Cat. No. 15044W Selling Your Home · 2012. 7. 16. · 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

ContentsIntroduction ........................................................ 2

Chapter 1. Main Home ....................................... 2

Chapter 2. Rules for Sales in 1998 .................. 3How To Figure Gain or Loss ........................... 3Choosing To Use Rules in Chapter 3 ............. 5Gain on Sale .................................................... 5Loss on Sale .................................................... 5Basis ................................................................ 5Excluding the Gain .......................................... 10Ownership and Use Tests ............................... 12Special Situations ............................................ 15Reporting the Gain .......................................... 15Real Estate and Transfer Taxes ..................... 16

Chapter 3. Rules Under Prior Law ................... 18Postponing Gain .............................................. 18How and When To Report ............................... 26One-Time Exclusion of Gain ........................... 28

Chapter 4. Recapture of Federal Subsidy ....... 35

Chapter 5. How To Get More Information ....... 35

Index .................................................................... 37

Important Change for 1998

Form 2119 obsolete. Beginning in 1998, Form 2119is no longer used to report the sale of a home. If yousold your main home in 1998, report the sale only if youhave a gain that is not excluded from your income. Youmay be able to exclude gain up to $250,000 ($500,000on a joint return in most cases). If you cannot excludeall of the gain, report the sale on Schedule D (Form1040), Capital Gains and Losses. See Reporting theGain in chapter 2.

Important Reminders

Change of address. If you change your mailing ad-dress, be sure to notify the Internal Revenue Service(IRS) using Form 8822, Change of Address. Mail it tothe Internal Revenue Service Center for your old ad-dress. (Addresses for the Service Centers are on theback of the form.)

Home sold with undeducted points. If you have notdeducted all the points you paid to secure a mortgageon your old home, you may be able to deduct the re-maining points in the year of sale. See Points in Part Iof Publication 936, Home Mortgage Interest Deduction.

Department of the TreasuryInternal Revenue Service

Publication 523Cat. No. 15044W

SellingYour HomeFor use in preparing

1998 Returns

IntroductionThis publication explains the tax rules that apply whenyou sell your main home. Generally, your main homeis the one in which you live most of the time.

Gain. If you have a gain from the sale of your mainhome, you may be able to exclude it from income upto a limit of $250,000 ($500,000 on a joint return in mostcases).

Loss. You cannot deduct a loss from the sale of yourmain home.

Worksheets. Worksheets are included in the publica-tion to help you figure the adjusted basis of the homeyou sold, the gain (or loss) on the sale, and the amountof the gain that you can exclude.

Reporting the sale. Do not report the 1998 sale ofyour main home on your tax return unless you have again and at least part of it is taxable. Report any taxablegain on Schedule D (Form 1040).

Who may need to read chapter 3. Chapter 3 of thispublication explains the rules that applied to sales be-fore May 7, 1997. Those rules may still apply to you ifyou are in either of the following situations.

1) You sold your main home at a gain before May 7,1997, and either:

a) Bought your new home in 1998 or later, or

b) Did not buy a new home within the replacementperiod.

2) You sold your main home at a gain after May 6,1997, made the choice described on page 5, andeither 1(a) or 1(b) above is true.

If you are in either of these situations and havequestions, see chapter 3.

Date of sale. If you received a Form 1099–S, Pro-ceeds From Real Estate Transactions, the date of saleshould be shown in box 1. If you did not receive thisform, the date of sale is the earlier of (a) the date titletransferred or (b) the date economic burdens and ben-efits of ownership shifted to the buyer. In most cases,these dates are the same.

What is not covered in this publication. This publi-cation does not cover the sale of rental property, sec-ond homes, or vacation homes. For information on howto report those sales, see Publication 544, Sales and

Other Dispositions of Assets.

Useful ItemsYou may want to see:

Publication

m 521 Moving Expenses

m 527 Residential Rental Property

m 530 Tax Information for First-Time Homeowners

m 544 Sales and Other Dispositions of Assets

m 547 Casualties, Disasters, and Thefts (Businessand Nonbusiness)

m 551 Basis of Assets

m 587 Business Use of Your Home

m 936 Home Mortgage Interest Deduction

Form (and Instructions)

m Schedule D (Form 1040) Capital Gains andLosses

m 1040X Amended U.S. Individual Income Tax Return

m 8822 Change of Address

m 8828 Recapture of Federal Mortgage SubsidySee chapter 5 for information about getting these

publications and forms.

1.Main Home

This chapter 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 chapter 2, you gen-erally must have owned and used the property as yourmain home for at least 2 years during the 5-year periodending on the date of sale.

To postpone gain under the rules in chapter 3, thehome you sold and the home you buy to replace it mustboth qualify as your main home.

Land. You may sell the land on which your main homeis located, but not the house itself. In this case, youcannot postpone or exclude any gain you have from thesale of the land.

Page 2 Chapter 1 Main Home

Example. On March 3, 1998, you sell the land onwhich your main home is located. You buy anotherpiece of land and move your house to it. This sale isnot considered a sale of your main home, and youcannot exclude any gain on the sale.

More than one home. If you have more than onehome, only the sale of your main home qualifies forpostponing or excluding gain. If you have two homesand live in both of them, your main home is ordinarilythe one you live in most of the time.

Example 1. You own and live in a house in town.You also own a beach house, which you use in thesummer months. The town house is your main home;the beach house is not.

Example 2. You own a house, but you live in an-other house that you rent. The rented home is yourmain home.

Property used partly as your home. If you use onlypart of the property as your main home, the rules dis-cussed in this publication apply only to the gain or losson the sale of that part of the property. For details, seeProperty used partly as your home and partly for busi-ness or rental under Ownership and Use Tests inchapter 2. Also see Part of property used as main homeunder One-Time Exclusion of Gain in chapter 3.

2.Rules for Sales in 1998

Generally, you use the rules in this chapter if yousold your main home in 1998.

You may be able to exclude any gain from incomeup to a limit of $250,000 ($500,000 on a joint return inmost cases). If you can exclude all of the gain, you donot need to report the sale on your tax return.

If you have gain that cannot be excluded, report iton Schedule D (Form 1040).

The main topics in this chapter are:

• How to figure gain or loss,

• Choosing to use rules in chapter 3,

• Gain on sale,

• Loss on sale,

• Basis,

• Excluding gain,

• Ownership and use tests,

• Special situations,

• Reporting gain, and

• Real estate and transfer taxes.

This chapter includes worksheets you can use tofigure your gain (or loss) and your exclusion. Use

Worksheet 1 to figure the adjusted basis of the homeyou sold. Use Worksheet 2 to figure the gain (or loss),the exclusion, and the taxable gain (if any) on the sale.If you cannot take the full exclusion, use Worksheet 3to figure the reduced exclusion amount.

How To Figure Gain or LossTo figure the gain (or loss) on the sale of your mainhome, you must know the selling price , the amountrealized , and the adjusted basis .

Selling price. The selling price is the total amount youreceive for your home. It includes money, all notes,mortgages, or other debts assumed by the buyer aspart of the sale, and the fair market value of any otherproperty or any services you receive.

Personal property. The selling price of your homedoes not include amounts you received for personalproperty sold with your home. Personal property isproperty that is not a permanent part of the home. Ex-amples are furniture, draperies, and lawn equipment.Separately stated cash you received for these itemsshould not be shown on Form 1099–S (discussed later).

Payment by employer. You may have to sell yourhome because of a job transfer. If your employer paysyou for a loss on the sale or for your selling expenses,do not include the payment as part of the selling price.Include it in your gross income as wages on line 7 ofForm 1040. (Your employer will include it with the restof your wages in box 1 of your Form W–2.)

Option to buy. If you grant an option to buy yourhome and the option is exercised, add the amount youreceive for the option to the selling price of your home.If the option is not exercised, you must report theamount as ordinary income in the year the option ex-pires. Report this amount on line 21 of Form 1040.

Form 1099–S. If you received Form 1099–S, box 2should show the total amount you received for yourhome.

However, box 2 will not include the fair market valueof any property other than cash or notes, or any ser-vices, you received or will receive. Instead, box 4 willbe checked.

If you can exclude the entire gain from a sale in1998, the person responsible for closing the sale gen-erally will not have to report it on Form 1099–S. Youwill use sale documents and other records to figure thetotal amount you received for your home.

Amount realized. The amount realized is the sellingprice minus selling expenses.

Selling expenses. Selling expenses include com-missions, advertising fees, legal fees, and loan chargespaid by the seller, such as loan placement fees or“points.”

Adjusted basis. While you owned your home, youmay have made adjustments (increases or decreases)to the basis. This adjusted basis is used to figure gainor loss on the sale of your home. For information onhow to figure your home's adjusted basis, see Basis,later.

Chapter 2 Rules for Sales in 1998 Page 3

Amount of gain or loss. When you know the amountrealized and the home's adjusted basis, you can figureyour gain or loss. If the amount realized is more thanthe adjusted basis, the difference is a gain and you maybe able to exclude it.

If the amount realized is less than the adjusted basis,the difference is a loss. A loss on the sale of your mainhome cannot be deducted.

Jointly owned home. If you and your spouse sell yourjointly owned home and file a joint return, you figureyour gain or loss as one taxpayer.

Separate returns. If you file separate returns, eachof you must figure your own gain or loss according toyour ownership interest in the home. Your ownershipinterest is determined by state law.

Joint owners not married. If you and a joint ownerother than your spouse sell your jointly owned home,each of you must figure your own gain or loss accordingto your ownership interest in the home. Each of youapplies the rules discussed in this publication on anindividual basis.

Trading homes. If you trade your old home for anotherhome, treat the trade as a sale and a purchase.

Example. You owned and lived in a home with anadjusted basis of $41,000. A real estate dealer ac-cepted your old home as a trade-in and allowed you$50,000 toward a new house priced at $80,000. Youare considered to have sold your old home for $50,000and to have had a gain of $9,000 ($50,000 − $41,000).

If the dealer had allowed you $27,000 and assumedyour unpaid mortgage of $23,000 on your old home,your sales price would still be $50,000 (the $27,000trade-in allowed plus the $23,000 mortgage assumed).

Foreclosure or repossession. If your home wasforeclosed on or repossessed, you have a sale. If thesale resulted in a taxable gain, report it on Schedule D(Form 1040).

You figure the gain or loss from the sale in generallythe same way as a gain or loss from any sale. But theamount of your gain or loss depends, in part, onwhether you were personally liable for repaying the debtsecured by the home, as shown in the following chart.

IF you were ...

Not personally liablefor the debt

Personally liable forthe debt

THEN your sellingprice includes ...

The full amount ofdebt canceled by theforeclosure orrepossession

The amount ofcanceled debt up tothe home’s fair marketvalue. You may alsohave ordinary income,as explained next.

Ordinary income. If you were personally liable forthe canceled debt, you may have ordinary income inaddition to any gain or loss. If the canceled debt ismore than the home's fair market value, you have or-dinary income equal to the difference. Report that in-come on line 21, Form 1040. However, the income fromcancellation of debt is not taxed to you if the cancella-tion is intended as a gift, or if you are insolvent orbankrupt. For more information on insolvency orbankruptcy, see Publication 908, Bankruptcy TaxGuide.

Form 1099–A and Form 1099–C. Generally, youwill receive Form 1099–A, Acquisition or Abandonmentof Secured Property, from your lender. This form willhave the information you need to determine the amountof your gain or loss and whether you have any ordinaryincome from cancellation of debt. If your debt is can-celed, you may receive Form 1099–C, Cancellation ofDebt.

More information. If part of your home is used forbusiness or rental purposes, see Foreclosures andRepossessions in chapter 1 of Publication 544 for moreinformation. Publication 544 also has examples of howto figure gain or loss on a foreclosure or repossession.

Abandonment. If you abandon your home, you mayhave ordinary income. If the abandoned home securesa debt for which you are personally liable and the debtis canceled, you have ordinary income equal to theamount of canceled debt.

If the home is secured by a loan and the lenderknows the home has been abandoned, the lendershould send you Form 1099–A or Form 1099–C. SeeForeclosure or repossession, earlier, for informationabout those forms. If the home is later foreclosed onor repossessed, gain or loss is figured as explained inthat discussion.

Transfer to spouse. If you transfer your home to yourspouse, or to your former spouse incident to your di-vorce, you generally have no gain or loss (unless theException applies). This is true even if you receive cashor other consideration for the home. Therefore, therules explained in this publication do not apply.

