IRS Updates Publication on Selling Your Home

IRS Updates Publication on Selling Your Home

News story posted in Publications on 30 January 2012| comments
audience: National Publication | last updated: 31 January 2012
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Summary

The IRS has revised Pub. 523, Selling Your Home. Although not specific to charitable gift planning, this publication can be helpful to donors and their advisors in determining the basis and capital gain exclusion qualification rules applicable to personal residences. This can be of value when planning split-interest gifts such as bargain sales, charitable gift annuities, charitable remainder trusts, charitable lead trusts, and life estate agreements.

Full Text:

(PGDC Editor's Note: Some tables exluded. See link below for entire document available on IRS website.)

Publication 523

Selling Your Home

 
For use in preparing 2011 Returns

What's New

Future developments. The IRS has created a page on IRS.gov for information about Publication 523, at www.irs.gov/pub523. Information about any future developments affecting Publication 523 (such as legislation enacted after we release it) will be posted on that page.


Reminders

Change of address. If you change your mailing address, be sure to notify the Internal Revenue Service (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 sale. See Points in Part I of Publication 936, Home Mortgage Interest Deduction.

Photographs of missing children. The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.


Introduction

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

If you sold your main home in 2011, 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 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 Form 8949 and Schedule D (Form 1040). You may also have to complete Form 4797, Sales of Business Property. See Reporting the Sale, later.

If you have a loss on the sale, you generally cannot deduct it on your return. However, you may need to report it. See Reporting the Sale, later.

The main topics in this publication are:

  • Figuring gain or loss,
  • Basis,
  • Excluding the gain,
  • Ownership and use tests, and
  • Reporting the sale.

Other topics include:

  • Business use or rental of home,
  • Deducting taxes in the year of sale, and
  • Recapturing a federal mortgage subsidy.

Worksheets. Near the end of this publication you will find worksheets you can use to figure your gain (or loss) and your exclusion. Use Worksheet 1 to figure the adjusted basis of the home you sold. Use Worksheet 2 to figure the gain (or loss), the exclusion, and the taxable gain (if any) on the sale. If you do not qualify for the maximum exclusion, use Worksheet 3 to figure your reduced maximum exclusion.

Date of sale. If you received a Form 1099-S, Proceeds From Real Estate Transactions, the date of sale should be shown in box 1. If you did not receive this form, the date of sale is the earlier of (a) the date title transferred or (b) the date the economic burdens and benefits of ownership shifted to the buyer. In most cases, these dates are the same.

What is not covered in this publication. This publication does not cover the sale of rental property, second homes, or vacation homes. For information on how to report any gain or loss from those sales, see Publication 544, Sales and Other Dispositions of Assets.

Comments and suggestions. We welcome your comments about this publication and your suggestions for future editions.

You can write to us at the following address:


    Internal Revenue Service
    Individual Forms and Publications Branch
    SE:W:CAR:MP:T:I
    1111 Constitution Ave. NW, IR-6526
    Washington, DC 20224

We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence.

You can email us at taxforms@irs.gov. Please put "Publications Comment" on the subject line. You can also send us comments from www.irs.gov/formspubs/. Select "Comment on Tax Forms and Publications" under "Information about."

Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products.

Ordering forms and publications. Visit www.irs.gov/formspubs/ to download forms and publications, call 1-800-829-3676, or write to the address below and receive a response within 10 days after your request is received.

    Internal Revenue Service
    1201 N. Mitsubishi Motorway
    Bloomington, IL 61705-6613

Tax questions. If you have a tax question, check the information available on IRS.gov or call 1-800-829-1040. We cannot answer tax questions sent to either of the above addresses.

Useful Items

You may want to see:

Publication

  • 521 Moving Expenses
  • 527 Residential Rental Property (Including Rental of Vacation Homes)
  • 530 Tax Information for Homeowners
  • 544 Sales and Other Dispositions of Assets
  • 547 Casualties, Disasters, and Thefts
  • 551 Basis of Assets
  • 587 Business Use of Your Home
  • 936 Home Mortgage Interest Deduction
  • 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals)

Form (and Instructions)

  • Schedule D (Form 1040) Capital Gains and Losses
  • 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (And Section 1082 Basis Adjustment)
  • 1040X Amended U.S. Individual Income Tax Return
  • 1099-S Proceeds From Real Estate Transactions
  • 4797 Sales of Business Property
  • 8822 Change of Address
  • 8828 Recapture of Federal Mortgage Subsidy
  • 8949 Sales and Other Dispositions of Capital Assets

See How To Get Tax Help, near the end of this publication, for information about getting these publications and forms.


Main Home

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:

  • House,
  • Houseboat,
  • Mobile home,
  • Cooperative apartment, or
  • Condominium.

To exclude gain under the rules in this publication, you in most cases 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. You buy a piece of land and move your main home to it. Then, you sell the land on which your main home was located. This sale is not considered a sale of your main home, and you cannot exclude any gain on the sale of the land.

Vacant land. The sale of vacant land is not a sale of your main home unless:

  • The vacant land is adjacent to land containing your home,
  • You owned and used the vacant land as part of your main home,
  • The separate sale of your home satisfies the requirements for exclusion and occurs within 2 years before or 2 years after the date of the sale of the vacant land, and
  • The other requirements for excluding gain from the sale of a main home have been satisfied with respect to the vacant land.

If these requirements are met, the sale of the home and the sale of the vacant land are treated as one sale and only one maximum exclusion can be applied to any gain. See Excluding the Gain, later.


    TIP: The destruction of your home is treated as a sale of your home. As a result, you may be able to meet these requirements if you sell vacant land used as a part of your main home within 2 years from the date of the destruction of your main home. For information, see Publication 547.

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 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 during the year.

Example 1. You own and live in a house in the city. You also own a beach house, which you use during the 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.

Factors used to determine main home. In addition to the amount of time you live in each home, other factors are relevant in determining which home is your main home. Those factors include the following.

1. Your place of employment.

2. The location of your family members' main home.

3. Your mailing address for bills and correspondence.

4. The address listed on your:

a. Federal and state tax returns,

b. Driver's license,

c. Car registration, and

d. Voter registration card.

5. The location of the banks you use.

6. The location of recreational clubs and religious organizations of which you are a member.

Property used partly as your main home. If you use only part of the property as your main home, the rules discussed in this publication 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.


Figuring Gain or Loss

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.

                            Selling price
                          - Selling expenses
                         _____________________

                            Amount realized
                          - Adjusted basis
                         _____________________

                            Gain or loss

Gain. Gain is the excess of the amount realized over the adjusted basis of the property.

Loss. Loss is the excess of the adjusted basis over the amount realized for the property

Selling Price

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 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, rugs, a washer and dryer, 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, but not as part of the sale of your home.

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 income on Form 1040, line 7, or on Form 1040NR, line 8.

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 Form 1040, line 21, or on Form 1040NR, line 21.

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

Amount Realized

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."

Adjusted Basis

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.

Amount of Gain or Loss

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, in most cases 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.

Dispositions Other Than Sales

Some special rules apply to other dispositions of your main home.

Foreclosure or repossession. If your home was foreclosed on or repossessed, you have a disposition. See Publication 4681 to determine if you have ordinary income, gain, or loss.

More information. If part of a 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, see Publication 4681 to determine if you have ordinary income, gain, or loss.

Trading (exchanging) 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 in most cases 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. As a result, the rules explained in this publication do not apply.

If you owned your home jointly with your spouse and transfer your interest in the home to your spouse, or to your former spouse incident to your divorce, the same rule applies. You have no gain or loss.

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, for more information.

Involuntary conversion. You have a disposition when your home is destroyed or condemned and you receive other property or money in payment, such as insurance or a condemnation award. This is treated as a sale and you may be able to exclude all or part of any gain from the destruction or condemnation of your home, as explained later under Special Situations (see Home destroyed or condemned).


Determining Basis

You need to know your basis in your home to figure 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.), your basis is either its fair market value when you received it or the adjusted basis of the previous owner.

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, near the end of this publication. Filled-in examples of that worksheet are included in the Comprehensive Examples, later.

Cost As Basis

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. In most cases, 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.

                        THEN reduce your home's
 IF you bought your     basis by the seller-paid
 home . . .             points . . .
 ______________________________________________________________________

 after 1990 but before  only if you deducted them as
 April 4, 1994          home mortgage interest in the
                        year paid.

 after April 3, 1994    even if you did not deduct
                        them.

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, but not 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 (that is, without the need for financing).

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

Some of the settlement fees or closing costs that you can include in your basis are:

1. Abstract fees (abstract of title fees),

2. Charges for installing utility services,

3. Legal fees (including fees for the title search and preparing the sales contract and deed),

4. Recording fees,

5. Survey fees,

6. Transfer or stamp taxes,

7. Owner's title insurance, and

8. Any amounts the seller owes that you agree to pay, such as:

a. Certain real estate taxes (discussed later),

b. Back interest,

c. Recording or mortgage fees,

d. Charges for improvements or repairs, and

e. Sales commissions.

Some settlement fees and closing costs you cannot include in your basis are:

1. Fire insurance premiums,

2. Rent for occupancy of the house before closing,

3. Charges for utilities or other services related to occupancy of the house before closing,

4. Any fee or cost that you deducted as a moving expense (allowed for certain fees and costs before 1994),

5. Charges connected with getting a mortgage loan, such as:

a. Mortgage insurance premiums (including funding fees connected with loans guaranteed by the Department of Veterans Affairs),

b. Loan assumption fees,

c. Cost of a credit report,

d. Fee for an appraisal required by a lender, and

6. Fees for refinancing a mortgage.

Real estate taxes. Real estate taxes for the year you bought your home may affect your basis, as shown in the following chart.

 IF . . .         AND . . .        THEN the taxes . . .
 ______________________________________________________________________

 you pay taxes    the seller does  are added to the
 that the seller  not reimburse    basis of your
 owed on the      you              home.
 home up to the
 date of sale     the seller       do not affect the
                  reimburses you   basis of your
                                   home.

 the seller pays  you do not       are subtracted
 taxes for you    reimburse the    from the basis of
 (taxes owed      seller           your home.
 beginning on
 the date of      you reimburse    do not affect the
 sale)            the seller       basis of your
                                   home.

Construction. If you contracted to have your house built on land you own, your basis is:

1. The cost of the land, plus

2. The amount it cost you to complete the house, including:

a. The cost of labor and materials,

b. Any amounts paid to a contractor,

c. Any architect's fees,

d. Building permit charges,

e. Utility meter and connection charges, and

f. Legal fees directly connected with building the house.

Your cost includes your down payment and any debt such as a first or second mortgage or notes you gave the seller or builder. It also includes certain settlement or closing costs. You may have to reduce your basis by points the seller paid for you. For more information, see Seller-paid points and Settlement fees or closing costs, earlier.

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:

  • The value of your own labor, or
  • The value of any other labor you did not pay for.

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 new home.

Cooperative apartment. If you are a tenant-stockholder in a cooperative housing corporation, your basis in the cooperative apartment used as your home is usually the cost of your stock in the corporation. This may include your share of a mortgage on the apartment building.

Condominium. To determine your basis in a condominium apartment used as your home, use the same rules as for any other home.

Basis Other Than Cost

You must use a basis other than cost, such as adjusted basis or fair market value, if you received your home as a gift, inheritance, a trade, or from your spouse. These situations are discussed in the following pages. Also, the instructions for Worksheet 1 (near the end of the publication) address each of these issues.

Home received as gift. Use the following chart to find the basis of a home you received as a gift.

