you receive for the sale of your home, but the amount of gain on the sale over your cost, or basis, that determines whether you will have to include any proceeds as taxable income on your return. You may be able to exclude any gain from income up to a limit of $250,000 ($500,000 on a joint return in most cases). If you can exclude all of the gain, you do not need to report the sale on your tax return.

    For additional information on selling your home, refer to Publication 523, Selling Your Home.

    References:

    If I take the exclusion of capital gain tax on the sale of my old home this year, can I also take the exclusion again if I sell my new home in the future?

    With the exception of the 2-year waiting period, there is no limit on the number of times you can exclude the gain on the sale of your principle residence so long as you meet the ownership and use tests.

    References:

    What is the amount of capital gains from the sale of a home that can be excluded if sold in less than the two year waiting period?

    If you owned and lived in the property as your main home for less than 2 years, you may still be able to claim an exclusion in some cases. The maximum amount you can exclude will be reduced.

    You can claim this reduced exclusion if either of the following is true.

    (1) You did not meet the ownership and use tests on a home you sold due to:

    . health reasons

    . a change in place of employment

    . to the extent provided by regulations, unforeseen circumstances. (see below)

    (2) Your exclusion would have been disallowed because of the rule on selling more than one home in a two year period, except you sold the home due to:

    . health reasons

    . a change in place of employment

    . to the extent provided by regulations, unforeseen circumstances. (see below)

    Use the worksheet in Publication 523, Selling Your Home, to figure your reduced exclusion.

    The IRS has issued temporary regulations. These regulations provide guidelines for taxpayers with reduced maximum exclusion circumstances. Temp: reg. 1.121-3T (e) details the "unforeseen circumstances" guidelines. See Temp reg 1.121-3T and Publication 523, Selling Your Home.

    References:

    I lived in a home as my principal residence for the first 2 of the last 5 years. For the last 3 years, the home was a rental property before selling it. Can I still avoid the capital gains tax and, if so, how should I deal with the depreciation I took while it was rented out?

    If, during the 5-year period ending on the date of sale, you owned the home for at least 2 years and lived in it as your main home for at least 2 years, you can exclude up to $250,000 of the gain ($500,000 on a joint return in most cases). However, you cannot exclude the portion of the gain equal to depreciation allowed or allowable for periods after May 6, 1997. This gain is reported on Form 4797. If you can show by adequate records or other evidence that the depreciation allowed was less than the amount allowable, the amount you cannot exclude is the amount allowed. Refer toPublication 523 , Selling Your Main Home and Form 4797 (PDF), Sale of Business Property for specifics on calculating and reporting the amount of the eligible exclusion.

    References:

    How do you report the sale of a second residence?

    Your second home is considered a capital asset. Use Form 1040, Schedule D (PDF) to report sales, exchanges, and other dispositions of capital assets.

    References:

    10.4 Capital Gains, Losses/Sale of Home: Losses (Homes, Stocks, Other Property)


    Is the loss on the sale of your home deductible?

    The loss on the sale of a personal residence is a nondeductible personal loss.

    References:

    As a result of a bankruptcy, the bank foreclosed on my house. Can you tell me where and how to report this loss on my taxes?

    The foreclosure or repossession is treated as a sale or exchange from which you, the borrower, may realize gain or loss. However, if you realize a loss on personal use property, such as your residence, the loss is not deductible. Refer to Publication 544, Sales and other Dispositions of Assets, and Publication 908 (PDF), Bankruptcy Tax Guide, for more information.

    References:

    11.1 Sale or Trade of Business, Depreciation, Rentals: Depreciation & Recapture


    I have a home office. Can I deduct expenses like mortgage, utilities, etc., but not deduct depreciation so that when I sell this house, the basis won't be affected?

    If you have qualified business use of your home and enough gross income from that business use to that entitle you to a depreciation deduction, you are required to reduce your basis in the home by the amount of depreciation allowed (deducted) or allowable (could have been deducted).

    Whether you choose to deduct the depreciation on your current return(s) will not matter. For tax purposes, you will still be treated as if you had taken the allowable deduction, and your basis will have to be reduced. For more information, refer to Publication 946, How to Depreciate Property, Publication 544, Sales and Other Dispositions of Assets, and Publication 587, Business Use of Your Home.

    References:

    11.4 Sale or Trade of Business, Depreciation, Rentals: Sales, Trades, Exchanges


    Can we move into our rental property, live there as our main home for two years, and sell it without having to pay capital gains tax?

    You may be able to exclude your gain from the sale of your main home that you have also used for business or to produce rental income if you meet the ownership and use tests, detailed in Publication 523, Sale of Your Home.

    However, 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. (Note: If you can show by adequate records or other evidence that the depreciation deduction allowed (did deduct) was less than the amount allowable (could have deducted), the amount you cannot exclude is the smaller of those two figures.)

    The gain, exclusion, and depreciation recapture should be reported on Form 1040, Schedule D (PDF), Capital Gains and Losses, as described in Publication 523, Selling Your Home.

    References:

    Tax Topics & FAQs | 2003 Tax Year Archives | Tax Help Archives | Home