If you owned your home jointly with your spouse andtransfer your interest in the home to your spouse, or toyour former spouse incident to your divorce, the samerule applies. You have no gain or loss.

If you buy or build a new home, its basis will not beaffected by your transfer of your old home to yourspouse, or to your former spouse incident to divorce.The basis of the home you transferred will not affect thebasis of your new home.

Exception. These rules do not apply if your spouseor former spouse is a nonresident alien. In that case,the other rules in this publication apply.

More information. See Property Settlements inPublication 504, Divorced or Separated Individuals, ifyou need more information.

Page 4 Chapter 2 Rules for Sales in 1998

Choosing To UseRules in Chapter 3Generally, you use the rules in chapter 2 if you soldyour main home in 1998.

You can choose to use the rules in chapter 3, ratherthan the rules in this chapter, if:

1) You sold your home in 1998 under a contract thatwas binding on August 5, 1997, or

2) You sold your home in 1998, and you bought a newhome on or before August 5, 1997, or under abinding contract that was in effect on that date.

You were also eligible to make this choice if you soldyour home after May 6, 1997, and before August 6,1997, or if you met condition (1) or (2) except that yousold your home in 1997 (after August 5).

Example. You sold your old main home at a gainon February 3, 1998. On June 27, 1997, before sellingyour old main home, you bought and moved into a newone. You can choose whether to use the rules of thischapter or the rules of chapter 3.

TIPYou might want to use the rules in chapter 3 ifyou cannot exclude your entire gain under therules in this chapter. In that case, compare the

amount of gain that would be taxed using the rules inthis chapter with the amount that would be taxed usingthe rules in chapter 3.

Gain on SaleYou will generally be subject to tax on all of the gainon the sale of your main home unless you exclude allor part of the gain under the rules described in thischapter.

Loss on SaleYou cannot deduct a loss on the sale of your home. Itis a personal loss.

Payment by employer. You must include in incomeany amount your employer pays you for a loss on thesale of your home or for expenses of the sale when youtransfer to a new location. Do not include the paymentas part of the selling price. Include it in your gross in-come as wages on line 7 of Form 1040. (Your employerwill include it with the rest of your wages in box 1 of yourForm W–2.)

BasisYou will need to know your basis in your home as astarting point for determining any gain or loss when yousell it. Your basis in your home is determined by howyou got the home. Your basis is its cost if you boughtit or built it. If you got it in some other way, its basis iseither its fair market value when you received it or theadjusted basis of the person you received it from.

While you owned your home, you may have madeadjustments (increases or decreases) to the basis. Thisadjusted basis is used to figure gain or loss on the saleof your home.

To figure your adjusted basis, you can use Work-sheet 1. A filled-in example of that worksheet is in-cluded in the comprehensive Example later in thischapter.

Table 1 in this publication explains how to use theworksheet in certain special situations.

The main topics in this section are:

• Cost as basis,

• Basis other than cost, and

• Adjusted basis.

Cost As BasisThe cost of property is the amount you pay for it in cashor other property.

Purchase. If you buy your home, your basis is its costto you. This includes the purchase price and certainsettlement or closing costs. Your purchase price in-cludes your down payment and any debt, such as a firstor second mortgage or notes you gave the seller inpayment for the home.

Seller-paid points. If the person who sold you yourhome paid points on your loan, you may have to reduceyour home's basis by the amount of the points, asshown in the chart below.

IF you bought yourhome ...

After 1990 but beforeApril 4, 1994

After April 3, 1994

THEN reduce yourhome’s basis by theseller-paid points ...

Only if you chose todeduct them as homemortgage interest inthe year paid

Even if you did notdeduct them

If you must reduce your basis by seller-paid pointsand you use Worksheet 1 to figure your adjusted basis,enter the seller-paid points on line 2 of the worksheet(unless you used the seller-paid points to reduce theamount on line 1).

Settlement fees or closing costs. When buyingyour home, you may have to pay settlement fees orclosing costs in addition to the contract price of theproperty. You can include in your basis the settlement


fees and closing costs that are for buying the home.You cannot include in your basis the fees and costs thatare for getting a mortgage loan. A fee is for buying thehome if you would have had to pay it even if you paidcash for the home.

Settlement fees do not include amounts placed inescrow for the future payment of items such as taxesand insurance.

Some of the settlement fees or closing costs that youcan include in the basis of your property are:

1) Abstract fees (sometimes called abstract of titlefees),

2) Charges for installing utility services,

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

4) Recording fees,

5) Survey fees,

6) Transfer 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 in detaillater),

b) Back interest,

c) Recording or mortgage fees,

d) Charges for improvements or repairs, and

e) Sales commissions.

Some settlement fees and closing costs not includedin your basis are:

1) Fire insurance premiums,

2) Rent for occupancy of the house before closing,

3) Charges for utilities or other services relating tooccupancy of the house before closing,

4) Any fee or cost that you deducted as a moving ex-pense (allowed for certain fees and costs before1994),

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

a) Mortgage insurance premiums (including VAfunding fees),

b) Loan assumption fees,

c) Cost of a credit report, and

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

6) Fees for refinancing a mortgage.

See Settlement fees or closing costs under How ToFigure Cost of New Home in chapter 3 for informationabout the fees and costs (real estate taxes and mort-gage interest, including points) that you may be able todeduct.

Real estate taxes. Real estate taxes for the yearyou bought your home may affect your basis, as shownin the following chart.

IF ...

You pay taxesthat the sellerowed on thehome (the taxesup to the dateof the sale)

The seller paidtaxes for you(the taxesbeginning onthe date of sale)

THEN thetaxes ...

Are added tothe basis ofyour home

AND ...

The seller doesnot reimburseyou

The sellerreimburses you

Do not affectthe basis ofyour home

Are subtractedfrom the basisof your home

You do notreimburse theseller

You reimbursethe seller

Do not affectthe basis ofyour home

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

1) The cost of the land, plus

2) The amount it cost you to complete the house, in-cluding:

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 thehouse.

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

Built by you. If you built all or part of your houseyourself, its basis is the total amount it cost you tocomplete 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 temporaryhousing while your home was being finished, you mustreduce your basis by the part of the contract price thatapplies to temporary housing. To figure the amount ofthe reduction, use the method described in Temporaryhousing under How To Figure Cost of New Home inchapter 3.


Cooperative apartment. Your basis in the apartmentis usually the cost of your stock in the co-op housingcorporation, which may include your share of a mort-gage on the apartment building.

Condominium. Your basis is generally its cost to you.

Basis Other Than CostYou must use a basis other than cost, such as fairmarket value, if you got your home as a gift, from yourspouse, as an inheritance, or in a trade. If you got yourhome in any of these ways, see the following discussionthat applies to you. If you want to figure your adjustedbasis using Worksheet 1, see Table 1 for help.

Fair market value. Fair market value is the price atwhich property would change hands between a willingbuyer and a willing seller, neither having to buy or sell,and both having reasonable knowledge of the relevantfacts. Sales of similar property, on or about the samedate, may be helpful in figuring the fair market valueof the property.

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

IF the donor’sadjusted basisat the time ofthe gift was ...

Equal to ormore than thefair marketvalue of thehome at thattime

THEN your basis is ...

The same as the donor’sadjusted basis at the time of thegift.

Exception: If using the donor’sadjusted basis results in a losswhen you sell the home, youmust use the fair market value ofthe home at the time of the giftas your basis.

Neither gain nor loss: If using thefair market value results in again, you have neither gain norloss.

Less than thefair marketvalue at thattime, and youreceived the giftbefore 1977

The smaller of the:

● Donor’s adjusted basis, plusany federal gift tax paid on thegift, or

● The home’s fair market valueat the time of the gift.

Less than thefair marketvalue at thattime, and youreceived the giftafter 1976

The same as the donor’sadjusted basis, plus the part ofany federal gift tax paid that isdue to the net increase in valueof the home (explained next)

Part of federal gift tax due to net increase invalue. Figure the part of the federal gift tax paid thatis due to the net increase in value of the home bymultiplying the total federal gift tax paid by a fraction.The numerator (top part) of the fraction is the net in-crease in the value of the home, and the denominator(bottom part) is the fair market value of the home. Thenet increase in the value of the home is its fair marketvalue minus the donor's adjusted basis.

Home received from spouse. You may have receivedyour home from your spouse or from your formerspouse incident to your divorce.

Transfers after July 18, 1984. If you received thehome after July 18, 1984, you had no gain or loss onthe transfer. Your basis in this home is generally thesame as your spouse's (or former spouse's) adjustedbasis just before you received it. This rule applies evenif you received the home in exchange for cash, the re-lease of marital rights, the assumption of liabilities, orother consideration.

If you owned a home jointly with your spouse andyour spouse transferred his or her interest in the hometo you, your basis in the half interest received from yourspouse is generally the same as your spouse's adjustedbasis just before the transfer. This also applies if yourformer spouse transferred his or her interest in thehome to you incident to your divorce. Your basis in thehalf interest you already owned does not change. Yournew basis in the home is the total of these two amounts.

Transfers before July 19, 1984. If you receivedyour home before July 19, 1984, in exchange for yourrelease of marital rights, your basis in the home isgenerally its fair market value at the time you receivedit.

More information. For more information on prop-erty received from a spouse or former spouse, seeProperty Settlements in Publication 504.

Home received as inheritance. If you inherited yourhome, its basis is its fair market value on the date of thedecedent's death or the later alternate valuation date ifthat date was used for federal estate tax purposes. Ifan estate tax return was filed, the value listed there forthe property generally is your basis. If a federal estatetax return did not have to be filed, your basis in thehome is the same as its appraised value at the date ofdeath for purposes of state inheritance or transmissiontaxes.

Surviving spouse. If you are a surviving spouseand you owned your home jointly, your basis in thehome will change. The new basis for the half interestowned by your spouse will be one-half of the fair marketvalue on the date of death (or alternate valuation date).The basis in your half will remain one-half of the ad-justed basis determined previously. Your new basis isthe total of these two amounts.

Example. Your jointly owned home had an adjustedbasis 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 forone-half of the adjusted basis plus $50,000 for one-halfof the fair market value).


Community property. In community property states(Arizona, California, Idaho, Louisiana, Nevada, NewMexico, Texas, Washington, and Wisconsin), eachspouse is usually considered to own half of the com-munity property. When either spouse dies, the fairmarket value of the community property becomes thebasis of the entire property, including the part belongingto the surviving spouse. For this to apply, at least halfof the community interest must be includible in the de-cedent's gross estate, whether or not the estate mustfile a return.

For more information about community property, seePublication 555, Community Property.

Home received in trade. If you acquired your homein a trade for other property, the basis of your home isgenerally the fair market value of the other property atthe time of the trade. If you traded one home for an-other, you have made a sale and purchase. In thatcase, you may have realized a gain. See Tradinghomes, earlier, for an example of figuring the gain.

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

Adjusted BasisAdjusted basis is your basis increased or decreasedby certain amounts.

To figure your adjusted basis, you can use Work-sheet 1. A filled-in example of that worksheet is in-cluded in a comprehensive Example later in this chap-ter. Table 1 explains how to use the worksheet incertain special situations.

Increases to basis. These include any:

1) Improvements that have a useful life of more than1 year,

2) Additions,

3) Special assessments for local improvements, and

4) Amounts you spent after a casualty to restoredamaged property.

Decreases to basis. These include any:

1) Gain you postponed from the sale of a previoushome before May 7, 1997,

2) Deductible casualty losses not covered by insur-ance,

3) Insurance payments you received or expect to re-ceive for casualty losses,

4) Payments you received for granting an easementor right-of-way,

5) Depreciation allowed or allowable if you used yourhome for business or rental purposes,

6) Residential energy credit (generally allowed from1977 through 1987) claimed for the cost of energyimprovements that you added to the basis of yourhome,

7) Adoption credit you claimed for improvements thatyou added to the basis of your home,

8) Nontaxable payments from an adoption assistanceprogram of your employer that you used for im-provements you added to the basis of your home,

9) First-time homebuyers credit (allowed to certainfirst-time buyers of a home in the District ofColumbia) claimed for 1997 or 1998, and

10) Energy conservation subsidy excluded from yourgross income because you received it (directly orindirectly) from a public utility after 1992 to buy orinstall any energy conservation measure. An energyconservation measure is an installation or modifi-cation that is primarily designed either to reduceconsumption of electricity or natural gas or to im-prove the management of energy demand for ahome.