 IF the donor's
 adjusted basis at
 the time of the
 gift was . . .       THEN your basis is . . .
 ______________________________________________________________________

 more than the fair   the same as the donor's adjusted
 market value of the  basis at the time of the gift.
 home at that time
                      Exception: If using the donor's
                      adjusted basis results in a loss
                      when you sell the home, you
                      must use the fair market value of
                      the home at the time of the gift as
                      your basis. If using the fair
                      market value results in a gain,
                      you have neither gain nor loss.

 equal to or less     the smaller of the:
 than the fair
 market value at        o donor's adjusted basis, plus
 that time, and you       any federal gift tax paid on
 received the gift        the gift, or
 before 1977
                        o the home's fair market value
                          at the time of the gift.

 equal to or less     the same as the donor's adjusted
 than the fair        basis, plus the part of any federal
 market value at      gift tax paid that is due to the net
 that time, and you   increase in value of the home
 received the gift    (explained next).
 after 1976

Fair market value. The fair market value of property at the time of the gift is the value of the property as appraised for purposes of the federal gift tax. If the gift was not subject to the federal gift tax, the fair market value is the value as appraised for the purposes of a state gift tax.

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 of the fraction is the net increase in the value of the home, and the denominator is the value of the home for gift tax purposes after reduction by 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 immediately before the gift.

Home acquired from a decedent who died before or after 2010. If you inherited your home from a decedent who died before or after 2010, your basis is the fair market value of the property on the date of the decedent's death (or the later alternate valuation date chosen by the personal representative of the estate). If an estate tax return was filed or required to be filed, the value of the property listed on the estate tax return 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 interest your spouse owned will be its fair market value on the date of death (or alternate valuation date). The basis in your interest will remain the same. Your new basis in the home is the total of these two amounts.

If you and your spouse owned the home either as tenants by the entirety or as joint tenants with right of survivorship, you will each be considered to have owned one-half of the home.

Example. Your jointly owned home (owned as joint tenants with right of survivorship) had an adjusted basis of $50,000 on the date of your spouse's death, and the fair market value on that date was $100,000. Your new basis in the home is $75,000 ($25,000 for one-half of the adjusted basis plus $50,000 for one-half of the fair market value).

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 total fair market value of the community property 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.

For more information about community property, see Publication 555, Community Property.


    CAUTION: If you are selling a home in which you acquired an interest from a decedent who died in 2010, see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, to determine your basis.

Home received as trade. If you acquired your home as a trade for other property, in most cases, the basis of your home is the fair market value (at the time of the trade) of the property you gave up. If you traded one home for another, you have made a sale and purchase. In that case, you may have a gain. See Trading (exchanging) homes under Dispositions Other Than Sales, earlier, for an example of figuring the gain.

Home received from spouse. If you received your home from your spouse or from your former spouse incident to your divorce, your basis in the home depends on the date of the transfer.

Transfers after July 18, 1984. If you received the home after July 18, 1984, there was no gain or loss on the transfer. In most cases, your basis in this home is 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 considerations.

If you owned a home jointly with your spouse and your spouse transferred his or her interest in the home to you, in most cases, your basis in the half interest received from your spouse is the same as your spouse's adjusted basis just before the transfer. This also applies if your former spouse transferred his or her interest in the home to you incident to your divorce. Your basis in the half interest you already owned does not change. Your new basis in the home is the total of these two amounts.

Transfers before July 19, 1984. If you received your home before July 19, 1984, in exchange for your release of marital rights, in most cases, 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.

Involuntary conversion. If your home is destroyed or condemned, you may receive insurance proceeds or a condemnation award. If you acquired a replacement home with these proceeds, the basis is its cost decreased by any gain not recognized on the conversion under the rules explained in:

  • Publication 547, in the case of a home that was destroyed, or
  • Chapter 1 of Publication 544, in the case of a home that was condemned.

Example. A fire destroyed your home that you owned and used for only 6 months. The home had an adjusted basis of $80,000 and the insurance company paid you $130,000 for the loss. Your gain is $50,000 ($130,000 - $80,000). You bought a replacement home for $100,000. The part of your gain that is taxable is $30,000 ($130,000 - $100,000), the unspent part of the payment from the insurance company. The rest of the gain ($20,000) is not taxable, so that amount reduces your basis in the new home. The basis of the new home is figured as follows.

 Cost of replacement home                       $100,000
 Minus: Gain not recognized                       20,000

 Basis of the replacement home                   $80,000

More information. For more information about basis, see Publication 551.

Adjusted Basis

Adjusted basis is your cost or other basis increased or decreased by certain amounts.

To figure your adjusted basis, you can use Worksheet 1, found toward the end of this publication. Filled-in examples of that worksheet are included in Comprehensive Examples, later.

RECORDS: 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:

  • Proof of the home's purchase price and purchase expenses;
  • Receipts and other records for all improvements, additions, and other items that affect the home's adjusted basis;
  • Any worksheets or other computations you used to figure the adjusted basis of the home you sold, the gain or loss on the sale, the exclusion, and the taxable gain;
  • Any Form 982 you filed to exclude any discharge of qualified principal residence indebtedness;
  • Any Form 2119, Sale of Your Home, you filed to postpone gain from the sale of a previous home before May 7, 1997; and
  • Any worksheets you used to prepare Form 2119, such as the Adjusted Basis of Home Sold Worksheet or the Capital Improvements Worksheet from the Form 2119 instructions, or other source of computations.

Increases to Basis

These include the following.

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

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.

The following chart lists some other examples of improvements.

             Examples of Improvements That Increase Basis
 ______________________________________________________________________

 Keep for Your Records

 Additions                        Heating & Air
 Bedroom                          Conditioning
 Bathroom                         Heating system
 Deck                             Central air conditioning
 Garage                           Furnace
 Porch                            Duct work
 Patio                            Central humidifier
                                  Filtration system
 Lawn & Grounds
 Landscaping                      Plumbing
 Driveway                         Septic system
 Walkway                          Water heater
 Fence                            Soft water system
 Retaining wall                   Filtration system
 Sprinkler system
 Swimming pool                    Interior
                                  Improvements
 Miscellaneous                    Built-in appliances
 Storm windows, doors             Kitchen modernization
 New roof                         Flooring
 Central vacuum                   Wall-to-wall carpeting
 Wiring upgrades
 Satellite dish                   Insulation
 Security system                  Attic
                                  Walls
                                  Floors
                                  Pipes and duct work

Improvements no longer part of home. Your home's adjusted basis does not include the cost of any improvements that are replaced and are no longer part of the home.

Example. You put wall-to-wall carpeting in your home 15 years ago. Later, you replaced that carpeting with new wall-to-wall carpeting. The cost of the old carpeting you replaced is no longer part of your home's adjusted basis.

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.

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. For example, if you have a casualty and your home is damaged, increase your basis by the amount you spend on repairs that restore the property to its pre-casualty condition.

Decreases to Basis

These include the following.

  • Discharge of qualified principal residence indebtedness that was excluded from income (but not below zero).
  • 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.
  • Nonbusiness energy property credit (allowed beginning in 2006 but not for 2008) claimed for making certain energy saving improvements you added to the basis of your home.
  • Residential energy efficient property credit (allowed beginning in 2006) claimed for making certain energy saving improvements 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 you used for improvements you added to the basis of your home.
  • 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 primarily designed either to reduce consumption of electricity or natural gas or to improve the management of energy demand for a home.
  • District of Columbia first-time homebuyer credit (allowed on the purchase of a principal residence in the District of Columbia beginning on August 5, 1997).
  • General sales taxes claimed as an itemized deduction on Schedule A (Form 1040) that were imposed on the purchase of personal property, such as a houseboat used as your home or a mobile home.

Discharges of qualified principal residence indebtedness. You may be able to exclude from gross income a discharge of qualified principal residence indebtedness. This exclusion applies to discharges made after 2006 and before 2013. If you choose to exclude this income, you must reduce (but not below zero) the basis of your principal residence by the amount excluded from gross income.

File Form 982 with your tax return. See the form's instructions for detailed information.


    TIP: A decrease in basis due to a discharge of qualified principal residence indebtedness that is excluded from income occurs only if you retain ownership of the principal residence after a discharge. In most cases, this would occur in a refinancing or a restructuring of the mortgage.

Principal residence. Your principal residence is the home where you ordinarily live most of the time. You can have only one principal residence at any one time. See Main Home, earlier.

Qualified principal residence indebtedness. This is a mortgage you took out to buy, build, or substantially improve your principal residence. It must be secured by your principal residence, and it cannot be more than the cost of your principal residence plus improvements.

Amount eligible for the exclusion. The exclusion applies only to debt discharged after 2006 and before 2013. The maximum amount you can treat as qualified principal residence indebtedness is $2 million ($1 million if married filing separately). You cannot exclude from gross income discharge of qualified principal residence indebtedness if the discharge was for services performed for the lender or on account of any other factor not directly related to a decline in the value of your residence or to your financial condition.


Excluding the Gain

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 (near the end of this publication) to figure the amount of your exclusion and your taxable gain, if any.


    CAUTION: If you have any taxable gain from the sale of your home, you may have to increase your withholding or make estimated tax payments. See Publication 505, Tax Withholding and Estimated Tax.

Maximum Exclusion

You can exclude up to $250,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if all of the following are true.

  • You meet the ownership test.
  • You meet the use test.
  • During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home.

For details on gain allocated to periods of nonqualified use, see Nonqualified Use, later.

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 may be able to exclude up to $500,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if you are married and file a joint return and meet the requirements listed in the discussion of the special rules for joint returns, later, under Married Persons.

Ownership and Use Tests

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:

  • 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).

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. However, the maximum amount you may be able to exclude will be reduced. See Reduced Maximum Exclusion, later.

Example 1 -- home owned and occupied for at least 2 years. Mya bought and moved into her main home in September 2008. She sold the home at a gain on September 15, 2011. During the 5-year period ending on the date of sale (September 16, 2006 -- September 15, 2011), she owned and lived in the home for more than 2 years. She meets the ownership and use tests.

Example 2 -- ownership test met but use test not met. Ayden bought a home in 2006. 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, 2011. He owned the home during the entire 5-year period ending on the date of sale (June 29, 2006 -- June 28, 2011). 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).

Period of Ownership and Use

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 nor do they have to occur at the same time.

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 x 2) during the 5-year period ending on the date of sale.

Example. Naomi bought and moved into a house in July 2007. She lived there for 13 months and then moved in with a friend. She moved back into her own house in 2010 and lived there for 12 months until she sold it in July 2011. Naomi meets the ownership and use tests because, during the 5-year period ending on the date of sale, she owned the house for more than 2 years and lived in it for a total of 25 (13 + 12) months.

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. The following examples assume that the reduced maximum exclusion (discussed later) does not apply to the sales.

Example 1. David Johnson, who is single, bought and moved into his home on February 1, 2009. Each year during 2009 and 2010, David left his home for a 2-month summer vacation. David sold the house on March 1, 2011. Although the total time David lived in his home is less than 2 years (21 months), he meets the use requirement and may exclude gain. The 2-month vacations are short temporary absences and are counted as periods of use in determining whether David used the home for the required 2 years.

Example 2. Professor Paul Beard, who is single, bought and moved into a house on August 28, 2008. He lived in it as his main home continuously until January 5, 2010, when he went abroad for a 1-year sabbatical leave. On February 6, 2011, 1 month after returning from his leave, Paul 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 because he did not use the residence for the required 2 years.

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 2000, Helen Jones lived in a rented apartment. The apartment building was later converted to condominiums, and she bought her same apartment on December 3, 2008. In 2009, Helen became ill and on April 14 of that year she moved to her daughter's home. On July 12, 2011, while still living in her daughter's home, she sold her condominium.

