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Publication 17
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16. Selling Your HomeImportant ChangeUnforeseen circumstances - September 11, 2001, terrorists attacks. If you are an individual affected by the September 11, 2001, terrorists attacks, you may qualify for a reduced maximum exclusion of gain on the sale or exchange of your main home. See Reduced Maximum Exclusion, later. Important RemindersChange of address. If you change your mailing address, be sure to notify the IRS using Form 8822, Change of Address. Mail it to the Internal Revenue Service Center for your old address. (Addresses for the Service Centers are on the back of the form.) Home sold with undeducted points. If you have not deducted all the points you paid to secure a mortgage on your old home, you may be able to deduct the remaining points in the year of the sale. See Mortgage ending early under Points in chapter 25. IntroductionThis chapter explains the tax rules that apply when you sell your main home. Generally, your main home is the one in which you live most of the time. Gain. If you have a gain from the sale of your main home, you may be able to exclude up to $250,000 of the gain from your income ($500,000 on a joint return in most cases). Any gain not excluded is taxable. See Excluding the Gain, later. Loss. You cannot deduct a loss from the sale of your main home. Worksheets. Publication 523, Selling Your Home, includes worksheets to help you figure the adjusted basis of the home you sold, the gain (or loss) on the sale, and the amount of the gain that you can exclude. Reporting the sale. Do not report the sale of your main home on your tax return unless you have a gain and at least part of it is taxable. Report any taxable gain on Schedule D (Form 1040). You may also have to include Form 4797, Sales of Business Property. See Reporting the Gain in chapter 2 of Publication 523. At the time this publication was being prepared for print, regulations relating to gain from the sale or exchange of your home were awaiting approval. These regulations would provide a list of factors and rules to consider in determining whether a home is your main home, whether vacant land is part of it, and whether gain must be allocated between residential and nonresidential uses. They would also explain the circumstances under which the primary reason a home is sold or exchanged is a change in place of employment, health, or unforeseen circumstances. In addition, the regulations would provide rules for figuring a reduced maximum exclusion, for determining if more than one exclusion is available to joint owners or to those who file jointly, and rules for applying these regulations retroactively. For more information on the rules included in the new regulations, see Publication 523, Selling Your Home, and Publication 553, Highlights of 2002 Tax Changes. Useful ItemsYou may want to see: Publication
Form (and Instructions)
Main HomeUsually, the home you live in most of the time is your main home and can be a: To exclude gain under the rules of this chapter, you generally must have owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date of sale. Land. If you sell the land on which your main home is located, but not the house itself, you cannot exclude any gain you have from the sale of the land. Example. On March 4, 2002, you sell the land on which your main home is located. You buy another piece of land and move your house to it. This sale is not considered a sale of your main home, and you cannot exclude tax on any gain on the sale of the land. More than one home. If you have more than one home, you can exclude gain only from the sale of your main home. You must include in income the gain from the sale of any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time. Example 1. You own and live in a house in the city. You also own a beach house, which you use during summer months. The house in the city is your main home. Example 2. You own a house, but you live in another house that you rent. The rented house is your main home. Property used partly as your main home. If you use only part of the property as your main home, the rules discussed in this chapter apply only to the gain or loss on the sale of that part of the property. For details, see Property used partly as your home and partly for business or rental during the year of sale under Business Use or Rental of Home, later. How To Figure Gain or LossTo 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. 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 any services you receive. Payment by employer. You may have to sell your home because of a job transfer. If your employer pays you for a loss on the sale or for your selling expenses, do not include the payment as part of the selling price. Your employer will include it in box 1 of your Form W-2 and you will include it in your gross income as wages on line 7 of Form 1040. Option to buy. If you grant an option to buy your home and the option is exercised, add the amount you receive for the option to the selling price of your home. If the option is not exercised, you must report the amount as ordinary income in the year the option expires. Report this amount on line 21 of Form 1040. Form 1099-S. If you received Form 1099-S, Proceeds From Real Estate Transactions, box 2 (gross proceeds) should show the total amount you received for your home. However, box 2 will not include the fair market value of any property other than cash or notes, or any services, you received or will receive. Instead, box 4 will be checked to indicate your receipt (or expected receipt) of these items. If you can exclude the entire gain, the person responsible for closing the sale generally will not have to report it on Form 1099-S. If you do not receive Form 1099-S, use sale documents and other records to figure the total amount you received for your home. Amount realized. The amount realized is the selling price minus selling expenses. Selling expenses. Selling expenses include:
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 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, generally is taxable. Loss on sale. If the amount realized is less than the adjusted basis, the difference is a loss. A loss on the sale of your main home cannot be deducted. Jointly owned home. If you and your spouse sell your jointly owned home and file a joint return, you figure your gain or loss as one taxpayer. Separate returns. If you file separate returns, each of you must figure your own gain or loss according to your ownership interest in the home. Your ownership interest is determined by state law. Joint owners not married. If you and a joint owner other than your spouse sell your jointly owned home, each of you must figure your own gain or loss according to your ownership interest in the home. Each of you applies the rules discussed in this chapter on an individual basis. Trading homes. If you trade your old home for another home, treat the trade as a sale and a purchase. Example. You owned and lived in a home that had an adjusted basis of $41,000. A real estate dealer accepted your old home as a trade-in and allowed you $50,000 toward a new home priced at $80,000. This is treated as a sale of your old home for $50,000 with a gain of $9,000 ($50,000 - $41,000). If the dealer had allowed you $27,000 and assumed your unpaid mortgage of $23,000 on your old home, your sales price would still be $50,000 (the $27,000 trade-in allowed plus the $23,000 mortgage assumed). Foreclosure or repossession. If your home was foreclosed on or repossessed, you have a sale. You figure the gain or loss from the sale in generally the same way as gain or loss from any sale. But the amount of your gain or loss depends, in part, on whether you were personally liable for repaying the debt secured by the home. Get Publication 523 for more information. Form 1099-A and Form 1099-C. If your debt is canceled, you may receive Form 1099-C, Cancellation of Debt. Generally, you will receive Form 1099-A, Acquisition or Abandonment of Secured Property, from your lender. This form will have the information you need to determine the amount of your gain or loss and any ordinary income from cancellation of debt. Abandonment. If you abandon your home, you may have ordinary income. If the abandoned home secures a debt for which you are personally liable and the debt is canceled, you have ordinary income equal to the amount of the canceled debt. Get Publication 523 for more information. Transfer to spouse. If you transfer your home to your spouse, or to your former spouse incident to your divorce, you generally have no gain or loss. This is true even if you receive cash or other consideration for the home. Therefore, the rules in this chapter do not apply. More information. If you need more information, see Transfer to spouse in Publication 523 and Property Settlements in Publication 504, Divorced or Separated Individuals. BasisYou need to know your basis in your home to determine any gain or loss when you sell it. Your basis in your home is determined by how you got the home. Your basis is its cost if you bought it or built it. If you got it in some other way (inheritance, gift, etc.), its basis is either its fair market value when you got it or the adjusted basis of the person you got it from. While you owned your home, you may have made adjustments (increases or decreases) to your home's basis. The result of these adjustments is your home's adjusted basis, which is used to figure gain or loss on the sale of your home. See Adjusted Basis, later. You can find more information on basis and adjusted basis in chapter 14 of this publication and in Publication 523. Cost As BasisThe cost of property is the amount you pay for it in cash, debt obligations, other property, or services. Purchase. If you buy your home, your basis is its cost to you. This includes the purchase price and certain settlement or closing costs. Generally, your purchase price includes your down payment and any debt, such as a first or second mortgage or notes you gave the seller in payment for the home. If you build, or contract to build, a new home, your purchase price can include costs of construction, as discussed in chapter 2 of Publication 523. Settlement fees or closing costs. When you bought your home, you may have paid settlement fees or closing costs in addition to the contract price of the property. You can include in your basis the settlement fees and closing costs you paid for buying the home. You cannot include in your basis the fees and costs for getting a mortgage loan. Therefore, a fee paid for buying the home is any fee you would have had to pay even if you paid cash for the home. Chapter 14 lists some of the settlement fees and closing costs that you can include in the basis of property, including your home. It also lists some settlement costs that cannot be included in basis. Also see chapter 2 of Publication 523 for additional items and a discussion of basis other than cost. Adjusted BasisAdjusted basis is your basis increased or decreased by certain amounts. Increases to basis. These include any:
Decreases to basis. These include any:
Improvements. These add to the value of your home, prolong its useful life, or adapt it to new uses. You add the cost of additions and other improvements to the basis of your property. Examples. Putting a recreation room or another bathroom in your unfinished basement, putting up a new fence, putting in new plumbing or wiring, putting on a new roof, or paving your unpaved driveway are improvements. An addition to your house, such as a new deck, a sunroom, or a garage, is also an improvement. Repairs. These maintain your home in good condition but do not add to its value or prolong its life. You do not add their cost to the basis of your property. Examples. Repainting your house inside or outside, fixing your gutters or floors, repairing leaks or plastering, and replacing broken window panes are examples of repairs.
The records you should keep include:
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Recordkeeping.