Improvements. These add to the value of your home,prolong its useful life, or adapt it to new uses. You addthe cost of improvements to the basis of your property.

Examples. Putting a recreation room in your unfin-ished basement, adding another bathroom or bedroom,putting up a new fence, putting in new plumbing orwiring, putting on a new roof, or paving your unpaveddriveway are improvements.

The chart below lists some other examples of im-provements.

AdditionsBedroomBathroomDeckGaragePorchPatio

Lawn & GroundsLandscapingDrivewayWalkwayFenceRetaining wallSprinkler systemSwimming pool

MiscellaneousStorm windows, doorsNew roofCentral vacuumWiring upgradesSatellite dishSecurity system

Heating & AirConditioningHeating systemCentral air conditioningFurnaceDuct workCentral humidifierFiltration system

PlumbingSeptic systemWater heaterSoft water systemFiltration system

InteriorImprovementsBuilt-in appliancesKitchen modernizationFlooringWall-to-wall carpeting

InsulationAtticWalls, floorPipes, duct work

Improvements no longer part of home. Yourhome's adjusted basis does not include the cost of anyimprovements that are no longer part of the home.


Table 1. How To Use Worksheet 1 in Special SituationsIf you use Worksheet 1, Adjusted Basis of Home Sold, and any of the situations described below apply to you,follow these instructions.

Situation InstructionsYou inherited yourhome.

Skip lines 1–4 of the worksheet.

You received yourhome as a gift.

Find your basis using the rules under Home received as gift in this publicationand enter it on lines 1 and 3 of the worksheet.

You received yourhome in a trade.

Find your basis using the rules under Home received in trade in this publication.Enter this amount on line 1 of the worksheet. (But if you received your home in atrade for your previous home before May 7, 1997,* and had a gain on the tradethat you postponed using a Form 2119, enter on line 1 of the worksheet theadjusted basis of the new home from that Form 2119.)

You built your home. Add the purchase price of the land and the cost of building the home (seeConstruction in this publication for details). Enter that total on line 1 of theworksheet. (However, if you filed a Form 2119 to postpone gain on the sale of aprevious home before May 7, 1997,* enter on line 1 of the worksheet theadjusted basis of the new home from that Form 2119.)

You received yourhome from yourspouse after July 18,1984.

Skip lines 1–4 of the worksheet.

You owned a homejointly with yourspouse, and yourspouse transferredhis or her interest inthe home to youafter July 18, 1984.

You received yourhome from yourspouse before July19, 1984.

Find your basis using the rules under Home received as inher itance in thispublication. Enter this amount on line 5 of the worksheet.Fill out the rest of the worksheet.

If you can add any federal gift tax to your basis, enter that amount on lines 4gand 5 of the worksheet.Fill out the rest of the worksheet.

Fill out the rest of the worksheet.

Fill out the rest of the worksheet.

Enter on line 5 of the worksheet your spouse’s adjusted basis in the home justbefore you received it.Fill out the rest of the worksheet, making adjustments to basis only for eventsafter the transfer.

Fill out one worksheet, including adjustments to basis for events both before andafter the transfer.

Skip lines 1–4 of the worksheet.Enter on line 5 of the worksheet the home’s fair market value at the time youreceived it.Fill out the rest of the worksheet, making adjustments to basis only for eventsafter the transfer.

You owned a homejointly with yourspouse, and yourspouse transferredhis or her interest inthe home to youbefore July 19, 1984.

Fill out a worksheet, lines 1–15, making adjustments to basis only for eventsbefore the transfer.Multiply the amount on line 15 of that worksheet by one-half (0.5) to get theadjusted basis of your half interest at the time of the transfer.Multiply the fair market value of the home at the time of the transfer by one-half(0.5). Generally, this is the basis of the half interest that was owned by yourspouse.Add the amounts from steps 2 and 3 and enter the total on line 5 of a secondworksheet.Complete the rest of the second worksheet, making adjustments to basis only forevents after the transfer.

12

31

2

31

21

212

3

12

3

1

2

3

4

5


You owned yourhome jointly withyour spouse whodied.

Fill out a worksheet, lines 1–15, making adjustments to basis only for eventsbefore your spouse’s death.

You owned yourhome jointly withyour spouse whodied, and yourpermanent home isin a communityproperty state.

Add the amounts from steps 2 and 3 and enter the total on line 5 of a secondworksheet.

Your home was everdamaged as a resultof a casualty.

On line 8 of the worksheet, enter any amounts you spent to restore the home toits condition before the casualty.

Multiply the amount on line 15 of the worksheet by one-half (0.5) to get theadjusted basis of your half interest on the date of death.

Use the rules under Surviving spouse in this publication to find the basis for thehalf interest that was owned by your spouse.

Enter the amount of your basis on line 5 of the worksheet. Generally, this is thefair market value of the home at the time of death. (But see Community propertyin this publication.)

Fill out the rest of the worksheet, making adjustments to basis only for eventsafter your spouse’s death.

On line 13 enter:

1

2

3

4

2

3

1

2

5 Complete the rest of the second worksheet, making adjustments to basis only forevents after your spouse’s death.

Skip lines 1–4 of the worksheet.1

Any insurance reimbursements you received (or expect to receive) for theloss, andAny deductible casualty losses not covered by insurance.

Table 1 ( Continued)

*Includes certain sales after May 6, 1997, for which you made the choice described in chapter 2.

Example. You put wall-to-wall carpeting in yourhome 15 years ago. Later, you replaced that carpetingwith new wall-to-wall carpeting. The cost of the oldcarpeting you replaced is no longer part of your home'sadjusted basis.

Repairs. These maintain your home in good conditionbut do not add to its value or prolong its life. You donot add their cost to the basis of your property.

Examples. Repainting your house inside or outside,fixing your gutters or floors, repairing leaks or plaster-ing, and replacing broken window panes are examplesof repairs.

Exception. The entire job is considered an im-provement, however, if items that would otherwise beconsidered repairs are done as part of an extensiveremodeling or restoration of your home.

RECORDS

Recordkeeping. You should keep records toprove 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 yousold your home. But if the basis of your old home affectsthe basis of your new one, such as when you sold yourold home before May 7, 1997, and postponed tax onany gain, you should keep those records as long asthey are needed for tax purposes.

The records you should keep include:

• Proof of the home's purchase price and purchaseexpenses,

• Receipts and other records for all improvements,additions, and other items that affect the home'sadjusted basis,

• Any worksheets you used to figure the adjustedbasis of the home you sold, the gain or loss on thesale, the exclusion, and the taxable gain,

• Any Form 2119 that you filed to postpone gain fromthe 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 Work-sheet or the Capital Improvements Worksheet fromthe Form 2119 instructions.

Excluding the GainYou may qualify to exclude from your income all or partof any gain from the sale of your main home. Thismeans that, if you qualify, you will not have to pay taxon the gain up to the limit described under Amount ofExclusion, next. To qualify, you must meet the owner-ship and use tests described later.

You can choose not to take the exclusion. In thatcase, you will have to pay tax on your entire gain, un-less you make the choice described on page 5.


Worksheet 1.

Caution: See if any of the situations listed in Table 1 apply to you before you use this worksheet.

Enter the purchase price of your old home. If you filed Form 2119 when you originally acquiredyour old home to postpone gain on the sale of a previous home, enter the adjusted basis of thenew home from that Form 2119Seller-paid points, for home bought after 1990. (See Seller-paid points in this chapter.) Do not includeany seller-paid points you previously subtracted to arrive at the amount entered on line 1, aboveSubtract line 2 from line 1Settlement fees or closing costs. Do not include amounts previously deducted as movingexpenses. If line 1 includes the adjusted basis of the new home from Form 2119, go to line 6.Abstract and recording fees

Surveys

Transfer or stamp taxesAmounts the seller owed that you agreed to pay (back taxes or interest, recordingor mortgage fees, and sales commissions)OtherAdd lines 4a through 4gCost of capital improvements. Do not include any capital improvements included on line 1 aboveSpecial tax assessments paid on your old home for local improvements, such as streets and sidewalksOther increases to basisAdd lines 3, 5, 6, 7, and 8Depreciation, related to the business use or rental of your old home, claimed(or allowable)Residential energy credit (generally allowed from 1977 through 1987) and adoption creditclaimed for any capital improvements included on line 6 and, if applicable, line 1 abovePayments received for any easement or right-of-way grantedOther decreases to basisAdd lines 10 through 13ADJUSTED BASIS OF HOME SOLD. Subtract line 14 from line 9. Enter here and onWorksheet 2, line 4

1.

2.

3.4.

5.6.7.8.9.

10.

13.14.15.

Title insurance

Legal fees (including title search and preparing document)

Adjusted Basis of Home Sold

11.

12.

Worksheet 2.

Part 1–Gain (or Loss) on SaleSelling price of homeSelling expensesSubtract line 2 from line 1Adjusted basis of home sold. (From Worksheet 1, line 15.)

1.2.3.4.

Gain (or Loss), Exclusion, and Taxable Gain

Part 2–Exclusion and Taxable GainEnter any depreciation claimed on the property for periods after May 6, 1997. If none, enter zeroSubtract line 6 from line 5. (If the result is less than zero, enter zero.)Maximum exclusion. (See Amount of Exclusion in this chapter.)

Subtract line 9 from line 5. This is your taxable gain. Report it on Schedule D (Form 1040) asdescribed under Reporting the Gain in this chapter. (If the amount on this line is zero, do notreport the sale or exclusion on your tax return)

6.7.8.9.

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

a.b.c.d.e.

g.

f.

Enter the smaller of line 7 or line 8. This is your exclusion. If you are reporting the sale on theinstallment method, enter this amount on line 15 of Form 6252

10.


Amount of ExclusionYou can exclude the entire gain on the sale of yourmain home up to:

1) $250,000, or

2) $500,000 if all of the following are true.

a) You are married and file a joint return for theyear.

b) Either you or your spouse meets the ownershiptest.

c) Both you and your spouse meet the use test.

d) Neither you nor your spouse excluded gain fromthe sale of another home after May 6, 1997.

Reduced ExclusionYou can claim an exclusion, but the maximum amountof gain you can exclude will be reduced, if:

1) You owned a home on August 5, 1997, sold it be-fore August 5, 1999, and did not meet the owner-ship and use tests, or

2) Due to a change in health or place of employment,you either:

a) Did not meet the ownership and use tests, or

b) Excluded gain on the sale of another home afterMay 6, 1997.

Use Worksheet 3 on page 13 to figure your re-duced exclusion.

More Than One Home Sold During2-Year PeriodYou cannot exclude gain on the sale of your home if,during the 2-year period ending on the date of the sale,you sold another home at a gain and excluded all orpart of that gain. If you cannot exclude the gain, youmust include it in your income.

However, you can claim a reduced exclusion if yousold the home due to a change in health or place ofemployment. See Reduced Exclusion, earlier.

Sales before May 7, 1997. When counting the numberof sales during a 2-year period, do not count sales be-fore May 7, 1997.

Ownership and Use TestsYou can claim the exclusion if, during the 5-year periodending on the date of the sale, you have:

1) Owned the home for at least 2 years (the owner-ship test), and

2) Lived in the home as your main home for at least2 years (the use test).

Exception. If you owned and lived in the property asyour main home for less than 2 years, you may be ableto claim a reduced exclusion. See Reduced Exclusion,earlier.

Period of ownership and use. The required 2 yearsof ownership and use (during the 5-year period endingon the date of the sale) do not have to be continuous.You meet the tests if you can show that you owned andlived in the property as your main home for either 24full months or 730 days (365 × 2) during the 5-yearperiod. Short temporary absences for vacations orother seasonal absences, even if you rent out theproperty during the absences, are counted as periodsof use. See Ownership and use tests met at differenttimes, later.

Example 1 – met use test but not ownership test.From 1990 through August 1997 Amanda lived with herparents in a house that her parents owned. On Sep-tember 2, 1997, she bought this house from her par-ents. She continued to live there until December 15,1998, when she sold it at a gain. Although Amandalived in the property as her main home for more than2 years, she did not own it for the required 2 years.She cannot exclude any part of her gain on the sale,unless she sold the property due to a change in healthor place of employment, as explained under ReducedExclusion, earlier.