Helen can exclude gain on the sale of her condominium because she met the ownership and use tests during the 5-year period from July 13, 2006, to July 12, 2011, the date she sold the condominium. She owned her condominium from December 3, 2008, to July 12, 2011 (more than 2 years). She lived in the property from July 13, 2006 (the beginning of the 5-year period), to April 14, 2009 more than 2 years).

The time Helen lived in her daughter's home during the 5-year period can be counted toward her period of ownership, and the time she lived in her rented apartment during the 5-year period can be counted toward her period of use.

Cooperative apartment. If you sold stock as a tenant-shareholder 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 entitled you to occupy as your main home for at least 2 years.

Exceptions to Ownership and Use Tests

The following sections contain exceptions to the ownership and use tests for certain taxpayers.

Exception for individuals with a disability. There is an exception to the use test if:

  • 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 during the 5-year period before the sale of your home.

Under this exception, you are considered to live in your home during any time within the 5-year period that you own the home and live in a facility (including a nursing home) 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 replacement home on whose sale 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 (see Involuntary Conversions in Publication 551). 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.

Members of the uniformed services or Foreign Service, employees of the intelligence community, or employees or volunteers of the Peace Corps. 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 (defined later) as a member of the uniformed services or Foreign Service of the United States, or as an employee of the intelligence community. You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve outside the United States either as an employee of the Peace Corps on qualified official extended duty (defined later) or as an enrolled volunteer or volunteer leader of the Peace Corps. 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.

If this helps you qualify to exclude gain, you can choose to have the 5-year test period suspended by filing a return for the year of sale that does not include the gain.

Example. John bought and moved into a home in 2003. He lived in it as his main home for 2 1/2 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 2011. To meet the use test, John chooses to suspend the 5-year test period for the 6 years he was on qualified official extended duty. This means he can disregard those 6 years. Therefore, John's 5-year test period consists of the 5 years before he went on qualified official extended duty. He meets the ownership and use tests because he owned and lived in the home for 2 1/2 years during this test period.

Period of suspension. The period of suspension cannot last more than 10 years. Together, the 10-year suspension period and the 5-year test period can be as long as, but no more than, 15 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.

Example. Mary bought a home on April 1, 1995. She used it as her main home until August 31, 1998. On September 1, 1998, she went on qualified official extended duty with the Navy. She did not live in the house again before selling it on July 31, 2011. Mary chooses to use the entire 10-year suspension period. Therefore, the suspension period would extend back from July 31, 2011, to August 1, 2001, and the 5-year test period would extend back to August 1, 1996. During that period, Mary owned the house all 5 years and lived in it as her main home from August 1, 1996, until August 31, 1998, a period of more than 24 months. She meets the ownership and use tests because she owned and lived in the home for at least 2 years during this test period.

Uniformed services. The uniformed services are:

  • The Armed Forces (the Army, Navy, Air Force, Marine Corps, and Coast Guard),
  • The commissioned corps of the National Oceanic and Atmospheric Administration, and
  • The commissioned corps of the Public Health Service.

Foreign Service member. For purposes of the choice to suspend the 5-year test period for ownership and use, you are a member of the Foreign Service if you are any of the following.

  • A Chief of mission.
  • An Ambassador at large.
  • A member of the Senior Foreign Service.
  • A Foreign Service officer.
  • Part of the Foreign Service personnel.

Employee of the intelligence community. For purposes of the choice to suspend the 5-year test period for ownership and use, you are an employee of the intelligence community if you are an employee of any of the following.

  • The Office of the Director of National Intelligence.
  • The Central Intelligence Agency.
  • The National Security Agency.
  • The Defense Intelligence Agency.
  • The National Geospatial-Intelligence Agency.
  • The National Reconnaissance Office and any other office within the Department of Defense for the collection of specialized national intelligence through reconnaissance programs.
  • Any of the intelligence elements of the Army, the Navy, the Air Force, the Marine Corps, the Federal Bureau of Investigation, the Department of Treasury, the Department of Energy, and the Coast Guard.
  • The Bureau of Intelligence and Research of the Department of State.
  • Any of the elements of the Department of Homeland Security concerned with the analyses of foreign intelligence information.

Qualified official extended duty. You are on qualified official extended duty if you are on extended duty while:

  • Serving at a duty station at least 50 miles from your main home, or
  • Living in Government quarters under Government orders.

You are on extended duty when you are called or ordered to active duty for a period of more than 90 days or for an indefinite period.

Married Persons

If you and your spouse file a joint return for the year of sale and one spouse meets the ownership and use tests, you can exclude up to $250,000 of the gain. (But see Special rules for joint returns, next.)

Special rules for joint returns. You can exclude up to $500,000 of the gain on the sale of your main home if all of the following are true.

  • You are married and file a joint return for the year.
  • Either you or your spouse meets the ownership test.
  • Both you and your spouse meet the use test.
  • During the 2-year period ending on the date of the sale, neither you nor your spouse excluded gain from the sale of another home.

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.

Example 1 -- one spouse sells a home. Emily sells her home in June 2011. 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 2011. The $500,000 maximum exclusion for certain joint returns does not apply because Jamie does not meet the use test.

Example 2 -- each spouse sells a home. The facts are the same as in Example 1 except that Jamie also sells a home in 2011 before he marries Emily. He meets the ownership and use tests on his home, but Emily does not. Emily and Jamie can each exclude up to $250,000 of gain from the sale of their individual homes. The $500,000 maximum exclusion for certain joint returns does not apply because Emily and Jamie do not jointly meet the use test for the same home.

Sale of main home by surviving spouse. 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.

If you meet all of the following requirements, you may qualify to exclude up to $500,000 of any gain from the sale or exchange of your main home.

  • The sale or exchange took place after 2008.
  • The sale or exchange took place no more than 2 years after the date of death of your spouse.
  • You have not remarried.
  • You and your spouse met the use test at the time of your spouse's death.
  • You or your spouse met the ownership test at the time of your spouse's death.
  • Neither you nor your spouse excluded gain from the sale of another home during the last 2 years before the date of death.

The ownership and use tests were described earlier.

Example. Harry owned and used a house as his main home since 2007. Harry and Wilma married on July 1, 2011, and from that date they used Harry's house as their main home. Harry died on August 15, 2011, and Wilma inherited the property. Wilma sold the property on September 1, 2011, at which time she had not remarried. Although Wilma owned and used the house for less than 2 years, Wilma is considered to have satisfied the ownership and use tests because her period of ownership and use includes the period that Harry owned and used the property before death.

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.

Reduced Maximum Exclusion

If you fail to meet the requirements to qualify for the $250,000 or $500,000 exclusion, you may still qualify for a reduced exclusion. This applies to those who:

  • Fail to meet the ownership and use tests, or
  • Have used the exclusion within 2 years of selling their current home.

In both cases, to qualify for a reduced exclusion, the sale of your main home must be due to one of the following reasons.

  • A change in place of employment.
  • Health.
  • Unforeseen circumstances.

Qualified individual. For purposes of the reduced maximum exclusion, a qualified individual is any of the following.

  • You.
  • Your spouse.
  • A co-owner of the home.
  • A person whose main home is the same as yours.

Primary reason for sale. One of the three reasons above will be considered to be the primary reason you sold your home if either (1) or (2) is true.

1. You qualify under a "safe harbor." This is a specific set of facts and circumstances that, if applicable, qualifies you to claim a reduced maximum exclusion. Safe harbors corresponding to the reasons listed above are described later.

2. A safe harbor does not apply, but you can establish, based on facts and circumstances, that the primary reason for the sale is a change in place of employment, health, or unforeseen circumstances.

Factors that may be relevant in determining your primary reason for sale include whether:

a. Your sale and the circumstances causing it were close in time,

b. The circumstances causing your sale occurred during the time you owned and used the property as your main home,

c. The circumstances causing your sale were not reasonably foreseeable when you began using the property as your main home,

d. Your financial ability to maintain the property became materially impaired,

e. The suitability of the property as your main home materially changed, and

f. During the time you owned the property, you used it as your home.

Change in Place of Employment

You may qualify for a reduced exclusion if the primary reason for the sale of your main home is a change in the location of employment of a qualified individual.

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 reason you sold your home if:

  • The change occurred during the period you owned and used the property as your main home, and
  • The new place of employment is at least 50 miles farther from the home you sold than was the former place of employment (or, if there was no former place of employment, the distance between your new place of employment and the home sold is at least 50 miles).

Example. Justin was unemployed and living in a townhouse in Florida he had owned and used as his main home since 2010. He got a job in North Carolina and sold his townhouse in 2011. 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 considered to be because of a change in place of employment, and he is entitled to claim a reduced maximum exclusion of gain from the sale.

Health

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, or
  • To obtain or provide medical or personal care for a qualified individual suffering from a disease, illness, or injury.

The sale of your home is not because of health if the sale merely benefits a qualified individual's general health or well-being.

For purposes of this reason, a qualified individual includes, in addition to the individuals listed earlier under Qualified individual, any of the following family members of these individuals.

  • Parent, grandparent, stepmother, stepfather.
  • Child, grandchild, stepchild, adopted child, eligible foster child.
  • Brother, sister, stepbrother, stepsister, half-brother, half-sister.
  • Mother-in-law, father-in-law, brother-in-law, sister-in-law, son-in-law, or daughter-in-law.
  • Uncle, aunt, nephew, niece, or cousin.

Example. In 2010, 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 2011, Chase and Lauren sold 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 to provide care for Lauren's father, Chase and Lauren are entitled to a reduced maximum exclusion.

Doctor's recommendation safe harbor. Health is considered to be the 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.

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 could not reasonably have anticipated before buying and occupying that home. You are not considered to have an unforeseen circumstance if the primary reason you sold your home was that you preferred to get a different home or because your finances improved.

Specific event safe harbors. Unforeseen circumstances are considered to be the reason for selling your home if any of the following events occurred while you owned and used the property as your main home.

1. An involuntary conversion of your home, such as when your home is destroyed or condemned.

2. Natural or man-made disasters or acts of war or terrorism resulting in a casualty to your home, whether or not your loss is deductible.

3. In the case of qualified individuals (listed earlier under Qualified individual):

a. Death,

b. Unemployment (if the individual is eligible for unemployment compensation),

c. A change in employment or self-employment status that results in the individual's inability to pay reasonable basic living expenses (listed under Reasonable basic living expenses, below) for his or her household,

d. Divorce or legal separation under a decree of divorce or separate maintenance, or

e. Multiple births resulting from the same pregnancy.

4. An event the IRS determined to be an unforeseen circumstance in published guidance of general applicability. For example, the IRS determined the September 11, 2001, terrorist attacks to be an unforeseen circumstance.

Reasonable basic living expenses. Reasonable basic living expenses for your household include the following.

  • Amounts spent for food.
  • Amounts spent for clothing.
  • Housing and related expenses.
  • Medical expenses.
  • Transportation expenses.
  • Tax payments.
  • Court-ordered payments.
  • Expenses reasonably necessary to produce income.

Any of these amounts spent to maintain an affluent or luxurious standard of living are not reasonable basic living expenses.

Nonqualified Use

Gain from the sale or exchange of the main home is not excludable from income if it is allocable to periods of nonqualified use. Nonqualified use means any period in 2009 or later where neither you nor your spouse (or your former spouse) used the property as a main home, with certain exceptions (see next).

Exceptions. A period of nonqualified use does not include:

1. Any portion of the 5-year period ending on the date of the sale or exchange after the last date you (or your spouse) use the property as a main home;

2. Any period (not to exceed an aggregate period of 10 years) during which you (or your spouse) are serving on qualified official extended duty:

a. As a member of the uniformed services;

b. As a member of the Foreign Service of the United States; or

c. As an employee of the intelligence community; and

3. Any other period of temporary absence (not to exceed an aggregate period of 2 years) due to change of employment, health conditions, or such other unforeseen circumstances as may be specified by the IRS.

