Reporting the Gain

Do not report the 2001 sale of your main home on your tax return unless:

• You have a gain and you do not qualify to exclude all of it, or
• You have a gain and choose not to exclude it.

If you have any taxable gain on the sale of your main home that cannot be excluded, report the entire gain realized (line 5 of Worksheet 2) on Schedule D (Form 1040). Report it on line 1 or line 8 of Schedule D, depending on how long you owned the home. If you qualify for an exclusion (line 9 of Worksheet 2), show it on the line directly below the line on which you report the gain. Write "Section 121 exclusion" in column (a) of that line and show the amount of the exclusion in column (f) as a loss (in parentheses).

If you used the home for business or to produce rental income during the year of sale, you must 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 in that year). See Business Use or Rental of Home, earlier.

Installment sale. Some sales are made under arrangements that provide for part or all of the selling price to be paid in a later year. These sales are called "installment sales." If you finance the buyer's purchase of your home yourself, instead of having the buyer get a loan or mortgage from a bank, you probably have an installment sale. You may be able to report the part of the gain you cannot exclude on the installment basis.

Use Form 6252, Installment Sale Income, to report the sale. Enter your exclusion (line 9 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 generally consist of both interest and principal. You must report the interest you receive as part of each payment separately as interest income. If the buyer of your home uses the property as a main or second home, you must also report the name, address, and social security number (SSN) of the buyer on line 1 of either Schedule B (Form 1040) or Schedule 1 (Form 1040A). The buyer must give you his or her SSN and you must give the buyer your SSN. Failure to meet these requirements may result in a $50 penalty for each failure. If you or the buyer does not have and is not eligible to get an SSN, see the next discussion.

Individual taxpayer identification number (ITIN). If either you or the buyer of your home is a nonresident or resident alien who does not have and is not eligible to get an SSN, the IRS will issue you (or the buyer) an ITIN. To apply for an ITIN, file Form W-7, Application for IRS Individual Taxpayer Identification Number, with the IRS.

If you have to include the buyer's SSN on your return and the buyer 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 do 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.

Illustrated Example

Emily White, a single person, bought a home in 1990. She lived in the home until May 31, 1999, when she moved out of the house and put it up for rent. Emily rented her home until May 31, 2000. She moved back into the house and lived there until she sold it on January 10, 2001.

Emily can exclude gain on the sale of her home because she owned and lived in the home for at least 2 years of the 5-year period ending on the date of the sale.

Emily's records show the following:

Emily uses Worksheet 1 to figure the adjusted basis of the home she sold ($52,608). She uses Worksheet 2 to figure the gain on the sale ($127,392) and the amount of her exclusion ($125,750). Emily cannot exclude $1,642, the part of her gain equal to the depreciation deduction claimed while the house was rented.

Emily reports her gain and exclusion in Part II of Schedule D (Form 1040). She enters $1,642 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 so, after completing that worksheet, she also enters $1,642 on line 19 of Schedule D. She then figures her tax using Part IV of Schedule D.

Emily's completed Worksheets 1 and 2 and the front page of her Schedule D appear on pages 18 and 19. Page 2 of Schedule D and her Unrecaptured Section 1250 Gain Worksheet are not shown.

worksheets for Emily White

Schedule D for Emily White