Example 2 – period of absence. Professor PaulBeard bought and moved into a house on January 4,1996. He lived in it as his main home continuously untilOctober 1, 1997, when he went abroad for a 1-yearsabbatical leave. During part of the period of leave, thehouse was unoccupied, and during the rest of the pe-riod, he rented it out. On October 1, 1998, he sold thehouse. Because his leave was not a short temporaryabsence, he cannot include the period of leave to meetthe 2-year use test. However, even though he did notlive in the house for the required 2-year period, he doesqualify for a reduced exclusion because he owned thehome on August 5, 1997, and sold it before August 5,1999. See Reduced Exclusion, earlier.

Ownership and use tests met at different times. Youcan meet the ownership and use tests during different2-year periods. However, you must meet both testsduring the 5-year period ending on the date of the sale.

Example. In 1990, Helen Jones lived in a rentedapartment. The apartment building was later changedto a condominium, and she bought her apartment onDecember 1, 1995. In 1996, Helen became ill and onApril 14 of that year she moved to her daughter's home.On July 10, 1998, while still living in her daughter'shome, she sold her apartment.

Helen can exclude gain on the sale of her apartmentbecause she met the ownership and use tests. Her5-year period is from July 11, 1993, to July 10, 1998,the date she sold the apartment. She owned herapartment from December 1, 1995, to July 10, 1998(over 2 years). She lived in the apartment from July 11,1993 (the beginning of the 5-year period), to April 14,1996 (over 2 years).


Worksheet 3.

Caution: Complete column (B) only if you are marr ied filing a joint return.

Maximum amountEnter the number of days that you used the property as a main home during the5-year period ending on the date of sale. (If married filing jointly, fill in columns (A)and (B))Enter the number of days that you owned the property during the 5-year periodending on the date of sale. (If married filing jointly and one spouse owned theproperty longer than the other spouse, both spouses are treated as owning theproperty for the longer period)Enter the smaller of line 2a or 2bHave you (or your spouse if filing jointly) excluded gain from the sale of anotherhome after May 6, 1997?

Enter the smaller of line 2c or 3Divide the amount on line 4 by 730 days. Enter the result as a decimalMultiply the amount on line 1 by the decimal amount on line 5Add the amounts in column (A) and (B) of line 6. This is your reduced maximumexclusion. Enter it here and on Worksheet 2, line 8

1.2a.

3.

4.5.6.7.

Reduced Exclusion Worksheet

b.

c.

NO. Skip line 3 and enter the number of days from line 2c on line 4.YES. If the other home was sold before this home, enter the number of daysbetween the date of sale of the other home and the date of sale of this home.Otherwise, skip line 3 and enter the number of days from line 2c on line 4

(A) (B)

$250,000.00

You Your Spouse

$250,000.00

Cooperative apartment. If you sold stock in a coop-erative housing corporation, the ownership and usetests are that, during the 5-year period ending on thedate of sale, you must have:

1) Owned the stock for at least 2 years, and

2) Lived in the house or apartment that the stock en-titles you to occupy as your main home for at least2 years.

Exception for individuals with a disability. There isan exception to the use test if, during the 5-year periodbefore the sale of your home:

1) You become physically or mentally unable to carefor yourself, and

2) You owned and lived in your home as your mainhome for a total of at least 1 year.

Under this exception, you are considered to live in yourhome during any time that you own the home and livein a facility (including a nursing home) that is licensedby a state or political subdivision to care for persons inyour condition.

If you meet this exception to the use test, you stillhave to meet the 2-out-of-5-year ownership test to claimthe exclusion.

Gain postponed on sale of previous home. For theownership and use tests, you may be able to add thetime you owned and lived in a previous home to the

time you lived in the home on which you wish to excludegain. You can do this if you postponed all or part of thegain on the sale of the previous home (as describedunder Postponing Gain in chapter 3) because of buyingthe home on which you wish to exclude gain.

In addition, if buying the previous home enabled youto postpone all or part of the gain on the sale of a homeyou owned earlier, you can also include the time youowned and lived in that earlier home.

Previous home destroyed or condemned. For theownership and use tests, you add the time you ownedand lived in a previous home that was destroyed orcondemned to the time you owned and lived in thehome on which you wish to exclude gain. This rule ap-plies if any part of the basis of the home you sold de-pended on the basis of the destroyed or condemnedhome. Otherwise, you must have owned and lived in thesame home for 2 of the 5 years before the sale toqualify for the exclusion.

Married PersonsIf you and your spouse file a joint return for the yearof sale, you can exclude gain if either spouse meets theownership and use tests. (But see Amount of Exclusion,earlier.)

Example 1 – one spouse sells a home. Emily sellsher home in June 1998. She marries Jamie later in theyear. She meets the ownership and use tests, butJamie does not. Emily can exclude up to $250,000 ofgain on a separate or joint return for 1998.


Example 2 – each spouse sells a home. The factsare the same as in Example 1 except that Jamie alsosells a home. He meets the ownership and use testson his home. Emily and Jamie can each exclude up to$250,000 of gain.

Death of spouse before sale. If your spouse diedbefore the date of sale, you are considered to haveowned and lived in the property as your main homeduring any period of time when your spouse owned andlived in it as a main home.

Home transferred from spouse. If your home wastransferred to you by your spouse (or former spouse ifthe transfer was incident to divorce), you are consid-ered to have owned it during any period of time whenyour spouse owned it.

Use of home after divorce. You are considered tohave used property as your main home during any pe-riod when:

1) You owned it, and

2) Your spouse or former spouse is allowed to live init under a divorce or separation instrument.

Business Use or Rental of HomeYou may be able to exclude your gain from the sale ofa home that you have used for business or to producerental income. But you must meet the ownership anduse tests.

Example 1 - use test met. On May 30, 1992, Amybought a house. She moved in on that date and livedin it until May 31, 1994, when she moved out of thehouse and put it up for rent. The house was rented fromJuly 1, 1994, to March 31, 1996. Amy moved back intothe house on April 1, 1996, and lived there until she soldit on January 31, 1998. During the 5–year period endingon the date of the sale (February 1, 1993 – January 31,1998), Amy owned and lived in the house for more than2 years as shown in the table below.

Amy can exclude gain up to $250,000.

Example 2 – use test not met. Carol bought ahouse in 1989. She lived in it until January 31, 1996,when she moved out and put it up for rent. The housewas rented from March 1, 1996, until May 31, 1999.Carol moves back into the house on June 1, 1999, andlives there until she sells it on September 30, 1999.During the 5-year period ending on the date of the sale(October 1, 1994 – September 30, 1999), Carol lives inthe house for less than 2 years as shown in the fol-lowing table.

Carol cannot exclude any of the gain on the sale, unlessshe sold the house due to a change in health or placeof employment, as explained under ReducedExclusion, earlier.

Example 3 – partial business use before the yearof sale. In 1993 Harry bought a house. He used 3/4of the house as his main home and 1/4 for businesspurposes. On October 31, 1998, Harry retired andstarted using all of the house as his main home. OnNovember 1, 1999, he sold the house at a gain.

During the 5-year period ending on the date of sale,Harry met the 2-year use test only for 3/4 of the house.Only gain from that part of the house qualifies for theexclusion, unless he sold the house due to a changein health (or place of employment), as explained underReduced Exclusion, earlier.

Property used partly as your home and partly forbusiness or rental. You may have used part of yourproperty as your home and part of it for business or toproduce income. Examples are:

• A working farm on which your house was located,

• An apartment building in which you lived in one unitand rented out the others, or

• A store building with an upstairs apartment in whichyou lived.

If you sell the entire property, you should consider thetransaction as the sale of two properties. You excludegain only on the part used as your home. This includesthe land and outbuildings, such as a garage for thehome, but not those used for the business or the pro-duction of income.

Example 1. You owned a four-unit apartment housefor 10 years. During that entire period, you lived in oneunit and rented three units. You sold the apartmenthouse in July 1998. Your records show:

Because one-fourth of the apartment building wasyour home, you figure your excluded gain as follows:

Five Year PeriodUsed as

HomeUsed asRental

10/1/94 – 1/31/96 16 months2/1/96 – 5/31/99 40 months6/1/99 – 9/30/99 4 months

20 months 40 months

Apartment house:

Five Year PeriodUsed as

HomeUsed asRental Cost ..................................................................... $80,000

Capital improvements ......................................... 20,0002/1/93 – 5/31/94 16 months Depreciation (on 3 rented units only) ................. 40,0006/1/94 – 3/31/96 22 months Selling price ......................................................... 120,0004/1/96 – 1/31/98 22 months Selling expenses ................................................. 8,000

38 months 22 months

Personal Rental(1/4) (3/4)

1) Selling price ...................................... $30,000 $90,0002) Minus: Selling expenses .................. 2,000 6,0003) Amount realized ............................... $28,000 $84,0004) Basis (cost plus improvements) ....... $25,000 $75,0005) Minus: Depreciation ......................... –0– 40,0006) Adjusted basis .................................. $25,000 $35,0007) Gain [(3) minus (6)] .......................... $3,000 $49,000


The gain of $49,000 on the three-fourths of thebuilding that was rental property is reported on Form4797, Sales of Business Property. You exclude the gainon the one-fourth that was your home.

Depreciation for business use after May 6, 1997. Ifyou were entitled to take depreciation deductions be-cause you used your home for business purposes oras rental property, you cannot exclude the part of yourgain equal to any depreciation allowed or allowable asa deduction for periods after May 6, 1997. If you canshow by adequate records or other evidence that thedepreciation deduction allowed was less than theamount allowable, the amount you cannot exclude isthe smaller figure.

Example. Micah sold his main home in 1998 at a$30,000 gain. He meets the use and ownership teststo exclude the gain from his income. However, he usedpart of the home for business from July through De-cember 1997 and claimed $500 depreciation. He canexclude $29,500 ($30,000 – $500) of his gain. He hasa taxable gain of $500.

Special SituationsThe situations that follow may affect your exclusion.

Expatriates. You cannot claim the exclusion if section877(a)(1) of the Internal Revenue Code applies to you.That section applies to U.S. citizens who have re-nounced their citizenship (and long-term residents whohave ended their residency) if one of their principalpurposes was to avoid U.S. taxes.

In addition, you cannot make the choice describedon page 5 even if statements 1 or 2 in that discussionare true. (You could make that choice if you sold yourhome before August 6, 1997.)

Home destroyed or condemned. If your home wasdestroyed or condemned in 1998, any gain (for exam-ple, because of insurance proceeds you received)qualifies for the exclusion.

Any part of the gain that cannot be excluded (be-cause it is more than the limit) may be postponed underthe rules explained in:

• Publication 547, in the case of a home that wasdestroyed, or

• Chapter 1 of Publication 544, in the case of a homethat was condemned.

Sale of remainder interest. Subject to the other rulesin this chapter, you can choose to exclude gain from thesale of a remainder interest in your home. If you makethis choice, you cannot choose to exclude gain fromyour sale of any other interest in the home that you sellseparately.

Exception for sales to related persons. You can-not exclude gain from the sale of a remainder interestin your home to a related person. Related persons in-

8) Gain not excluded ............................ $49,000 clude your brothers and sisters, half-brothers and half-sisters, spouse, ancestors (parents, grandparents, etc.),and lineal descendants (children, grandchildren, etc.).Related persons also include certain corporations,partnerships, trusts, and exempt organizations.

Reporting the GainDo not report the 1998 sale of your main home on yourtax return unless:

• You have a gain and do not qualify to exclude allof it,

• You have a gain and choose not to exclude it, or

• You made the choice described on page 5 in thischapter and have a taxable gain.

If you have any taxable gain on the sale of your mainhome that cannot be excluded, report the entire gainrealized (line 5 of Worksheet 2) on Schedule D (Form1040), Capital Gains and Losses. Report it on line 1or line 8 of Schedule D, depending on how long youowned the home. If you qualify for an exclusion (line 9of Worksheet 2), show it on the line directly below theline on which you report the gain. Write “Section 121exclusion” in column (a) of that line and show theamount of the exclusion in column (f) as a loss (in pa-rentheses).

If you made the choice on page 5 and you sold yourhome in 1998, use Worksheet 4 on page 33 to figureyour gain, one-time exclusion, taxable gain, and post-poned gain. Report any taxable gain on Schedule D(Form 1040). You will not report an exclusion or apostponed gain on your return. You should keep thefilled-in worksheet with your copy of your 1998 tax re-turn.