Calculation. To figure the portion of the gain allocated to the period of nonqualified use, multiply the gain by the following fraction:


Total nonqualified use during the period of ownership in
2009 or later
________________________________________________________

Total period of ownership

This calculation can be found in Worksheet 2, line 10, later in this publication.

For examples of this calculation, see Business Use or Rental of Home, below.


Business Use or Rental of Home

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

Example 1. On May 28, 2005, Amy, who is unmarried for all years in this example, bought a house. She moved in on that date and lived in it until May 31, 2007, when she moved out of the house and put it up for rent. The house was rented from June 1, 2007, to March 31, 2009. Amy claimed depreciation deductions in 2007 through 2009 totaling $10,000. Amy moved back into the house on April 1, 2009, and lived there until she sold it on January 29, 2011, for a gain of $200,000. During the 5-year period ending on the date of the sale (January 31, 2006 -- January 29, 2011), Amy owned and lived in the house for more than 2 years as shown in the following table.

 Five-Year Period         Used as Home     Used as Rental
 ______________________________________________________________________

 1/31/06 - 5/31/07          16 months
 6/01/07 - 3/31/09                           22 months
 4/01/09 - 1/29/11          22 months

                            38 months        22 months

During the period Amy owned the house (2,032 days), her period of nonqualified use was 90 days. Because the gain attributable to periods of nonqualified use is $8,360, Amy can exclude $181,640 of her gain, as shown on Worksheet 2.

               Worksheet 2. Taxable Gain on Sale of Home
 ______________________________________________________________________

 Keep for Your Records

 Part 1. Gain or (Loss) on Sale

  1. Selling price of home                                 1. _________

  2. Selling expenses (including commissions,
     advertising and legal fees, and seller-paid loan
     charges)                                              2. _________

  3. Subtract line 2 from line 1. This is the amount
     realized                                              3. _________

  4. Adjusted basis of home sold (from Worksheet 1, line
     13)                                                   4. _________

  5. Gain or (loss) on the sale. Subtract line 4 from
     line 3. If this is a loss, stop here                  5.   200,000

 Part 2. Exclusion and Taxable Gain

  6. Enter any depreciation allowed or allowable on the
     property for periods after May 6, 1997. If none,
     enter -0-                                             6.    10,000

  7. Subtract line 6 from line 5. If the result is less
     than zero, enter -0-                                  7.   190,000

  8. Aggregate number of days of nonqualified use after
     12/31/2008                                            8.        90

  9. Number of days taxpayer owned the property            9.     2,032

 10. Divide the amount on line 8 by the amount on line
     9. Enter the result as a decimal (rounded to at
     least 3 places). But do not enter an amount greater
     than 1.00                                            10.     0.044

 11. Gain allocated to nonqualified use. (Line 7
     multiplied by line 10)                               11.     8,360

 12. Gain eligible for exclusion. Subtract line 11 from
     line 7                                               12.   181,640

 13. If you qualify to exclude gain on the sale, enter
     your maximum exclusion (see Maximum Exclusion). If
     you qualify for a reduced maximum exclusion, enter
     the amount from Worksheet 3, line 7. If you do not
     qualify to exclude gain, enter -0-                   13.   250,000

 14. Exclusion. Enter the smaller of line 12 or line 13   14.   181,640

 15. Taxable gain. Subtract line 14 from line 5. Report
     your taxable gain as described under Reporting the
     Sale. If the amount on this line is zero, do not
     report the sale or exclusion on your tax return. If
     the amount on line 6 is more than zero, complete
     line 16                                              15.    18,360

 16. Enter the smaller of line 6 or line 15. Enter this
     amount on line 12 of the Unrecaptured Section 1250
     Gain Worksheet in the instructions for
     Schedule D (Form 1040)                               16.    10,000

Example 2. William owned and used a house as his main home from 2005 through 2008. On January 1, 2009, he moved to another state. He rented his house from that date until April 30, 2011, when he sold it. During the 5-year period ending on the date of sale (May 1, 2006 -- April 30, 2011), William owned and lived in the house for more than 2 years. Because it was rental property at the time of the sale, he must report the sale on Form 4797. Because the period of nonqualified use does not include any part of the 5-year period after the last date William lived in the house, he has no period of nonqualified use. Because he met the ownership and use tests, he can exclude gain up to $250,000. However, he cannot exclude the part of the gain equal to the depreciation he claimed or could 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 or allowable as a deduction for periods after May 6, 1997. If you can show by adequate records or other evidence that the depreciation allowed was less than the amount allowable, then you may limit the amount of gain recognized to the depreciation allowed.

Unrecaptured section 1250 gain. This is the part of any long-term capital gain from the sale of your home that is due to depreciation and cannot be excluded. To figure the amount of unrecaptured section 1250 gain to be reported on Schedule D (Form 1040), you must also take into account certain gains or losses from the sale of property other than your home. Use the Unrecaptured Section 1250 Gain Worksheet in the Schedule D instructions for this purpose.

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 gain on the sale of the property 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. However, you cannot exclude the part of any gain equal to any depreciation allowed or allowable after May 6, 1997. See Depreciation after May 6, 1997, earlier.

Example 1. Ray sold his main home in 2011 at a $30,000 gain. He has no gains or losses from the sale of property other than the gain from the sale of his home. 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 2010 and claimed $500 depreciation. Because the business office was part of his home (not separate from it), he does not have to allocate the gain on the sale 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. Because Ray was entitled to take a depreciation deduction, he must recognize $500 of the gain as unrecaptured section 1250 gain. He reports his gain, exclusion, and the taxable gain of $500 on Form 8949 and Schedule D (Form 1040).

Example 2. The facts are the same as in Example 1 except that Ray was not entitled to claim depreciation for the business use of his home. Since Ray did not claim any depreciation, 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:

  • A working farm on which your house was located,
  • A duplex in which you lived in one unit and rented the other, or
  • A store building with an upstairs apartment in which you lived.

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, an allocation of the gain on the sale is required. For this purpose, 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 2007, Lew bought property that consisted of a house, a stable, and 35 acres. He used the house and 7 acres as his main home and used the stable and 28 acres in his business for the next 4 years. He sold the entire property in 2011 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. Since the business part was separate from his home, 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. Lew reports 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 2006, Mary bought property that consisted of a house, a barn, and 2 acres. Mary used the house and 2 acres as her main home and used the barn in her antiques business. In 2010, Mary moved out of the house and rented it to tenants. She claimed depreciation on the house while renting it in 2010 and 2011. She continued to use the barn in her business. Mary sold the entire property in 2011 for a $21,000 gain. Since the barn is separate from her home, Mary must allocate the basis of the property and amount realized between the residential and business parts of the property. She reports 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 (with 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.

To determine the amounts to report on Form 4797, you must divide your selling price, selling expenses, and basis between the part of the property used for business or rental and the separate part used as your home. In the same way, if you qualify to exclude any of the gain on the business or rental part of your property, also divide your maximum exclusion between that part of the property and the separate part used as your home. If you use Worksheet 2 (near the end of this publication) to figure your exclusion and taxable gain from each part, fill out a separate Part 2 of the worksheet for each.

Excluding gain on the business or rental part of your property. In most cases, you 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, fill it out only through line 14. 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, later.)

If you have any taxable gain due to depreciation, first fill out the Unrecaptured Section 1250 Gain Worksheet in the Schedule D (Form 1040) instructions. Enter the result on Schedule D. To figure your tax, complete the Schedule D Tax Worksheet in the Schedule D instructions (do not use the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 instructions).

Example 5. In January 2007, you bought and moved into a 4-story townhouse. In December 2009, 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 2011. You claimed depreciation of $2,000 for the basement apartment. You sold the entire townhouse in December 2011 for a $16,000 gain. Your records show the following.

 Purchase price                                        $96,000
 Improvements (kitchen and bath in rental)               4,000
 Depreciation (on rental)                                2,000
 Selling price                                         124,000
 Selling expenses                                       10,000

Because you met the ownership and use tests for both the rental apartment and your residence, you can claim an exclusion for both parts. However, because they are separate units, you must allocate your basis, selling price, and selling expenses between them. 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 and one-fourth (25%) was for the rental part.

                                         Home      Rental
                                        (3/4)       (1/4)
 ______________________________________________________________________

 Purchase price                       $72,000     $24,000

 Plus: Improvements                       -0-       4,000
 Minus: Depreciation                      -0-       2,000

 Adjusted basis                       $72,000     $26,000

Next, to figure the gain on each part, fill out a separate Part 1 of Worksheet 2 for each part, dividing your selling price and selling expenses between the home and the rental.

      Worksheet 2. Gain or (Loss), Exclusion, and Taxable Gain on
                             Sale of Home
 ______________________________________________________________________

                                                         Home    Rental
                                                        (3/4)     (1/4)
 ______________________________________________________________________

 Part 1. Gain or (Loss) on Sale

  1. Selling price of home                            $93,000   $31,000
  2. Selling expenses                                   7,500     2,500

  3. Subtract line 2 from line 1. This is the
     amount realized                                  $85,500   $28,500
  4. Adjusted basis of home sold                       72,000    26,000

  5. Subtract line 4 from line 3. This is the gain
     or (loss)                                        $13,500    $2,500

Then, to figure your taxable gain and exclusion, fill out a separate Part 2 of Worksheet 2 for each part, dividing your maximum exclusion between the two parts. You are single, so the maximum exclusion is $250,000.

                                                         Home    Rental
                                                        (3/4)     (1/4)
 ______________________________________________________________________

 Part 2. Exclusion and Taxable Gain

  6. Depreciation allowed or allowable
     after May 6, 1997                                   $-0-    $2,000
  7. Subtract line 6 from line 5                       13,500       500
  8. Aggregate number of days of
     nonqualified use after 12/31/2008                    -0-       -0-
  9. Number of days taxpayer owned
     the property                                         N/A       N/A
 10. Divide the amount on line 8 by
     the amount on line 9. Enter the
     result as a decimal (rounded to at
     least 3 places). But do not enter
     an amount greater than 1.00                          -0-       -0-
 11. Gain allocated to nonqualified
     use (line 7 multiplied by line 10)                   -0-       -0-
 12. Gain eligible for exclusion.
     Subtract line 11 from line 7                      13,500       500
 13. Maximum exclusion                               $187,500   $62,500
 14. Exclusion (smaller of line 12 or
     line 13)                                          13,500       500
 15. Taxable gain (line 14 minus line
     5)                                                   -0-        *
 16. Smaller of line 6 or line 15                         -0-        *
 ______________________________________________________________________

                               FOOTNOTE TO TABLE

      * Lines 15 and 16 do not need to be filled out for the
 rental part.

                            END OF FOOTNOTE TO TABLE

Report the gain from the rental part, $2,500, in Part III of Form 4797. Enter your $500 exclusion as a loss (in parentheses) on Form 4797, line 2, column (g), and enter "Section 121 exclusion" on that line. Your taxable gain from the rental part is $2,000 ($2,500 - $500).

Use test met for business part (with 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. In most cases, you can exclude gain on the entire property.

Example 6. Assume the same facts as in Example 5, except that in March 2011, you combined the two separate dwelling units by eliminating the basement kitchen and building a new interior stairway to the upper floors. You then used the entire townhouse as your main home for the rest of 2011. Because 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), in Part II Form 8949, and in Part II of Schedule D (Form 1040). Since your $2,000 taxable gain is from depreciation, it is unrecaptured section 1250 gain; enter it on line 12 of the Unrecaptured Section 1250 Gain Worksheet in the Schedule D (Form 1040) instructions. You have no gains or losses from the sale of property other than the gain from the sale of your home, so you also enter $2,000 on lines 13 and 18 of the worksheet and on line 19 of Schedule D. Then figure your tax using the Schedule D Tax Worksheet.


