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Keyword: Primary Residence

This is archived information that pertains only to the 2005 Tax Year. If you
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I have a mortgage for my primary residence and a second mortgage for land that I intend to build a home on. Can the interest be deducted for the second mortgage?

Unless you have begun construction of a home on the bare land that you can occupy within 24 months, the land would be considered an investment and the interest you paid on the second mortgage would not qualify as deductible mortgage interest. However, it would constitute investment interest if you itemize your deductions. For more information, refer to Publication 550, Investment Income and Expenses, chapter 3 and Publication 936, Home Mortgage Interest Deduction.

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Is the mortgage interest and property tax on a second residence deductible?

The mortgage interest on a second home which you use as a residence for some portion of the taxable year, is generally deductible if the interest satisfies the same requirements for deductibility as interest on a primary residence. Real estate taxes paid on your primary and second residence are, generally, deductible. Deductible real estate taxes include any state, local, or foreign taxes on real property levied for the general public welfare. Deductible real estate taxes do not include taxes charged for local benefits and improvements that increase the value of the property. For more information, refer to Publication 17, Your Federal Income Tax for Individuals; chapter 24 Tax Topic 503, Deductible Taxes; and Publication 530, Tax Information for First-Time Home Owners.

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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 exceeds a certain dollar prescribed by law. To determine the amount of gain that can be excluded from income refer to Publication 523 Selling Your Home You may be entitled to exclude gain from income if 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. 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 the 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 the extended duty lasts for more than 90 days or for an indefinite period AND:

  • At a duty station that is at least 50 miles from the residence sold, or
  • When residing under orders in government housing.

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 .

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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 maximum dollar limit. If you can exclude all of the gain, you do not need to report the sale on your tax return. To determine the maximum dollar limit you can exclude or for additional information on selling your home, refer to Publication 523, Selling Your Home.

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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.

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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 the maximum dollar limit. 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 to Publication 523 , Selling Your Home and Form 4797 (PDF), Sale of Business Property for specifics on calculating and reporting the amount of gain.

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Is the loss on the sale of your home deductible?

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

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