Maximum tax rate on capital gains. Your netcapital gain is taxed at a maximum tax rate of 10%,20%, 25%, or 28%, depending on your situation. Tofigure your tax using the maximum capital gains taxrate, use Part IV of Schedule D.

Installment sale. Some sales are made under ar-rangements that provide for part or all of the sellingprice to be paid in a later year. These sales are called“installment sales.” If you finance the buyer's purchaseof your home yourself, instead of having the buyer geta loan or mortgage from a bank, you may have an in-stallment sale. If the sale qualifies, you can report thepart of the gain you cannot exclude on the installmentbasis.

Seller-financed mortgage. If you sell your homeand hold a note, mortgage, or other financial agree-ment, the payments you receive generally consist ofboth interest and principal. You must report the interestyou receive as part of each payment separately as in-terest income. If the buyer of your home uses theproperty as a main or second home, you must alsoreport the name, address, and social security number(SSN) of the buyer on line 1 of either Schedule B (Form1040) or Schedule 1 (Form 1040A). The buyer mustgive you his or her SSN and you must give the buyeryour SSN. Failure to meet these requirements may re-

9) Gain excluded .................................. $3,000


sult in a $50 penalty for each failure. If you or the buyerdoes not have and is not eligible to get an SSN, see thenext discussion.

Individual taxpayer identification number (ITIN).If either you or the buyer of your home is a nonresidentor resident alien who does not have and is not eligibleto get an SSN, the IRS will issue you (or the buyer) anITIN. To apply for an ITIN, file Form W–7, Applicationfor IRS Individual Taxpayer Identification Number, withthe IRS. It usually takes about 30 days to get an ITIN.

If you have to include the buyer's SSN on your returnand the buyer does not have and cannot get an SSN,enter the buyer's ITIN. If you have to give an SSN tothe buyer and you do not have and cannot get one, givethe buyer your ITIN.

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

More information. For more information on install-ment sales, see Publication 537, Installment Sales.

ExampleEmily White, a single person, sold her main home onSeptember 15, 1998. She had owned and lived in it asher main home for the past 10 years. She did not buya new home but moved into a rented apartment instead.

Emily's records show the following:

Emily uses Worksheet 1 to figure the adjusted basisof the home she sold ($54,250). She uses Worksheet2 to figure the gain on the sale ($125,750) and theamount of her exclusion ($125,750). The completedworksheets appear on page 17.

Emily can exclude her entire gain. Neither the salenor the exclusion are reported on her tax return. Shewill keep the worksheet and records of the sale with hercopy of her 1998 tax return.

Real Estate and TransferTaxesWhen you sell your main home, treat real estate andtransfer taxes on that home as discussed in this section.

Real estate taxes. You and the buyer must deduct thereal estate taxes on your home for the year of saleaccording to the number of days in the real property taxyear that each owned the home.

• You are treated as paying the taxes up to, but notincluding, the date of sale. You can deduct thesetaxes as an itemized deduction in the year of sale.It does not matter what part of the taxes you actuallypaid.

• The buyer is treated as paying the taxes beginningwith the date of sale.

If the buyer paid your share of the taxes (or any de-linquent taxes you owed), the payment increases theselling price of your home. The buyer adds the amountpaid to his or her basis in the property.

If the person responsible for closing the sale (gen-erally the settlement agent) must file Form 1099–S, theinformation reported on the form to you and the IRSmust include (in box 5) the part of any real estate taxthat the buyer can deduct. If you actually paid the taxesfor the year of sale, you must subtract the amountshown in box 5 of Form 1099–S from the amount youpaid. The result is the amount you can deduct.

For more information about real estate taxes, seePublication 530.

Transfer taxes. You cannot deduct transfer taxes,stamp taxes, and other incidental taxes and chargeson 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 amountyou realize on the sale. If you pay these amounts as thebuyer, include them in your cost basis of the property.

1) Original cost of old home ............................... $50,0002) Legal fees for title search on old home ......... 7503) Back taxes paid for prior owner of old home . 1,5004) Improvements to old home (deck) ................. 2,0005) Selling price of old home ................................ 195,0006) Commission and expenses of sale ................ 15,000


$50,000

50,000

750

1,500

2,2502,000

54,250

$54,250

$195,00015,000

180,00054,250125,750

Chapter 2—1998 Sale of Main Home—Emily White

Worksheet 1.

Caution: See if any of the situations listed in Table 1 apply to you before you use this worksheet.

Enter the purchase price of your old home. If you filed Form 2119 when you originally acquiredyour old home to postpone gain on the sale of a previous home, enter the adjusted basis of thenew home from that Form 2119Seller-paid points, for home bought after 1990. (See Seller-paid points in this chapter.) Do not includeany seller-paid points you previously subtracted to arrive at the amount entered on line 1, aboveSubtract line 2 from line 1Settlement fees or closing costs. Do not include amounts previously deducted as movingexpenses. If line 1 includes the adjusted basis of the new home from Form 2119, go to line 6.Abstract and recording fees

Surveys

Transfer or stamp taxesAmounts the seller owed that you agreed to pay (back taxes or interest, recordingor mortgage fees, and sales commissions)OtherAdd lines 4a through 4gCost of capital improvements. Do not include any capital improvements included on line 1 aboveSpecial tax assessments paid on your old home for local improvements, such as streets and sidewalksOther increases to basisAdd lines 3, 5, 6, 7, and 8Depreciation, related to the business use or rental of your old home, claimed(or allowable)Residential energy credit (generally allowed from 1977 through 1987) and adoption creditclaimed for any capital improvements included on line 6 and, if applicable, line 1 abovePayments recieved for any easement or right-of-way grantedOther decreases to basisAdd lines 10 through 13ADJUSTED BASIS OF HOME SOLD. Subtract line 14 from line 9. Enter here and onWorksheet 2, line 4

1.

2.

3.4.

5.6.7.8.9.

10.

13.14.15.

Title insurance

Legal fees (including title search and preparing document)

Adjusted Basis of Home Sold

11.

12.

a.b.c.d.e.

g.

f.

250,000125,750

-0-

Worksheet 2.

Part 1–Gain (or Loss) on SaleSelling price of homeSelling expensesSubtract line 2 from line 1Adjusted basis of home sold. (From Worksheet 1, line 15.)

1.2.3.4.

Gain (or Loss), Exclusion, and Taxable Gain

Part 2–Exclusion and Taxable Gain

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

Enter any depreciation claimed on the property for periods after May 6, 1997. If none, enter zeroSubtract line 6 from line 5. (If the result is less than zero, enter zero.)Maximum exclusion. (See Amount of Exclusion in this chapter.)

Subtract line 9 from line 5. This is your taxable gain. Report it on Schedule D (Form 1040) asdescribed under Reporting the Gain in this chapter. (If the amount on this line is zero, do notreport the sale or exclusion on your tax return)

6.7.8.9. Enter the smaller of line 7 or line 8. This is your exclusion. If you are reporting the sale on the

installment method, enter this amount on line 15 of Form 625210.

125,750

-0-


3.Rules UnderPrior Law

The rules in this chapter are the rules that applied tosales of a main home before May 7, 1997. They havebeen kept in the publication because they may applyto you if you are in either of the following situations.

1) You sold your main home at a gain before May 7,1997, and either:

a) Bought your new home in 1998 or later, or

b) Did not buy a new home within the replacementperiod.

2) You sold your main home at a gain after May 6,1997, made the choice described on page 5, andeither 1(a) or 1(b) is true.

The main topics in this chapter are:

• Postponing gain,

• How and when to report, and

• One-time exclusion of gain.

Gain. If you had a gain from the sale, you must includeit in your income for the year of sale, except for any partyou postpone or exclude. Table 2 on page 20 gives anoverview of postponing and excluding gain.

Loss. If you had a loss from the sale, you cannot de-duct it.

How to report the sale. Generally, sales covered bythis chapter were reported using Form 2119, Sale ofYour Home.

You will not use Form 2119 if you sold your homein 1998 and make the choice to use the rules describedin this chapter. (That choice is explained in chapter 2on page 5.) In that case, use Worksheet 4 on page 33to figure your gain, one-time exclusion, taxable gain,and postponed gain. If you have a taxable gain, reportit on Schedule D (Form 1040). You will not report anexclusion or a postponed gain on your return. Youshould keep the filled-in worksheet with your copy ofyour 1998 tax return.

Postponing GainUnder the rules of this chapter, you must postpone taxon the gain on the sale of your main home if both of thefollowing are true.

1) You buy and live in a new main home within thereplacement period.

2) The new main home costs at least as much as theadjusted sales price of the old home.

(Also, if you are age 55 or older and meet certainqualifications, no tax applies to any gain you choose toexclude. See One-Time Exclusion of Gain, later.)

This section of the publication explains the time al-lowed for replacing your main home (the replacementperiod) and how to determine the taxable gain, if any.The main topics in this section are:

• Replacement period,

• Old home,

• New home, and

• Certain sales by married persons.

Tax postponed, not forgiven. The tax on the gain ispostponed, not forgiven. You subtract any gain that isnot taxed in the year you sell your old home from thecost of your new home. This gives you a lower basis inthe new home.

Example. You sold your home in January 1997 for$90,000 and had a $5,000 gain. Within the time allowedfor replacement, you bought another home for $103,000and moved into it. The $5,000 gain will not be taxed in1997, but you must subtract it from the $103,000. Thismakes the basis of your new home $98,000. If you latersell the new home for $110,000, your gain will be$12,000 ($110,000 − $98,000).

Source of funds to buy home. You do not have touse the same funds received from the sale of your oldhome to buy or build your new home. For example, youcan use less cash than you received by increasing theamount of your mortgage loan and still postpone the taxon your gain.

Replacement PeriodYour replacement period is the time period during whichyou must replace your old home to postpone any of thegain from its sale. It starts 2 years before and ends 2years after the date of sale.

Example. You sold your old home on April 27, 1997.You have until April 27, 1999, to buy and move into anew home that you use as your main home.

Occupancy test. You must physically live in the newhome as your main home within the replacement pe-riod. If you move furniture or other personal belongingsinto the new home but do not actually live in it, you havenot met the occupancy test.

No added time is allowed. To postpone gain on thesale of your home, you must replace the old home andoccupy the new home within the specified period. Youare not allowed any additional time, even if conditionsbeyond your control keep you from doing it (unless youqualify for a suspension of the replacement period, asexplained later). For example, destruction of the newhome while it was being built would not extend the re-placement period. Also, if you bought or began buildingyour new home within the specified period but for anyreason were unable to live in it within 2 years, the re-placement period is not extended.

Page 18 Chapter 3 Rules Under Prior Law

If you do not replace the home in time and you hadpostponed gain in the year of sale, you must file anamended return for the year of sale. You must includein your income the entire gain on the sale of your oldhome. You will have to pay interest on any additionaltax due. The interest is generally figured from the duedate of the original return.

Suspension of replacement period. The replace-ment period may be suspended for:

• People living outside the United States, and

• Members of the Armed Forces.

The following chart illustrates the replacement periodfor most people and for those who qualify for the sus-pension. The chart uses the example of a home soldon April 30, 1997.

THEreplacementperiod begins ...

AND thereplacementperiod ends ...

Most people 2 years beforethe sale (April30, 1995)

2 years after thesale (April 30,1999)

Certain peopleliving andworkingoutside theUnited States

2 years beforethe sale (April30, 1995)

Members ofthe ArmedForces onextendedactive duty

FOR ...

Members ofthe ArmedForcesstationedoutside theUnited States






For details, including the special rules that apply tocombat zone service, see the following discussionsof People Outside the United States and Membersof the Armed Forces.

People Outside the United StatesThe replacement period after the sale of your old homeis suspended while you have your tax home (the placewhere you live and work) outside the United States.This suspension applies only if your stay abroad beginsbefore the end of the 2-year replacement period. Thereplacement period, plus the period of suspension, islimited to 4 years after the date of sale of your oldhome.

Example. You sold your home on May 11, 1996.This began your replacement period. On September11, 1996, you were transferred to a foreign country. Youhave used 4 months of your replacement period andhave 20 months left. From September 11, 1996, to June10, 1998, when you return to the United States, yourreplacement period is suspended. Your replacementperiod starts again on June 11, 1998, and ends 20months later on February 11, 2000.

Married persons. If you are married, the suspensionof the replacement period lasts while either you or yourspouse has a tax home outside the United States,provided both of you used the old and the new homesas your main home.