Reporting the Sale

Do not report the 2011 sale of your main home on your tax return unless:

  • You have a gain and do not qualify to exclude all of it,
  • You have a gain and choose not to exclude it, or
  • You received Form 1099-S.

Otherwise, report the sale on your tax return. Report the sale on line 1 or line 3 of Form 8949 as a short-term or long-term transaction, depending on how long you owned the home. Complete columns (a) and (c) through (f) as you would if you were not claiming the exclusion. Enter the selling price (Worksheet 2, line 1) in column (e) (other than the portion of the selling price allocated to business or rental use). Enter the adjusted basis (Worksheet 2, line 4) in column (f) (other than the portion of the adjusted basis allocated to business or rental use). Enter "H" in column (b) if you are excluding any gain reflected on Form 8949. Include in column (g) as a negative number (in parentheses) the amount of any such excluded gain (and any selling expenses other than those allocated to business or rental use). See the example for column (g) in the Instructions for Schedule D (Form 1040).

If you have a loss on the sale of your main home for which you received a Form 1099-S, you must report the sale on Form 8949 even though the loss is not deductible. Because the loss is nondeductible, enter "L" in column (b). Enter the amount of the nondeductible loss as a positive number in column (g). For more details, see Nondeductible Losses in the Instructions for Schedule D (Form 1040).

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, and the Instructions for Form 4797.

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 (line 14 of Worksheet 2) 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 in most cases consist of both interest and principal. You must separately report as interest income the interest you receive as part of each payment. 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 Schedule B (Form 1040A or Form 1040). 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 either 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.

If you have to include the buyer's SSN on your return and the buyer is an alien who does not have and cannot get an SSN, enter the buyer's ITIN. If you have to give an SSN to the buyer and you are an alien who does not have and cannot get one, give the buyer your ITIN.

An ITIN is for tax use only. It does not entitle the holder to social security benefits or change the holder's employment or immigration status under U.S. law.

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

Comprehensive Examples

Example 1. Peter and Betty Clark, who are married and file a joint return, bought a home in 1969. They lived in it as their main home until they sold it in February 2011 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.

 Original cost                             $40,000
 Legal fees for title search                   250
 Improvements (roof)                         2,000
 Selling price                             395,000
 Selling expenses, including commission     25,000

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.

Because the Clarks are married and file a joint return for the year, they qualify to exclude the full amount of their gain and the settlement agent does not file or issue them a Form 1099-S. Because they do not receive a Form 1099-S and they choose to exclude the gain, they do not report the sale of the home on their tax return.

   Worksheet 1. Adjusted Basis of Home Sold -- Illustrated Example 1
                       for Peter and Betty Clark
 ______________________________________________________________________

 Keep for Your Records

 Caution: See the Worksheet 1 Instructions before you use this
 worksheet.

   1.   Enter the purchase price of the home sold. (If
        you filed Form 2119 when you originally acquired
        that home to postpone gain on the sale of a
        previous home before May 7, 1997, enter the
        adjusted basis of the new home from that
        Form 2119.)                                         1.  $40,000

   2.   Seller-paid points for home bought after 1990
        (see Seller-paid points). Do not include any
        seller-paid points you already subtracted to
        arrive at the amount entered on line 1              2. ________

   3.   Subtract line 2 from line 1                         3.   40,000

   4.   Settlement fees or closing costs (see Settlement
        fees or closing costs). If line 1 includes the
        adjusted basis of the new home from Form 2119,
        skip lines 4a - 4g and 5; go to line 6.

     a. Abstract and recording fees          4a. ________

     b. Legal fees (including fees for
        title search and preparing
        documents)                           4b.      250

     c. Survey fees                          4c. ________

     d. Title insurance                      4d. ________

     e. Transfer or stamp taxes              4e. ________

     f. Amounts that the seller owed that
        you agreed to pay (back taxes or
        interest, recording or mortgage
        fees, and sales commissions)         4f. ________

     g. Other                                4g. ________

   5.   Add lines 4a through 4g                             5.      250

   6.  Cost of additions and improvements. Do not include
       any additions and improvements included on line 1    6.    2,000

   7.  Special tax assessments paid for local
       improvements, such as streets and sidewalks          7. ________

   8.  Other increases to basis                             8. ________

   9.  Add lines 3, 5, 6, 7, and 8                          9.   42,250

  10.  Depreciation allowed or allowable,
       related to the business use or
       rental of the home                    10. ________

  11.  Other decreases to basis (see
       Decreases to Basis)                   11. ________

  12.  Add lines 10 and 11                                 12. ________

  13.  Adjusted basis of home sold. Subtract line 12 from
       line 9. Enter here and on Worksheet 2, line 4       13.  $42,250

  Worksheet 2. Taxable Gain on Sale of Home -- Illustrated Example 1
                       for Peter and Betty Clark
 ______________________________________________________________________

 Keep for Your Records

 Part 1. Gain or (Loss) on Sale

        1. Selling price of home                          1.   $395,000

        2. Selling expenses (including commissions,
           advertising and legal fees, and seller-paid
           loan charges)                                  2.     25,000

        3. Subtract line 2 from line 1. This is the
           amount realized                                3.    370,000

        4. Adjusted basis of home sold (from Worksheet
           1, line 13)                                    4.     42,250

        5. Gain or (loss) on the sale. Subtract line 4
           from line 3. If this is a loss, stop here      5.    327,750

 Part 2. Exclusion and Taxable Gain

        6. Enter any depreciation allowed or allowable
           on the property for periods after May 6,
           1997. If none, enter -0-                       6.        -0-

        7. Subtract line 6 from line 5. If the result
           is less than zero, enter -0-                   7.    327,750

        8. Aggregate number of days of nonqualified use
           after 12/31/2008                               8.        N/A

        9. Number of days taxpayer owned the property     9.        N/A

       10. Divide the amount on line 8 by the amount on
           line 9. Enter the result as a decimal
           (rounded to at least 3 places). But do not
           enter an amount greater than 1.00             10.        N/A

       11. Gain allocated to nonqualified use. (Line 7
           multiplied by line 10)                        11.        N/A

       12. Gain eligible for exclusion. Subtract line
           11 from line 7                                12.    327,750

       13. If you qualify to exclude gain on the sale,
           enter your maximum exclusion (see Maximum
           Exclusion). If you qualify for a reduced
           maximum exclusion, enter the amount from
           Worksheet 3, line 7. If you do not qualify
           to exclude gain, enter -0-                    13.    500,000

       14. Exclusion. Enter the smaller of line 12 or
           line 13                                       14.    327,750

       15. Taxable gain. Subtract line 14 from line 5.
           Report your taxable gain as described under
           Reporting the Sale. If the amount on this
           line is zero, do not report the sale or
           exclusion on your tax return. If the amount
           on line 6 is more than zero, complete
           line 16                                       15.        -0-

       16. Enter the smaller of line 6 or line 15.
           Enter this amount on line 12 of the
           Unrecaptured Section 1250 Gain Worksheet in
           the instructions for Schedule D (Form 1040)   16.        -0-

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 sale on Form 8949 and Schedule D (Form 1040). On their Form 8949, Part II, they report their selling price of $695,000 in column (e), their adjusted basis of $42,250 in column (f), and their exclusion of $500,000 in column (g). They enter "H" in column (b). Worksheet 1 remains the same as shown in Example 1. Their completed Worksheet 2 is shown next, followed by Form 8949 and the front page of the Clarks' Schedule D.

   Worksheet 2. Taxable Gain on Sale of Home -- Illustrated Example
                      2 for Peter and Betty Clark
 ______________________________________________________________________

 Keep for Your Records

 Part 1. Gain or (Loss) on Sale

  1. Selling price of home                                 1.  $695,000

  2. Selling expenses (including commissions,
     advertising and legal fees, and seller-paid loan
     charges)                                              2. _________

  3. Subtract line 2 from line 1. This is the amount
     realized                                              3.   695,000

  4. Adjusted basis of home sold (from Worksheet 1, line
     13)                                                   4.    42,250

  5. Gain or (loss) on the sale. Subtract line 4 from
     line 3. If this is a loss, stop here                  5.   652,750

 Part 2. Exclusion and Taxable Gain

  6. Enter any depreciation allowed or allowable on the
     property for periods after May 6, 1997. If none,
     enter -0-                                             6.       -0-

  7. Subtract line 6 from line 5. If the result is less
     than zero, enter -0-                                  7.   652,750

  8. Aggregate number of days of nonqualified use after
     12/31/2008                                            8.       N/A

  9. Number of days taxpayer owned the property            9.       N/A

 10. Divide the amount on line 8 by the amount on line
     9. Enter the result as a decimal (rounded to at
     least 3 places). But do not enter an amount greater
     than 1.00                                            10.       N/A

 11. Gain allocated to nonqualified use. (Line 7
     multiplied by line 10)                               11.       N/A

 12. Gain eligible for exclusion. Subtract line 11 from
     line 7                                               12.   652,750

 13. If you qualify to exclude gain on the sale, enter
     your maximum exclusion (see Maximum Exclusion). If
     you qualify for a reduced maximum exclusion, enter
     the amount from Worksheet 3, line 7. If you do not
     qualify to exclude gain, enter -0-                   13.   500,000

 14. Exclusion. Enter the smaller of line 12 or line 13   14.   500,000

 15. Taxable gain. Subtract line 14 from line 5. Report
     your taxable gain as described under Reporting the
     Sale. If the amount on this line is zero, do not
     report the sale or exclusion on your tax return.
     If the amount on line 6 is more than zero,
     complete line 16                                     15.   152,750

 16. Enter the smaller of line 6 or line 15. Enter this
     amount on line 12 of the Unrecaptured Section 1250
     Gain Worksheet in the instructions for
     Schedule D (Form 1040)                               16.       -0-

2011 Form 8949, Sales and Other Dispositions of Capital Assets

[form omitted]

2011 Schedule D (Form 1040), Capital Gains and Losses

[form omitted]

Example 3. Emily White, a single person, bought a home on May 1, 1999. She lived in the home until May 31, 2009, when she moved out and put it up for rent. Emily rented her home from June 1, 2009, until May 31, 2010. She moved back into the house and lived there until she sold it on January 11, 2011.

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.

 Original cost                             $50,000
 Legal fees for title search                   750
 Back taxes paid for prior owner             1,500
 Improvements (deck)                         2,000
 Selling price                             195,000
 Selling expenses, including commission     15,000
 Depreciation claimed after May 6, 1997      1,791

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, $115,061. Emily cannot exclude $1,791, the part of her gain equal to the depreciation claimed while the house was rented, nor can she exclude $10,689, the part of her gain allocated to nonqualified use.

Emily reports the sale in Part II of Form 8949 and Part II of Schedule D (Form 1040). On her Form 8949, Part II, she reports her selling price of $195,000 in column (e) and her adjusted basis of $52,459 in column (f). In column (g), she reports the sum of her exclusion and her selling expenses as a negative number. She enters "H" and "O" in column (b). She enters $1,791 on line 12 of the Unrecaptured Section 1250 Gain Worksheet in the Schedule D (Form 1040) instructions. She has no gains or losses from the sale of property other than the gain from the sale of her home. Therefore, she also enters $1,791 on lines 13 and 18 of the worksheet and on line 19 of Schedule D. She then figures her tax using the Schedule D Tax Worksheet in the Schedule D (Form 1040) instructions.

Emily's completed Worksheet 1 appears next. Her completed Worksheet 2, her Form 8949, and the front page of 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 -- Illustrated Example 3
                            for Emily White
 ______________________________________________________________________

 Keep for Your Records

 Caution: See the Worksheet 1 Instructions before you use this
 worksheet.