Tax home. Your tax home is the city or general areaof your main place of business, employment, station,or post of duty. For your tax home to be outside theUnited States, you must live and work there. It does notmatter where your family lives. More information on atax home outside the United States is in Publication 54,Tax Guide for U.S. Citizens and Resident AliensAbroad.

Combat zone service. The running of the replacementperiod (including the suspension if you live and workoutside the United States) is suspended for any periodyou served in a combat zone (defined later underMembers of the Armed Forces) in support of the ArmedForces, plus 180 days. This suspension applies eventhough you were not a member of the Armed Forces.It applies to Red Cross personnel, accredited corre-spondents, and civilians under the direction of theArmed Forces in support of those forces.

The rules for suspending the running of the replace-ment period and for applying that suspension to yourspouse are the same as the suspension rules explainedlater under Members of the Armed Forces and its dis-cussion Combat zone service.

Members of the Armed ForcesThe replacement period after the sale of your old homeis suspended while you serve on extended active dutyin the Armed Forces. You are on extended active dutyif you are serving under a call or order for more than90 days or for an indefinite period. The suspensionapplies only if your service begins before the end of the2-year replacement period. The replacement period,plus any period of suspension, is limited to 4 years afterthe date you sold your old home.

Example 1. You sold your home on May 1, 1995.This began your replacement period. You joined theArmed Forces on August 1, 1995. You have used 3months of your replacement period (May, June, andJuly). Your active duty ends July 31, 1997. From August1, 1995, to July 31, 1997, your replacement period issuspended. Your replacement period starts again onAugust 1, 1997, and you have until May 1, 1999 (21months) to buy or build and live in your new home.

Example 2. You are a regular member of the ArmedForces and sold your home on June 5, 1996. If youremain in the Armed Forces, you postpone your gain

Chapter 3 Rules Under Prior Law Page 19

from the sale of your old home only if you buy or buildand live in another home by June 5, 2000.

Overseas assignment. The suspension of the re-placement period after the sale of your old home isextended for up to an additional 4 years while you are:

• Stationed outside the United States, or

• Required to live in on-base quarters following yourreturn from a tour of duty outside the United States.In this case, you must be stationed at a remote sitewhere the Secretary of Defense has determined thatadequate off-base housing is not available.

The suspension can continue for up to 1 year afterthe last day you are stationed outside the United Statesor the last day you are required to live in governmentquarters on base. However, the replacement period,plus any period of suspension, is limited to 8 years afterthe date of sale of your old home.

If you qualify for the time suspension for membersof the Armed Forces and have already filed an incometax return reporting gain from the sale of a home thatcan be further postponed, you can file Form 1040X toclaim a refund. See Amended Return, later, for the timeallowed for filing an amended return.

Example 1. You are a regular member of the ArmedForces and sold your home on May 1, 1993. During the4 years from May 1, 1993, to May 1, 1997, you servedoutside the United States. When you return, you arestationed at a remote site and are required to live onbase because off-base housing is not available. Thetime to replace your home is suspended:

1) While you are serving outside the United States,plus

2) While you are required to live on base after yourreturn from the overseas assignment, plus

3) Up to 1 year.

If the requirement that you live on base ends on Octo-ber 31, 1997, the suspension period expires October31, 1998. You then have the full 2-year replacementperiod to buy or build and occupy a new home. This isbecause you did not use any of that time before youroverseas assignment began, and your replacementperiod plus your 51/2 year period of suspension is notmore than 8 years. Your replacement period ends onOctober 31, 2000.

Example 2. The facts are the same as in Example1 except the requirement that you live on base endson October 31, 1998. The suspension period expiresOctober 31, 1999. You then have less than the full2-year replacement period to buy or build and occupya new home. This is because your replacement periodplus your 61/2 year period of suspension is limited to 8years after the sale of your old home. Therefore, yourreplacement period ends on May 1, 2001.

Spouse in Armed Forces. If your spouse is in theArmed Forces and you are not, the suspension alsoapplies to you if you owned the old home. Both of youmust have used the old home and must use the newhome as your main home. However, if you are divorcedor separated while the replacement period is sus-pended, the suspension ends for you on the date of thedivorce or separation.

Combat zone service. The running of the replacementperiod (including any suspension) is suspended for anyperiod you served in a combat zone.

Combat zone. The term “combat zone” means:

1) The Persian Gulf Area combat zone (effective Au-gust 2, 1990), and

2) The qualified hazardous duty area of Bosnia andHerzegovina, Croatia, and Macedonia, which is

TO ... YOU must ... How You Benefit

Postponegain

Buy (or build)and live in anew homewithin thereplacementperiod.

You may not have to pay tax on all(or part) of your gain for the year ofsale. (But you have to reduce thebasis of your new home by theamount of the postponed gain. Thiswill increase any gain on the latersale of that new home.)

Excludegain

● Be age 55 orolder on thedate of the sale,

You exclude up to $125,000($62,500 if married filing separately)of your gain. (You can exclude gainunder the rules in this chapter onlyonce in your lifetime after July 26,1978. But you may be able toexclude gain on a sale after May 6,1997, under the rules in chapter 2.)

Any part of your gain that you do not postpone or exclude is taxable. You must include that part in yourincome.

● Meet ownershipand use tests,and

● Choose to takethe exclusion.

Table 2. Overview of Postponing and Excluding Gain From Sales Before May 7, 1997How To Find Out More

See Postponing Gain in this chapter.

See One-time Exclusion of Gain in thischapter.


treated as a combat zone effective November 21,1995.

Service outside combat zone. If you performedmilitary service in an area outside the combat zone thatwas in direct support of military operations in the com-bat zone and you received special pay for duty subjectto hostile fire or imminent danger, you are treated as ifyou served in the combat zone.

Also, you are treated as if you served in a combatzone if you performed services as part of OperationJoint Endeavor or Operation Joint Guard, were outsidethe United States, and were deployed away from yourpermanent duty station.

When suspension ends. This suspension ends180 days after the later of:

1) The last day you were in the combat zone (or, ifearlier, the last day the area qualified as a combatzone), or

2) The last day of any continuous hospitalization (lim-ited to 5 years if hospitalized in the United States)for an injury sustained while serving in the combatzone.

Example. Sergeant James Smith, on extended ac-tive duty in an Army unit stationed in Virginia, had a gainfrom the sale of his home on June 4, 1995. He had notyet purchased a new home when he entered a combatzone on January 4, 1996. He left the combat zone onJanuary 4, 1997, and returned with his unit to Virginia.He remains on active duty in Virginia.

Sergeant Smith's replacement period began on June4, 1995, the date he sold the home. If he had not beensent to a combat zone, his replacement period wouldend 4 years later, on June 4, 1999.

When he entered the combat zone on January 4,1996, Sergeant Smith had used 7 months of the re-placement period. The replacement period was thensuspended for the time he served in the combat zoneplus 180 days. The replacement period started againon July 4, 1997, after the end of the 180-day period(January 5, 1997, to July 3, 1997) following his last dayin the combat zone. Sergeant Smith then has 41months remaining in his replacement period (4 yearsminus the 7 months already used). His replacementperiod ends December 3, 2000 (41 months after July3, 1997).

Spouse. The suspension for service in a combatzone generally applies to your spouse (even if you fileseparate returns). However, any suspension becauseof your hospitalization within the United States does notapply to your spouse. Also, the suspension for yourspouse does not apply for any tax year beginning morethan 2 years after the last day the area qualified as acombat zone.

More information. For information on other taxbenefits available to those who served in a combatzone, get Publication 3, Armed Forces' Tax Guide.

Amended ReturnIf you sell your old home and do not plan to replace it,you must include the gain in income for the year of sale.If you later change your mind, buy or build and live inanother home within the replacement period, and meetthe requirements to postpone gain, you will have to filean amended return (Form 1040X) for the year of saleto claim a refund.

You can file an amended return by the later of:

1) 3 years from the date you filed the return for theyear of sale, or

2) 2 years from the date you paid the tax.

A return filed before the due date is treated as filedon the due date.

You may have longer to file the amended return ifyou could not manage your finances for a time due toa medically determinable physical or mental impairmentexpected to last for a continuous period of at least 12months. This does not apply if your spouse or someoneelse was authorized to act for you during that time. SeePublication 556, Examination of Returns, AppealRights, and Claims for Refund, for more information.

Extended replacement period. If you have an ex-tended replacement period because you have your taxhome outside the United States or are a member of theArmed Forces, the replacement period may go beyondthe last date you can file an amended return claiminga refund for the year of sale. If there is a possibility youmay change your mind and buy (or build) and live inanother home during the extended replacement period,you should file a “protective claim” for refund of the taxyou paid on the gain. File this claim on Form 1040Xanytime within the period allowed for filing an amendedreturn.

Protective claim. To file a protective claim for re-fund, use Form 1040X and its instructions. However,you may leave lines 1 through 23 blank on the front ofthe form if you do not know the amount of your post-poned gain. In Part II of the form:

1) Write “Protective Claim,”

2) Explain that you paid tax on the gain from the saleof your old home,

3) State the amount of the gain you reported on youroriginal return,

4) State that you have an extended replacement pe-riod and why this extended period applies to yourparticular situation, and

5) State that you are filing this protective claim be-cause during your extended replacement periodyou may buy (or build) a new main home.

Old HomeTo figure the taxable gain and postponed gain from thesale of your old home, compare the adjusted salesprice of your old home with the cost of your new home,as shown in the following chart.


How to figure taxable and postponed gain.

IF the cost ofyour newhome is ...

Equal to ormore than theadjusted salesprice of yourold home

Less than theadjusted salesprice of yourold home

THEN you ...

Must postpone your entiregain. None of it is taxed in theyear of sale.

Are taxed on the smaller of:● The entire gain (minus any

exclusion), or● The difference between the

adjusted sales price of theold home and the cost ofthe new home.

You must postpone any gainthat is not taxed.

Adjusted sales price. This is the amount realized fromthe sale of your old home minus:

• Any exclusion you claim (line 14 of Form 2119), and

• Any fixing-up expenses you had (line 16 of Form2119).

If the amount realized (minus any exclusion) is not morethan the cost of your new home, you postpone yourentire gain. You do not need to figure your fixing-upexpenses.

Fixing-up expenses. Fixing-up expenses are dec-orating and repair costs that you paid to sell your oldhome. For example, the costs of painting the home,planting flowers, and replacing broken windows arefixing-up expenses. Fixing-up expenses must meet allthe following conditions. The expenses:

1) Must be for work done during the 90-day periodending on the day you sign the contract of sale withthe buyer,

2) Must be paid no later than 30 days after the dateof sale,

3) Cannot be deductible in arriving at your taxable in-come,

4) Must not be used in figuring the amount realized,and

5) Must not be capital expenditures or improvements.

Note. You subtract fixing-up expenses from theamount realized only in figuring the part of the gain thatyou postpone. You cannot use them in figuring theactual gain on the sale.

Example. Your old home had a basis of $55,000.You signed a contract to sell it on December 17, 1996.On January 7, 1997, you sold it for $71,400. Sellingexpenses were $5,000. During the 90-day period end-

ing December 17, the date you signed the sales con-tract, you had the following work done. You paid for thework within 30 days after the date of sale.

Within the replacement period, you bought and livedin a new home that cost $64,600. You figure the gainpostponed and not postponed, and the basis of yournew home, as follows:

Property used partly as your home and partly forbusiness or rental. You may use part of your propertyas your home and part of it for business or to produceincome. If you sell the entire property, you should con-sider the transaction as the sale of two properties. Youpostpone the gain only on the part used as your home.This includes the land and outbuildings, such as a ga-rage for the home, but not those used for the businessor the production of income.

To postpone the gain on the part of the property thatis your home (one property), you must reinvest anamount equal to that part's adjusted sales price in yournew home. The same rule applies if you buy propertyfor use as your home and for your business. Only thepurchase price for the part used as your home can becounted as the cost of a new home. See New homeused partly for business or rental, later.

For an example of how to divide the gain betweenthe part of the property used as your home and the partused for business or other purposes, see Business Useor Rental of Home in chapter 2.