  1. Enter the purchase price of the home sold. (If you
     filed Form 2119 when you originally acquired that
     home to postpone gain on the sale of a previous home
     before May 7, 1997, enter the adjusted basis of the
     new home from that Form 2119.)                         1.  $50,000

  2. Seller-paid points for home bought after 1990 (see
     Seller-paid points). Do not include any seller-paid
     points you already subtracted to arrive at the
     amount entered on line 1                               2. ________

  3. Subtract line 2 from line 1                            3.   50,000

  4. Settlement fees or closing costs (see
     Settlement fees or closing costs).
     If line 1 includes the adjusted basis
     of the new home from Form 2119, skip
     lines 4a-4g and 5; go to line 6

   a. Abstract and recording fees            4a. ________

   b. Legal fees (including fees for title
      search and preparing documents)        4b.      750

   c. Survey fees                            4c. ________

   d. Title insurance                        4d. ________

   e. Transfer or stamp taxes                4e. ________

   f. Amounts that the seller owed that you
      agreed to pay (back taxes or
      interest, recording or mortgage fees,
      and sales commissions)                 4f.    1,500

   g. Other                                  4g. ________

  5. Add lines 4a through 4g                                5.    2,250

  6. Cost of additions and improvements. Do not include
     any additions and improvements included on line 1      6.    2,000

  7. Special tax assessments paid for local improvements,
     such as streets and sidewalks                          7. ________

  8. Other increases to basis                               8. ________

  9. Add lines 3, 5, 6, 7, and 8                            9.   54,250

 10. Depreciation allowed or allowable,
     related to the business use or rental
     of the home                             10.    1,791

 11. Other decreases to basis (see
     Decreases to Basis)                     11. ________

 12. Add lines 10 and 11                                   12.    1,791

 13. Adjusted basis of home sold. Subtract line 12 from
     line 9. Enter here and on Worksheet 2, line 4         13.  $52,459

  Worksheet 2. Taxable Gain on Sale of Home -- Illustrated Example 3
                            for Emily White
 ______________________________________________________________________

 Keep for Your Records

 Part 1. Gain or (Loss) on Sale

  1. Selling price of home                                 1.  $195,000

  2. Selling expenses (including commissions,
     advertising and legal fees, and seller-paid loan
     charges)                                              2.    15,000

  3. Subtract line 2 from line 1. This is the amount
     realized                                              3.   180,000

  4. Adjusted basis of home sold (from Worksheet 1, line
     13)                                                   4.    52,459

  5. Gain or (loss) on the sale. Subtract line 4 from
     line 3. If this is a loss, stop here                  5.   127,541

 Part 2. Exclusion and Taxable Gain

  6. Enter any depreciation allowed or allowable on the
     property for periods after May 6, 1997. If none,
     enter -0-                                             6.     1,791

  7. Subtract line 6 from line 5. If the result is less
     than zero, enter -0-                                  7.   125,750

  8. Aggregate number of days of nonqualified use after
     12/31/2008                                            8.       365

  9. Number of days taxpayer owned the property            9.     4,273

 10. Divide the amount on line 8 by the amount on line
     9. Enter the result as a decimal (rounded to at
     least 3 places). But do not enter an amount greater
     than 1.00                                            10.      .085

 11. Gain allocated to nonqualified use. (Line 7
     multiplied by line 10)                               11.    10,689

 12. Gain eligible for exclusion. Subtract line 11 from
     line 7                                               12.   115,061

 13. If you qualify to exclude gain on the sale, enter
     your maximum exclusion (see Maximum Exclusion). If
     you qualify for a reduced maximum exclusion, enter
     the amount from Worksheet 3, line 7. If you do not
     qualify to exclude gain, enter -0-                   13.   250,000

 14. Exclusion. Enter the smaller of line 12 or line 13   14.   115,061

 15. Taxable gain. Subtract line 14 from line 5. Report
     your taxable gain as described under Reporting the
     Sale. If the amount on this line is zero, do not
     report the sale or exclusion on your tax return.
     If the amount on line 6 is more than zero,
     complete line 16                                     15.    12,480

 16. Enter the smaller of line 6 or line 15. Enter this
     amount on line 12 of the Unrecaptured Section 1250
     Gain Worksheet in the instructions for
     Schedule D (Form 1040)                               16.    $1,791

2011 Form 8949, Sales and Other Dispositions of Capital Assets

[form omitted]

2011 Schedule D (Form 1040), Capital Gains and Losses

[form omitted]

Special Situations

The situations that follow may affect your exclusion.

Sale of home acquired in a like-kind exchange. You cannot claim the exclusion if:

  • You acquired your home in a like-kind exchange (also known as a section 1031 exchange), or your basis in your home is determined by reference to the basis of the home in the hands of the person who acquired the property in a like-kind exchange (for example, you received the home from that person as a gift), and
  • You sold the home during the 5-year period beginning with the date your home was acquired in the like-kind exchange.

Gain from a like-kind exchange is not taxable at the time of the exchange. This means that gain will not be taxed until you sell or otherwise dispose of the property you receive. To defer gain from a like-kind exchange, you must have exchanged business or investment property for business or investment property of a like kind. For more information about like-kind exchanges, see Publication 544, Sales and Other Dispositions of Assets.

Home relinquished in a like-kind exchange. The same tests that apply to determine if you qualify to exclude gain from the sale of your main home (discussed earlier) also apply to determine if you qualify to exclude gain from the exchange of your main home for another property. Under certain circumstances, you may meet the requirements for both the exclusion of gain from the exchange of a main home and the nonrecognition of gain from a like-kind exchange (discussed above under Sale of home acquired in a like-kind exchange). This can occur if you used your property as your main home for a period before the exchange that meets the use test, but at the time of the exchange, you used your home for business or rental purposes. This can also occur if you used your main home partly for business or rental purposes and then exchanged the home. In these situations, you would first exclude the gain from the sale of your main home to the extent allowable, and then apply the nonrecognition of gain provisions of section 1031 for like-kind exchanges to defer any remaining gain. For more information, see Revenue Procedure 2005-14, 2005-7 I.R.B. 528, available at www.irs.gov/irb/2005-07_IRB/ar10.html.

Expatriates. You cannot claim the exclusion if the expatriation tax applies to you. The expatriation tax applies to certain U.S. citizens who have renounced their citizenship (and to certain long-term residents who have ended their residency). For more information about the expatriation tax, see chapter 4 of Publication 519, U.S. Tax Guide for Aliens.

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 maximum exclusion) can be postponed under the rules explained in:

  • Publication 547, in the case of a home that was destroyed, or
  • Publication 544, chapter 1, in the case of a home that was condemned.

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, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.). Related persons also include certain corporations, partnerships, trusts, and exempt organizations.


Deducting Taxes in the Year of Sale

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 (the period to which the tax relates) that each owned the home.

  • You are treated as paying the taxes up to, but not including, the date of sale. You can deduct these taxes as an itemized deduction on Schedule A (Form 1040) in the year of sale. It does not matter what part of the taxes you actually paid.
  • The buyer is treated as paying the taxes beginning with the date of sale.

If the buyer paid your share of the taxes (or any delinquent taxes you owed), the payment increases the selling price of your home. The buyer adds the amount paid to his or her basis in the property.

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, 2011. They sold the home on May 7, 2011. 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 2011 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.

 1. Total real estate taxes for the real property
    tax year                                                       $620

 2. Number of days in the real property tax year
    that you owned the property                                     126

 3. Divide line 2 by 365 (366 if leap year)                        .345

 4. Multiply line 1 by line 3. This is your
    deduction. Enter it on line 6 of Schedule A (Form 1040)        $214

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) as an itemized deduction, the taxes for the part of the year they owned the home.

Form 1099-S. If the person responsible for closing the sale (in most cases 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 charged to the buyer. 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 as an itemized deduction.

More information. For more information about real estate taxes, see Publication 530.

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.


Recapturing (Paying Back) a Federal Mortgage Subsidy

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:

1. Came from the proceeds of qualified mortgage bonds, or

2. Were based on mortgage credit certificates.

The recapture also applies to assumptions of these loans.

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 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.

For example, if you give away your home (other than to your spouse or ex-spouse incident to divorce), you are considered to have sold or disposed of it. You figure your recapture tax as if you had sold your home for its fair market value on the date you gave it away.

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

  • You sell or otherwise dispose of your home at a gain within the first 9 years after the date you close 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. Recapture does not apply in any of the following situations.

  • Your mortgage loan was a qualified home improvement loan (QHIL) of not more than $15,000 used for alterations, repairs, and improvements that protect or improve the basic livability or energy efficiency of your home.
  • Your mortgage loan was a QHIL of not more than $150,000 in the case of a QHIL used to repair damage from Hurricane Katrina to homes in the hurricane disaster area; a QHIL funded by a qualified mortgage bond that is a qualified Gulf Opportunity Zone Bond; or a QHIL for an owner-occupied home in the Gulf Opportunity Zone (GO Zone), Rita GO Zone, or Wilma GO Zone. For more information, see Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma. Also see Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas.
  • 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 replace it on its original site within 2 years after the end of the tax year when the destruction happened. The replacement period is extended for main homes destroyed in a federally declared disaster area, a Midwestern disaster area, the Kansas disaster area, and in the Hurricane Katrina disaster area. For more information, see Replacement Period in Publication 547.
  • You refinance your mortgage loan (unless you later meet the conditions listed previously under When recapture applies).

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.


Recapture of First-Time Homebuyer Credit

Recapture of 2008 first-time homebuyer credit. If you claimed the first-time homebuyer credit for a home you purchased in 2008, you may have to recapture all or a portion of the amount you claimed. For a home purchased in 2008, you must repay the first-time homebuyer credit over a period of 15 years, starting in 2010. If your home ceases to be your main home before by the end of the 15-year period, you must include all remaining annual installments as additional tax on the tax return for that year. Your home ceases to be your main home if you sell the home, convert the home to business or rental property use, or the home is destroyed, condemned, or disposed of under the threat of condemnation. In the event of a sale or other conversion you will need to file Form 5405, First-Time Homebuyer Credit and Repayment of the Credit, with your tax return. In the case of the sale of the principal residence to a person who is not related to the taxpayer, the recapture shall not exceed the amount of gain, if any, on such sale. Solely for purposes of figuring this gain limitation, reduce the basis by the amount of the credit that has not been repaid.

Example. Dan and Kareema Love received $7,500 under the first-time homebuyer credit. They purchased the home on October 14, 2008, for $200,000. In 2009, they made improvements to the home that increased their basis by $1,000 to $201,000. They sold the home on November 3, 2011, for $198,000 to an unrelated person. Solely for purposes of figuring the gain limitation on how much of the first-time homebuyer credit they must repay, the adjusted basis of the home is $192,500 ($200,000 - $7,500 + $500). This amount is the original purchase price minus the unrecaptured portion of the credit plus the amount recaptured on their 2010 tax return. Dan and Kareema would have to accelerate the recapture of the $7,000 and repay the entire amount by adding it to their income tax liability for 2011.


    CAUTION: Adjusted basis is reduced by the amount of the unrecaptured first-time homebuyer credit only for purposes of figuring how much of the credit must be recaptured. Do not use this basis for figuring gain or for reporting basis or gain on Schedule D (Form 1040) or Form 8949.

Exceptions. If one of the following applies, you do not have to recapture the 2008 first-time homebuyer credit.

  • Death.
  • Involuntary conversion (see definition under the section Dispositions Other Than Sales, earlier).
  • Transfers between spouses or incident to divorce.
  • You are a member of the uniformed services, an employee of the intelligence community, or a member of the Foreign Service of the United States on qualified official extended duty service.