Home changed to rental property. You cannot post-pone tax on the gain on rental property, even if youonce used it as your home. The rules explained in this

Fixing-up expenses:Inside and outside painting ........................................ $800

Improvements:New venetian blinds and new water heater .............. $900

Gain On Salea) Selling price of old home ............... $71,400b) Minus: Selling expenses ................ 5,000c) Amount realized on sale ................ $66,400d) Basis of old home .......................... $55,000e) Plus: Improvements (blinds and

heater) ............................................ 900f) Adjusted basis of old home ............ 55,900g) Gain on sale [(c) minus (f)] ............ $10,500

Gain Taxed in Year of Saleh) Amount realized on sale ................ $66,400i) Minus: Fixing-up expenses (paint-

ing) .................................................. 800j) Adjusted sales price ....................... $65,600k) Minus: Cost of new home .............. 64,600l) Excess of adjusted sales price over

cost of new home ........................... $1,000m) Gain taxed in year of sale [lesser

of (g) or (l)] ..................................... $1,000

Gain Postponedn) Gain on sale [line (g)] ..................... $10,500o) Minus: Gain taxed [line (m)] ........... 1,000p) Gain postponed .............................. $9,500

Adjusted Basis of New Homeq) Cost of new home [line (k)] ............ $64,600r) Minus: Gain postponed [line (p)] .... 9,500s) Adjusted basis of new home .......... $55,100


chapter generally will not apply to its sale. Gains aretaxable and losses are deductible as explained inPublication 544.

Temporary rental of home before sale. You havenot changed your home to rental property if you tem-porarily rented out your old home before selling it, oryour new home before living in it, as a matter of con-venience or for another nonbusiness purpose. Youpostpone the tax on the gain from the sale if you meetthe requirements explained earlier.

For information on how to treat the rental income youreceive, see Publication 527.

Failed attempt to rent home. If you placed yourhome with a real estate agent for rent or sale and it wasnot rented, it is not considered business property orproperty held for the production of income. Thepostponement of gain rules explained in this chapterwill apply to the sale.

Rental property last used as main home. Specialrules apply to a gain from the sale of certain rentalproperty. Under these rules, part or all of the gain istreated as ordinary income, up to the amount of “addi-tional depreciation.” This is called “depreciation recap-ture.” The part of the gain that is ordinary income can-not qualify for capital gain treatment.

The depreciation recapture rules do not apply toproperty that you changed from rental property to yourmain home before selling it. Instead, you have one oftwo options.

1) If you postpone gain under the rules described inthis chapter, you carry over the depreciation ad-justments and the additional depreciation to thenew home. If you later change your new home torental property and then dispose of it, you may haveto recapture depreciation on the old home as ordi-nary income.

2) If you do not postpone gain under the rules in thischapter, you treat all of the gain as capital gain.

For more information about depreciation recapture,see chapter 3 of Publication 544.

Rental property sold by persons age 55 or older.The depreciation recapture rules just described underRental property last used as main home do not applyif:

• You were age 55 or older when you sold or other-wise disposed of rental property, and

• You owned and used that property as your mainhome at least 3 years out of the last 5 years. It doesnot matter whether, during your use of the propertyas your main home, you used all or part of it forrental purposes during vacations or seasonal ab-sences.

This exception to the depreciation recapture rulesapplies even if you do not choose to exclude the gainfrom your gross income under the rules explained laterunder One-Time Exclusion of Gain. Instead, if youqualify, all the gain will be treated as capital gain, notordinary income.

Condemned property. If your home was condemnedfor public use and you had a gain, you can postponethe tax on the gain in one of two ways. You can post-pone the tax under:

• The rules explained earlier in this discussion ofPostponing Gain, or

• The rules for a forced sale by condemnation ex-plained next.

TIPThe replacement periods may differ for eachtreatment. You should compare them beforedeciding which rules to follow.

Rules for forced sale by condemnation. If youtreat the transaction as a forced sale, you must buyreplacement property that costs at least as much as theamount realized from the forced sale. The replacementperiod begins on the earlier of:

1) The date the condemned property was disposedof, or

2) The date condemnation was threatened.

The replacement period generally ends 2 years afterthe close of the first tax year in which you realize anypart of the gain on the condemnation.

Example. You are a calendar year taxpayer. Youwere notified by the city council on March 6, 1995, ofits plan to acquire your property, by condemnation ifnecessary. On May 3, 1997, when your property hadan adjusted basis of $40,000, the city condemned theproperty and paid you $50,000. Your replacement pe-riod started on March 6, 1995, the date you were noti-fied of the plan to condemn the property. Because youdid not dispose of the property until 1997, your re-placement period ends on December 31, 1999. This is2 years after the last day of the year in which you re-alized the gain.

More information. Condemnations are discussedin detail in chapter 1 of Publication 544 under Involun-tary Conversions.

Gain on casualty. The tax on a gain from a fire, storm,or other casualty cannot be postponed under the rulesexplained in this chapter, but may be postponed underrules similar to those discussed earlier in Rules forforced sale by condemnation. You can get additionalinformation in Publication 547.

New HomeYour new home must be your main home. See the ex-planation of “main home” in chapter 1.

You must include in income any gain from the saleof your old home if you replace it with property that isnot your main home.

New home outside the United States. A new homeoutside the United States qualifies as a new home forpurposes of postponing gain. You must buy or build andlive in the new home as your main home within the timeallowed for replacement.


Retirement home. You have not purchased a newhome if you invest in a retirement home project thatgives you living quarters and personal care but doesnot give you any legal interest in the property. There-fore, you must include in income any gain on the saleof your old home. However, if you were age 55 or olderon the date of the sale, see One-Time Exclusion ofGain, later.

Title to new home not held by you or spouse. Youhave not purchased a new home if you invest in a homein which neither you nor your spouse holds any legalinterest (for example, a house to which someone else,such as your child, holds the title).

More than one new home bought in 2-year period.If you buy (or build) and live in more than one mainhome during the 2-year replacement period, only thelast one can be treated as your new main home to de-termine whether you must postpone the gain from thesale of the old home.

Work-related move. The rule just described doesnot apply if you had to sell one new home and buyanother one because of a work-related move. A work-related move is one for which you are allowed a de-duction for moving expenses. To qualify for the de-duction, the move must be closely related to the startof work, and you must meet the time and distance re-quirements explained in Publication 521.

Example. You buy two new homes and sell one ofthem as shown below:

When you completed the Form 2119 for the sale ofyour house in Chicago, you compared its adjusted salesprice with the cost of the home bought in Memphis. Thisdetermined the gain you postponed. You do not needto refigure your postponed gain when you buy the homein New York City because your move to New York waswork related.

For the tax treatment of the 1998 sale of theMemphis house, see chapter 2.

Holding period. If you postponed tax on any part ofthe gain from the sale of your old home, you will beconsidered to have owned your new home for thecombined period you owned both the old and the newhomes. This may affect how any taxable gain when yousell the new home is reported on Schedule D (Form1040).

How To Figure Cost of New HomeYou need to know the cost of your new home to figurethe gain taxed and the gain on which tax is postponedon the sale of your old home. The cost of your new

home includes costs incurred within the replacementperiod (beginning 2 years before and ending 2 yearsafter the date of sale) for the following items:

1) Buying or building the home,

2) Rebuilding the home, and

3) Capital improvements or additions.

You cannot consider any costs incurred before or afterthe replacement period. However, if you live outside theUnited States or you are a member of the ArmedForces, you can include any costs incurred during thesuspension period (discussed under Replacement Pe-riod, earlier).

Debts on new home. The cost of a new home includesthe debts it is subject to when you buy it (purchase-money mortgage or deed of trust) and the face amountof notes or other liabilities you give for it.

Temporary housing. If a builder gives you temporaryhousing while your new home is being finished, youmust reduce the contract price to arrive at the cost ofthe new home. To figure the amount of the reduction,multiply the contract price by a fraction. The numeratoris the value of the temporary housing, and the denom-inator is the sum of the value of the temporary housingplus the value of the new home.

Seller-paid points. In figuring the cost of your newhome, you must subtract any points paid by the sellerfrom its purchase price.

Settlement fees or closing costs. The cost of yournew home includes the settlement fees and closingcosts that you can include in your basis. See Settlementfees or closing costs under Basis, in chapter 2.

Settlement fees do not include amounts placed inescrow for the future payment of items such as taxesand insurance.

Deductible costs. If you itemize your deductions inthe year you buy the house, you can deduct some ofthe costs you paid at closing, such as real estate taxes,mortgage interest, and “points” that are deductible asinterest. You may also be able to deduct points paidby the seller at closing. For more information, seePublication 936 and Publication 530.

Real estate taxes. If you agree to pay taxes theseller owed on your new home (that is, taxes up to thedate of sale), the taxes you pay are treated as part ofthe cost. You cannot deduct them as taxes paid. If theseller paid taxes for you (that is, taxes beginning withthe date of sale), you can still deduct the taxes. If youdo not reimburse the seller for your part of the taxes,you must reduce the purchase price of your new homeby the amount of those taxes. For more information, seeSettlement or closing costs under Basis in Publication530.

New home used partly for business or rental. If youreplace your old home with property used partly as yourhome and partly for business or rental, you consideronly the cost of the part used as your home. You mustcompare the cost of this part to the adjusted sales price

January 1997 You sell your house in Chicago at a gain.

February 1997 You buy and move into a more expensivehouse in Memphis.

April 1998 You sell your house in Memphis due toa transfer required by your employer.

November 1998 You buy and move into a more expensivehouse in New York City. The move meetsthe requirements for a moving expensededuction.


of the old home to determine the amount of gain taxedin the year of sale and the amount of gain on which taxis postponed.

Example. Your old home had a basis of $50,000.You sold it in February 1997 for a gain of $25,000. Youradjusted sales price is $75,000. In March 1998, youbought a duplex house for $120,000. You live in halfand rent the other half. Because only half of the costof the duplex ($60,000) is considered an investment ina new main home, you are taxed on $15,000 ($75,000adjusted sales price − $60,000 cost) of the $25,000 gainon the sale. You must postpone tax on $10,000 of thegain reinvested in your new home. The basis of yournew home is $50,000 ($60,000 cost − $10,000 post-poned gain). The basis of the rented part of the duplexis $60,000.

Inheritance or gift. If you receive any part of your newhome as a gift or an inheritance, you cannot include thevalue of that part in the cost of the new home whenfiguring the gain taxed in the year of sale and the gainon which tax is postponed. However, you include thebasis of that part in your adjusted basis to determineany gain when you sell the new home.

Example. You bought a home in 1992 for $60,000.You sold that home in March 1997 for $65,000, at again of $5,000. You had fixing-up expenses of $200.

Your father died in March 1998 and you inherited hishome. Its basis to you is $62,000. You spent $14,000to modernize the home, resulting in an adjusted basisto you of $76,000. You moved into the home in July1998.

To find the gain taxed in the year of the sale, youcompare the adjusted sales price of the old home,$64,800 ($65,000 − $200), with the $14,000 you in-vested in your new home. (For this purpose, you do notinclude the value of the inherited part of your property,$62,000, in the cost of your new home.) The $5,000gain is fully taxed because the adjusted sales price ofthe old home is more than the amount you paid to re-model your new home, and the difference between thetwo amounts is more than $5,000.

Certain Sales by Married PersonsThis section explains how married persons figure theirpostponed gain in certain situations.

Home owned separately by one spouse. You maybe able to postpone gain from the sale of your old homeeven if:

• You or your spouse owned the old home separately,but title to the new one is in both your names as jointtenants, or

• You and your spouse owned the old home as jointtenants, and either you or your spouse owns thenew home separately.

You and your spouse can figure the postponed gain,which reduces the basis of the new home, as if the twoof you owned both homes jointly. To do this, both of youmust meet both of the following requirements.

• You used the old home as your main home and youuse the new home as your main home.

• You sign a statement that says: “We agree to re-duce the basis of the new home by the gain fromselling the old home.”

Both of you must sign the statement. You can make thestatement in the bottom margin on page 1 of Form 2119or on an attached sheet. If either of you does not signthe statement, you must report the gain in the regularway, as explained in the following examples.

Example 1. In April 1997 you sell a home that youowned separately but that both you and your spouseused as your main home. The adjusted sales price is$98,000, the adjusted basis is $86,000, and the gainon the sale is $12,000. In 1998 you and your spousebuy a new home for $100,000. You move in imme-diately. The title is held jointly, and under state law, youeach have a one-half interest. If you both sign thestatement to reduce the basis of the new home, youpostpone the gain on the sale as if you had owned boththe old and new homes jointly. You and your spousewill each have an adjusted basis of $44,000 ($50,000cost minus $6,000 postponed gain) in the new home.