    TIP: For details on claiming and repaying or recapturing the credit, see Form 5405 and its instructions.


Recapture of the 2009 or 2010 first-time homebuyer credit. If you claimed the first-time homebuyer credit for a home you purchased in 2009 or 2010, the credit is not required to be repaid unless your home ceases to be your main home within 36 months of the date of purchase. If you sell the home to someone who is not related to you, the repayment in the year of sale is limited to the amount of gain on the sale. Solely for purposes of figuring the gain limitation, reduce the adjusted basis by the amount of the credit. See the Instructions for Form 5405 for additional information.

Exception. Members of the uniformed services or Foreign Service and employees of the intelligence community do not have to repay the credit, if you sell the home or the home ceases to be your main home because you received Government orders to serve on qualified official extended duty.

For more information and assistance, see IRS.gov and click on "Tools" to access the "First-Time Homebuyer Credit Account Look-up Tool".


Worksheets

The worksheets on the following pages are provided to help you figure the adjusted basis of your home; your gain or (loss), exclusion, and taxable gain on the sale of your home; and the reduced maximum exclusion. Keep any completed worksheets with your tax records; do not submit them with your tax return.

         Worksheet 1 Instructions. Adjusted Basis of Home Sold
 ______________________________________________________________________

 Keep for Your Records

 If you use Worksheet 1 to figure the adjusted basis of your home,
 follow these instructions. DO NOT use this worksheet to determine your
 basis if you acquired an interest in your home from a decedent who
 died in 2010 and whose executor filed Form 8939.
 ______________________________________________________________________

 IF . . .                             THEN . . .
 ______________________________________________________________________

 you inherited your home from      1  skip lines 1-4 of the worksheet.
 a decedent who died either
 before or after 2010 or from a    2  find your basis using the rules
 decedent who died in 2010            under Home received as
 and whose executor did not           inheritance. Enter this amount on
 file Form 8939                       line 5.

                                   3  fill out lines 6-13.

 you received your home as a       1  read Home received as gift and
 gift                                 enter on lines 1 and 3 of the
                                      worksheet either the donor's
                                      adjusted basis or the home's fair
                                      market value at the time of the
                                      gift, whichever is appropriate.

                                   2  if you can add any federal gift
                                      tax to your basis, enter that
                                      amount on line 5.

                                   3  fill out lines 6-13.

 you received your home as a       1  enter on line 1 of the worksheet
 trade for other property             the fair market value of the
                                      other property at the time of the
                                      trade. (But if you received your
                                      home as a trade for your previous
                                      home before May 7, 1997, and had
                                      a gain on the trade that you
                                      postponed using Form 2119, enter
                                      on line 1 of the worksheet the
                                      adjusted basis of the new home
                                      from that Form 2119.)

                                   2  fill out lines 2-13.

 you built your home               1  add the purchase price of the
                                      land and the cost of building the
                                      home. See Construction. Enter
                                      that total on line 1 of the
                                      worksheet. (However, if you filed
                                      a Form 2119 to postpone gain on
                                      the sale of a previous home
                                      before May 7, 1997, enter on line
                                      1 of the worksheet the adjusted
                                      basis of the new home from that
                                      Form 2119.)

                                   2  fill out lines 2-13.

 you received your home from       1  skip lines 1-4 of the worksheet.
 your spouse after July 18,
 1984                              2  enter on line 5 your spouse's
                                      adjusted basis in the home just
                                      before you received it.

                                   3  fill out lines 6-13, including
                                      adjustments to basis only for
                                      events after the transfer.

 you owned a home jointly             fill out one worksheet, including
 with your spouse, who                adjustments to basis for events
 transferred his or her               both before and after the
 interest in the home to you          transfer.
 after July 18, 1984

 you received your home from       1  skip lines 1-4 of the worksheet.
 your spouse before July 19,
 1984                              2  enter on line 5 the home's fair
                                      market value at the time you
                                      received it.

                                   3  fill out lines 6-13, including
                                      adjustments to basis only for
                                      events after the transfer.

 you owned a home jointly          1  fill out lines 1-13 of the
 with your spouse, who                worksheet, including adjustments
 transferred his or her               to basis only for events before
 interest in the home to you          the transfer.
 before July 19, 1984
                                   2  multiply the amount on line 13 by
                                      50% (.50) to get the adjusted
                                      basis of your half-interest at
                                      the time of the transfer.

                                   3  multiply the fair market value of
                                      the home at the time of the
                                      transfer by 50% (.50). In most
                                      cases, this is the basis of the
                                      half-interest that your spouse
                                      owned.

                                   4  add the amounts from steps 2 and
                                      3 and enter the total on line 5
                                      of a second worksheet.

                                   5  complete lines 6-13 on the second
                                      worksheet, including adjustments
                                      to basis only for events after
                                      the transfer.

 you owned your home jointly       1  fill out lines 1-13 of the
 with a nonspouse                     worksheet.

                                   2  multiply the amount on line 13 by
                                      your percentage of ownership to
                                      get the adjusted basis of your
                                      part-interest.

 you owned your home jointly       1  fill out lines 1-13 of the
 with your spouse who died            worksheet, including adjustments
 before 2010 and before the           to basis only for events before
 sale                                 your spouse's death.

                                   2  multiply the amount on line 13 by
                                      50% (.50) to get the adjusted
                                      basis of your half-interest on
                                      the date of death.

                                   3  multiply the fair market value on
                                      the date of death (or later
                                      alternate valuation used for
                                      estate or inheritance tax) by 50%
                                      (.50). This is the basis for your
                                      spouse's half-interest.

                                   4  add the amounts from steps 2 and
                                      3 and enter the total on line 5
                                      of a second worksheet.

                                   5  complete lines 6-13 on the second
                                      worksheet, including adjustments
                                      to basis only for events after
                                      your spouse's death.

 you owned your home jointly       1  skip lines 1-4 of the worksheet.
 with your spouse who died
 before 2010 and before the        2  enter the basis of the home on
 sale, and your permanent             line 5. In most cases, this is
 legal home is in a community         the total fair market value of
 property state                       the home at the time of death.
                                      (See Community property.)

                                   3  fill out lines 6-13, including
                                      adjustments to basis only for
                                      events after your spouse's death.

 you owned your home jointly       1  fill out lines 1-13 of the
 with a nonspouse who died            worksheet, including adjustments
 before 2010 and before the           to basis only for events before
 sale                                 the co-owner's death.

                                   2  multiply the amount on line 13 by
                                      your percentage of ownership to
                                      get the adjusted basis of your
                                      part-interest on the date of
                                      death.

                                   3  multiply the fair market value on
                                      the date of death (or later
                                      alternate valuation used for
                                      estate or inheritance tax) by the
                                      co-owner's percentage of
                                      ownership. This is the basis for
                                      the co-owner's part-interest.

                                   4  add the amounts from steps 2 and
                                      3 and enter the total on line 5
                                      of a second worksheet.

                                   5  complete lines 6-13 on the second
                                      worksheet, including adjustments
                                      to basis only for events after
                                      the co-owner's death.

 your home was ever damaged as     1  in addition to lines 6-13,
 the result of a casualty             including other lines of the
                                      worksheet you may need to fill
                                      out, on line 8 enter any amounts
                                      you spent to restore the home to
                                      its condition before the
                                      casualty.

                                   2  on line 11 enter:

                                        o any insurance reimbursements
                                          you received (or expect to
                                          receive) for the loss, and

                                        o any deductible casualty
                                          losses not covered by
                                          insurance.

 none of these items apply            fill out entire worksheet.

               Worksheet 1. Adjusted Basis of Home Sold
 ______________________________________________________________________

 Keep for Your Records

 Caution: See the Worksheet 1 Instructions before you use this
 worksheet.

  1.    Enter the purchase price of the home sold. (If you
        filed Form 2119 when you originally acquired that
        home to postpone gain on the sale of a previous home
        before May 7, 1997, enter the adjusted basis of the
        new home from that Form 2119.)                         1. _____

  2.    Seller-paid points for home bought after 1990 (see
        Seller-paid points). Do not include any seller-paid
        points you already subtracted to arrive at the
        amount entered on line 1                               2. _____

  3.    Subtract line 2 from line 1                            3. _____

  4.    Settlement fees or closing costs (see
        Settlement fees or closing costs). If
        line 1 includes the adjusted basis of the
        new home from Form 2119, skip lines
        4a-4g and 5; go to line 6.

     a. Abstract and recording fees                4a. _____

     b. Legal fees (including fees for title
        search and preparing documents)            4b. _____

     c. Survey fees                                4c. _____

     d. Title insurance                            4d. _____

     e. Transfer or stamp taxes                    4e. _____

     f. Amounts that the seller owed that you
        agreed to pay (back taxes or interest,
        recording or mortgage fees, and sales
        commissions)                               4f. _____

     g. Other                                      4g. _____

  5.    Add lines 4a through 4g                                5. _____

  6.    Cost of additions and improvements. Do not include
        any additions and improvements included on line 1      6. _____

  7.    Special tax assessments paid for local improvements,
        such as streets and sidewalks                          7. _____

  8.    Other increases to basis                               8. _____

  9.    Add lines 3, 5, 6, 7, and 8                            9. _____

 10.    Depreciation allowed or allowable,
        related to the business use or rental of
        the home                                   10. _____

 11.    Other decreases to basis (see Decreases
        to Basis)                                  11. _____

 12.    Add lines 10 and 11                                   12. _____

 13.    Adjusted basis of home sold. Subtract line 12 from
        line 9. Enter here and on Worksheet 2, line 4         13. _____

               Worksheet 2. Taxable Gain on Sale of Home
 ______________________________________________________________________

 Keep for Your Records

 Part 1. Gain or (Loss) on Sale

  1. Selling price of home                                 1. _________

  2. Selling expenses (including commissions,
     advertising and legal fees, and seller-paid loan
     charges)                                              2. _________

  3. Subtract line 2 from line 1. This is the amount
     realized                                              3. _________

  4. Adjusted basis of home sold (from Worksheet 1, line
     13)                                                   4. _________

  5. Gain or (loss) on the sale. Subtract line 4 from
     line 3. If this is a loss, stop here                  5. _________

 Part 2. Exclusion and Taxable Gain

  6. Enter any depreciation allowed or allowable on the
     property for periods after May 6, 1997. If none,
     enter -0-                                             6. _________

  7. Subtract line 6 from line 5. If the result is less
     than zero, enter -0-                                  7. _________

  8. Aggregate number of days of nonqualified use after
     12/31/2008                                            8. _________

  9. Number of days taxpayer owned the property            9. _________

 10. Divide the amount on line 8 by the amount on line
     9. Enter the result as a decimal (rounded to at
     least 3 places). But do not enter an amount greater
     than 1.00                                            10. _________

 11. Gain allocated to nonqualified use. (Line 7
     multiplied by line 10)                               11. _________

 12. Gain eligible for exclusion. Subtract line 11 from
     line 7                                               12. _________

 13. If you qualify to exclude gain on the sale, enter
     your maximum exclusion (see Maximum Exclusion). If
     you qualify for a reduced maximum exclusion, enter
     the amount from Worksheet 3, line 7. If you do not
     qualify to exclude gain, enter -0-                   13. _________

 14. Exclusion. Enter the smaller of line 12 or line 13   14. _________

 15. Taxable gain. Subtract line 14 from line 5. Report
     your taxable gain as described under Reporting the
     Sale. If the amount on this line is zero, do not
     report the sale or exclusion on your tax return.
     If the amount on line 6 is more than zero,
     complete line 16                                     15. _________

 16. Enter the smaller of line 6 or line 15. Enter this
     amount on line 12 of the Unrecaptured Section 1250
     Gain Worksheet in the instructions for
     Schedule D (Form 1040)                               16. _________
 ----------------------------------------------------------------------

                Worksheet 3. Reduced Maximum Exclusion
 ______________________________________________________________________

 Keep for Your Records
 ______________________________________________________________________

 Caution: Complete this worksheet only if you qualify for a reduced
 maximum exclusion (see Reduced Maximum Exclusion). Complete column
 (a).
 ______________________________________________________________________

                                                   (a)          (b)
                                                   You      Your Spouse
 ______________________________________________________________________

 1.  Maximum amount                         1.   $250,000    $250,000

 2a. Enter the number of days (or months)
     that you used the property as a main
     home during the 5-year period* ending
     on the date of sale                    2a. __________  __________

  b. Enter the number of days (or months)
     that you owned the property during
     the 5-year period* ending on the date
     of sale. If you used days on line 2a,
     you also must use days on this line
     and on lines 3 and 5. If you used
     months on line 2a, you also must use
     months on this line and on lines 3
     and 5. (If married filing jointly and
     one spouse owned the property longer
     than the other spouse, both spouses
     are treated as owning the property
     for the longer period.)                 b. __________  __________

  c. Enter the smaller of line 2a or 2b      c. __________  __________

 3.  Have you (or your spouse, if filing
     jointly) excluded gain from the sale
     of another home during the 2-year
     period ending on the date of this
     sale?

     [] No. Skip line 3 and enter the
     number of days (or months) from line
     2c on line 4.

     [] Yes. Enter the number of days (or
     months) between the date of the most
     recent sale of another home on which
     you excluded gain and the date of
     sale of this home                      3.  __________  __________

 4.  Enter the smaller of line 2c or 3      4.  __________  __________

 5.  Divide the amount on line 4 by 730
     days (or 24 months). Enter the result
     as a decimal (rounded to at least 3
     places). But do not enter an amount
     greater than 1.000                     5.  __________  __________

 6.  Multiply the amount on line 1 by the
     decimal amount on line 5               6.  __________  __________

 7.  Reduced maximum exclusion. Add the
     amounts in columns (a) and (b) of
     line 6. Enter it here and on
     Worksheet 2, line 13                   7.  __________  __________
 ______________________________________________________________________

                            FOOTNOTE TO WORKSHEET 3

      * If you were a member of the uniformed services or
 Foreign Service, an employee of the intelligence community, or an
 employee or volunteer of the Peace Corps during the time you owned the
 home, see Members of the uniformed services or Foreign Service,
 employees of the intelligence community, or employees or volunteers of
 the Peace Corps to determine your 5-year period.

                         END OF FOOTNOTE TO WORKSHEET 3

How To Get Tax Help

You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get 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.

Free help with your return. Free help in preparing your return is available nationwide from IRS-certified volunteers. The Volunteer Income Tax Assistance (VITA) program is designed to help low-moderate income taxpayers and the Tax Counseling for the Elderly (TCE) program is designed to assist taxpayers age 60 and older with their tax returns. Most VITA and TCE sites offer free electronic filing and all volunteers will let you know about credits and deductions you may be entitled to claim. To find the nearest VITA or TCE site, visit IRS.gov or call 1-800-906-9887 or 1-800-829-1040.

As part of the TCE program, AARP offers the Tax-Aide counseling program. To find the nearest AARP Tax-Aide site, call 1-888-227-7669 or visit AARP's website at www.aarp.org/money/taxaide.

For more information on these programs, go to IRS.gov and enter keyword "VITA" in the upper right-hand corner.

Internet. You can access the IRS website at IRS.gov 24 hours a day, 7 days a week to:

  • Check the status of your 2011 refund. Go to IRS.gov and click on Where's My Refund. Wait at least 72 hours after the IRS acknowledges receipt of your e-filed return, or 3 to 4 weeks after mailing a paper return. If you filed Form 8379 with your return, wait 14 weeks (11 weeks if you filed electronically). Have your 2011 tax return available so you can provide your social security number, your filing status, and the exact whole dollar amount of your refund.
  • E-file your return. Find out about commercial tax preparation and e-file services available free to eligible taxpayers.
  • Download forms, including talking tax forms, instructions, and publications.
  • Order IRS products online.
  • Research your tax questions online.
  • Search publications online by topic or keyword.
  • Use the online Internal Revenue Code, regulations, or other official guidance.
  • View Internal Revenue Bulletins (IRBs) published in the last few years.
  • Figure your withholding allowances using the withholding calculator online at www.irs.gov/individuals.
  • Determine if Form 6251 must be filed by using our Alternative Minimum Tax (AMT) Assistant available online at www.irs.gov/individuals.
  • Sign up to receive local and national tax news by email.
  • Get information on starting and operating a small business.

Phone. Many services are available by phone.

  • Ordering forms, instructions, and publications. Call 1-800-TAX-FORM (1-800-829-3676) to order current-year forms, instructions, and publications, and prior-year forms and instructions. You should receive your order within 10 days.
  • Asking tax questions. Call the IRS with your tax questions at 1-800-829-1040.
  • Solving problems. You can get face-to-face help solving tax problems every business day in IRS Taxpayer Assistance Centers. An employee can explain IRS letters, request adjustments to your account, or help you set up a payment plan. Call your local Taxpayer Assistance Center for an appointment. To find the number, go to www.irs.gov/localcontacts or look in the phone book under United States Government, Internal Revenue Service.
  • TTY/TDD equipment. If you have access to TTY/TDD equipment, call 1-800-829-4059 to ask tax questions or to order forms and publications.
  • TeleTax topics. Call 1-800-829-4477 to listen to pre-recorded messages covering various tax topics.
  • Refund information. You can check the status of your refund on the new IRS phone app. Download the free IRS2Go app by visiting the iTunes app store or the Android Marketplace. IRS2Go is a new way to provide you with information and tools. To check the status of your refund by phone, call 1-800-829-4477 (automated refund information 24 hours a day, 7 days a week). Wait at least 72 hours after the IRS acknowledges receipt of your e-filed return, or 3 to 4 weeks after mailing a paper return. If you filed Form 8379 with your return, wait 14 weeks (11 weeks if you filed electronically). Have your 2011 tax return available so you can provide your social security number, your filing status, and the exact whole dollar amount of your refund. If you check the status of your refund and are not given the date it will be issued, please wait until the next week before checking back.
  • Other refund information. To check the status of a prior-year refund or amended return refund, call 1-800-829-1040.

Evaluating the quality of our telephone services. To ensure IRS representatives give accurate, courteous, and professional answers, we use several methods to evaluate the quality of our telephone services. One method is for a second IRS representative to listen in on or record random telephone calls. Another is to ask some callers to complete a short survey at the end of the call.

Walk-in. Many products and services are available on a walk-in basis.

  • Products. You can walk in to many post offices, libraries, and IRS offices to pick up certain forms, instructions, and publications. Some IRS offices, libraries, grocery stores, copy centers, city and county government offices, credit unions, and office supply stores have a collection of products available to print from a CD or photocopy from reproducible proofs. Also, some IRS offices and libraries have the Internal Revenue Code, regulations, Internal Revenue Bulletins, and Cumulative Bulletins available for research purposes.
  • Services. You can walk in to your local Taxpayer Assistance Center every business day for personal, face-to-face tax help. An employee can explain IRS letters, request adjustments to your tax account, or help you set up a payment plan. If you need to resolve a tax problem, have questions about how the tax law applies to your individual tax return, or you are more comfortable talking with someone in person, visit your local Taxpayer Assistance Center where you can spread out your records and talk with an IRS representative face-to-face. No appointment is necessary -- just walk in. If you prefer, you can call your local Center and leave a message requesting an appointment to resolve a tax account issue. A representative will call you back within 2 business days to schedule an in-person appointment at your convenience. If you have an ongoing, complex tax account problem or a special need, such as a disability, an appointment can be requested. All other issues will be handled without an appointment. To find the number of your local office, go to www.irs.gov/localcontacts or look in the phone book under United States Government, Internal Revenue Service.

Mail. You can send your order for forms, instructions, and publications to the address below. You should receive a response within 10 days after your request is received.


    Internal Revenue Service
    1201 N. Mitsubishi Motorway
    Bloomington, IL 61705-6613

Taxpayer Advocate Service. The Taxpayer Advocate Service (TAS) is your voice at the IRS. Our job is to ensure that every taxpayer is treated fairly, and that you know and understand your rights. We offer free help to guide you through the often-confusing process of resolving tax problems that you haven't been able to solve on your own. Remember, the worst thing you can do is nothing at all.

TAS can help if you can't resolve your problem with the IRS and:

  • Your problem is causing financial difficulties for you, your family, or your business.
  • You face (or your business is facing) an immediate threat of adverse action.
  • You have tried repeatedly to contact the IRS but no one has responded, or the IRS has not responded to you by the date promised.

If you qualify for our help, we'll do everything we can to get your problem resolved. You will be assigned to one advocate who will be with you at every turn. We have offices in every state, the District of Columbia, and Puerto Rico. Although TAS is independent within the IRS, our advocates know how to work with the IRS to get your problems resolved. And our services are always free.

As a taxpayer, you have rights that the IRS must abide by in its dealings with you. Our tax toolkit at www.TaxpayerAdvocate.irs.gov can help you understand these rights.

If you think TAS might be able to help you, call your local advocate, whose number is in your phone book and on our website at www.irs.gov/advocate. You can also call our toll-free number at 1-877-777-4778.

TAS also handles large-scale or systemic problems that affect many taxpayers. If you know of one of these broad issues, please report it to us through our Systemic Advocacy Management System at www.irs.gov/advocate.

Low Income Taxpayer Clinics (LITCs). Low Income Taxpayer Clinics (LITCs) are independent from the IRS. Some clinics serve individuals whose income is below a certain level and who need to resolve a tax problem. These clinics provide professional representation before the IRS or in court on audits, appeals, tax collection disputes, and other issues for free or for a small fee. Some clinics can provide information about taxpayer rights and responsibilities in many different languages for individuals who speak English as a second language. For more information and to find a clinic near you, see the LITC page on www.irs.gov/advocate or IRS Publication 4134, Low Income Taxpayer Clinic List. This publication is also available by calling 1-800-829-3676 or at your local IRS office.

Free tax services. Publication 910, IRS Guide to Free Tax Services, is your guide to IRS services and resources. Learn about free tax information from the IRS, including publications, services, and education and assistance programs. The publication also has an index of over 100 TeleTax topics (recorded tax information) you can listen to on the telephone. The majority of the information and services listed in this publication are available to you free of charge. If there is a fee associated with a resource or service, it is listed in the publication.

Accessible versions of IRS published products are available on request in a variety of alternative formats for people with disabilities.

DVD for tax products. You can order Publication 1796, IRS Tax Products DVD, and obtain:

  • Current-year forms, instructions, and publications.
  • Prior-year forms, instructions, and publications.
  • Tax Map: an electronic research tool and finding aid.
  • Tax law frequently asked questions.
  • Tax Topics from the IRS telephone response system.
  • Internal Revenue Code -- Title 26 of the U.S. Code.
  • Links to other Internet based Tax Research materials.
  • Fill-in, print, and save features for most tax forms.
  • Internal Revenue Bulletins.
  • Toll-free and email technical support.
  • Two releases during the year.
    • The first release will ship the beginning of January 2012.
    • The final release will ship the beginning of March 2012.

Purchase the DVD from National Technical Information Service (NTIS) at www.irs.gov/cdorders for $30 (no handling fee) or call 1-877-233-6767 toll free to buy the DVD for $30 (plus a $6 handling fee). 

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