If either of you does not sign the statement, yourentire gain of $12,000 will be currently taxed, not post-poned. This is because the adjusted sales price of theold home ($98,000) is greater than your part of the costof the new home ($50,000). You and your spouse willeach have a basis of $50,000 in the new home.

Example 2. The facts are the same as in Example1 except that you and your spouse owned the old homejointly and each had a one-half interest under state law.Your spouse buys the new home with separate fundsand takes title individually. If you both sign the state-ment, you and your spouse postpone the $12,000 gainfrom the sale of the old home. Your spouse will havean adjusted basis of $88,000 ($100,000 cost − $12,000postponed gain) in the new home.

If either of you does not sign the statement, you willbe taxed on your share of the gain on the old home,but your spouse will postpone tax on his or her shareof the gain. This is because the cost of the new homewas more than your spouse's share of the adjustedsales price of the old home. Your spouse's basis in thenew home will be $94,000 ($100,000 cost − $6,000postponed gain).

Example 3. The facts are the same as in Example1 except that you own the old home individually andyour spouse owns the new home individually. If youboth sign the statement, you postpone the $12,000 gainfrom the sale of the old home. Your spouse will havean adjusted basis in the new home of $88,000.

If either of you does not sign the statement, yourentire gain will be taxed, and your spouse's basis in thenew home will be $100,000.

Deceased spouse. If your spouse dies after you sellyour old home and before you buy and occupy a newhome, you can postpone the gain from the sale of theold home if the basic requirements are met, and:


1) You were married on the date your spouse died,and

2) You use the new home as your main home.

This applies whether title to the old home is in onespouse's name or held jointly.

If you sold your home and did not postpone the entiregain on the sale because of the death of your spouse(but otherwise qualified to do so under the rules ex-plained in this chapter), you can file an amended return(Form 1040X) to postpone the entire gain. See Time toexclude gain, later, under One-Time Exclusion of Gainand its discussion How To Make and Revoke a ChoiceTo Exclude Gain for information about the time allowedto file an amended return.

Separate homes replaced by single home. If youand your spouse both had gains from the sales ofhomes that had been your separate main homes beforeyour marriage, you may have to postpone the tax onboth gains. This can happen if all of the following aretrue.

• You jointly purchase a new home.

• Each spouse's share of the cost of the new homeis at least as much as the adjusted selling price ofthat spouse's old home. (Each spouse's share of thecost of the new home is the part equal to his or herinterest in the home under state law, generallyone-half.)

• Each spouse occupies the new home within thereplacement period.

Example. Before your marriage in February 1997,you sold your old home for an adjusted sales price of$90,000, and your spouse sold her old home for anadjusted sales price of $110,000. You each realized again of $15,000 from your sale. After your marriage, youjointly purchased a new home at a cost of $200,000 andmoved into it within the replacement period. Understate law, you each have a one-half interest in the newhome.

You must postpone your gain since you are treatedas purchasing a new home for $100,000 (1/2 of$200,000).

For the year of sale, there is tax on $10,000 of yourspouse's gain. This is the amount by which the adjustedsales price of her old home is more than her $100,000share of the cost of the new home.

Report the sales of the old homes on separate Forms2119.

Home replaced by two homes of spouses livingapart. If you and your spouse each buy and live inseparate new homes, the postponement provisionsapply separately to your gain and to your spouse's gain.

Example. You and your spouse owned your homejointly and used it as your main home. In April 1997,you sold the home for $98,000. The gain on the salewas $20,000. Under state law, each of you is entitledto one-half of the proceeds of the sale. Therefore, eachof you had a $10,000 gain from the sale of your home.

In January 1998, you and your spouse also individ-ually bought and lived in separate homes. The cost ofeach new home, $71,000 and $75,000 respectively,was more than your respective shares of the adjustedsales price of the old home. You and your spouse mustpostpone the tax on the $20,000 gain on the old home.

Your new home has an adjusted basis of $61,000($71,000 − 1/2 of $20,000 gain postponed). Yourspouse's new home has an adjusted basis of $65,000($75,000 − 1/2 of $20,000 gain postponed).

You report the sale of your home on two Forms 2119as if two separate properties were sold. You each reporthalf of the sales price.

Only one spouse buys a new home. Even if yourspouse does not buy a new home within the replace-ment period, you still should report on your Form 2119only your share of any gain from the sale of the oldhome. You postpone your share of the gain if you meetall the requirements to do so, even though your spousecannot postpone his or her share.

If you and your spouse originally filed a joint returnfor the year of sale, you and your spouse must file anamended joint return to report your spouse's share ofthe gain, which cannot be postponed. See Divorce aftersale under How and When To Report, later.

How and When To ReportIf you sold your main home in 1998 and the rules in thischapter apply to you because you made the choicedescribed on page 5, report the sale as explained underReporting the Gain on page 15.

If you sold your main home before 1998 and the rulesin this chapter apply to you (either because you sold thehome before May 7, 1997, or because you made thechoice described on page 5), the reporting require-ments you may have are explained in this section.

Form 2119. For sales before 1998, Form 2119 wasused to report the sale of an old home and any pur-chase of a new one within the replacement period. Youshould have filed Form 2119 with your tax return for theyear you sold your old home. If you filed your returnfor that year before buying a new home, you may alsohave to file a second Form 2119 when you do buy yournew home. If you need Form 2119 for that purpose, youcan still order it from the IRS. See chapter 5. A filledin Form 2119 is shown at the end of this chapter.

RECORDS

Keep a copy of Form 2119 with your tax recordsfor the year of the sale. Form 2119 is also asupporting document that shows how your new

home's basis is decreased by the amount of any post-poned gain on the sale of your old home. Therefore,you should also keep a copy of Form 2119 with yourrecords for the basis of your new home.

Loss reported on sale. If you reported a loss onthe sale of your home, you do not have to file a secondForm 2119 if you later buy a new home. The loss onthe sale was not deductible and has no effect on thebasis of your new home.


Reporting exclusion of gain. If you qualify for theone-time exclusion of gain from selling your home, useForm 2119 to claim the exclusion. See One-Time Ex-clusion of Gain, later, for details.

Reporting a taxable gain. Any taxable gain on thesale of your main home is reported on Schedule D(Form 1040).

Maximum tax rate on capital gains. Your netcapital gain from sales before May 7, 1997, is taxed ata maximum tax rate of 28%. To figure your tax usingthe maximum capital gains tax rate, use Part IV ofSchedule D (Form 1040).

New home purchased after return filed. If you post-poned gain from the sale of your old home and you buyand live in a new home after you file your return for theyear of the sale but within the replacement period, youshould notify the IRS as shown in the following chart.

Missing NSTABLE: 15044W16(1cols x 4.50inches)

Send the form (or forms) to the Internal RevenueService Center where you will file your next tax return.

New home purchased after tax paid on gain. If youpaid tax on the gain from the sale of your old home,and you buy and live in a new home within the re-placement period, you must file an amended return(Form 1040X) for the year of sale of your old home.Complete a new Form 2119 and include it with youramended return. Report on Schedule D (Form 1040)any gain on which you cannot postpone the tax, andclaim a refund of the rest of the tax.

Improvements made after tax paid on gain. If youreplaced your old home but still had to pay tax on atleast part of the gain from its sale, and you make im-provements to your new home within the replacement

period, fill out a new Form 2119 to refigure your taxablegain. If your refigured taxable gain is less than the gainyou originally reported, file an amended return and in-clude the new Form 2119.

No new home within replacement period. If youpostponed gain on the sale of your old home becauseyou planned to replace it but you do not replace it withinthe replacement period, you will have to file a secondForm 2119. Attach it to an amended return (Form1040X) for the year of the sale. Include a Schedule D(Form 1040) to report your gain.

You will have to pay interest on the additional taxdue. Interest is generally figured from the due date ofthe original return.

Divorce after sale. If you are divorced after filing a jointreturn on which you postponed the gain on the sale ofyour home, but you do not buy or build a new home(and your former spouse does), you must file anamended joint return to report the tax on your share ofthe gain. If your former spouse refuses to sign theamended joint return, attach a letter explaining whyyour former spouse's signature is missing.

Installment sale. If you finance the buyer's purchaseof your home yourself, instead of having the buyer geta loan or mortgage from a bank, you may have an in-stallment sale. If the sale qualifies, you can report anypart of the gain you cannot postpone or exclude on theinstallment basis. For information on reporting incomefrom this type of sale, see Installment Sale under Re-porting the Gain in chapter 2.

Statute of limitations. The 3-year limit for assessingtax on the gain from the sale of your home begins whenyou give the IRS information that shows that:

1) You replaced your old home, and how much thenew home cost,

2) You do not plan to buy and occupy a new homewithin the replacement period, or

3) You did not buy and occupy a new home within thereplacement period.

This information may be on the Form 2119 attached toyour tax return for the year of the sale, or on a secondForm 2119 filed later. File the second Form 2119 withthe Service Center where you will file your next tax re-turn. If needed, send an amended return for the yearof the sale to include in income the gain that you cannotpostpone.

ExampleFrank and Evelyn Smith sold their home on May 1,1997, for $87,000. They spent $500 on fixing-up ex-penses and paid a commission on the sale of $5,200.Neither Frank nor Evelyn was 55 or older on the dateof the sale. They planned to buy a replacement home,but had not bought one before they filed their 1997 taxreturn.

Frank and Evelyn completed Part 1 of Form 2119and attached it to their 1997 return. Because they


planned to buy a replacement home, they did not in-clude the gain on the sale in the income reported ontheir return.

On April 20, 1998, within the replacement period,Frank and Evelyn bought a new home for $77,200. Theprice of the new home was less than the adjusted salesprice of the old home. They figure the gain, the part ofthe gain on which tax is postponed and the part onwhich it is not, and the adjusted basis of their new homein the following way:

The Smiths file Form 1040X to amend their 1997return to include in income the part of their gain onwhich tax is not postponed. They attach a second Form2119 and a Schedule D (Form 1040) that includes thetaxable part of the gain. The filled-in Form 2119 theyfiled with their amended return appears at the end ofthis chapter.

One-Time Exclusion of GainThis section discusses how to exclude from gross in-come all or part of your gain from the sale of your mainhome if you meet certain age, ownership, and use testsat the time of the sale. This is a one-time exclusion ofgain for sales after July 26, 1978, and before May 7,1997. However, for sales after May 6, 1997, you mayqualify for the exclusion described in chapter 2.

(For certain sales after May 6, 1997, you may chooseinstead to claim the one-time exclusion and use theother rules described in this chapter. See page 5 fordetails on this choice.)

If you meet the requirements discussed in this sec-tion and you make the choice to exclude gain on thesale of your main home, the excluded gain is not taxed.

If you change your mind after you file the return forthe year of sale, you may be able to make or revoke thechoice later. You would have to file an amended returnfor the year of sale within certain time limits. See HowTo Make and Revoke a Choice To Exclude Gain, later.

Exclusion AmountIf you meet the age, ownership, and use tests, you canchoose to exclude $125,000 of your gain on the saleof your home. If you were married on the date of thesale and file a separate return, you can only choose toexclude $62,500. Your gain is the amount realized onthe sale minus the adjusted basis of the home. If thereis gain remaining after the exclusion, you may have topostpone tax on the rest of the gain if, as explainedearlier, you buy and live in another home.

Age, Ownership, and Use Testsfor Sales Before May 7, 1997You can claim the exclusion if you meet all the followingtests.

1) You were age 55 or older on the date of the sale.

2) During the 5-year period ending on the date of thesale, you:

a) Owned your main home for at least 3 years,and

b) Lived in your main home for at least 3 years .

3) Neither you nor your spouse have ever excludedgain on the sale of a home after July 26, 1978.However, see Effect of Marital Status, later, formore details.

Age 55 at time of sale. You must be 55 by the dateyou sell the home to qualify for the exclusion. You donot meet the age 55 test if you sell the property duringthe year in which you will be 55 but before you actuallybecome 55. The earliest date on which you can sellyour home and still qualify for the exclusion is your 55thbirthday.

Ownership and use tests. The required 3 years ofownership and use (during the 5-year period ending onthe date of the sale) do not have to be continuous. Youmeet the tests if you can show that you owned and livedin the property as your main home for either 36 fullmonths or 1,095 days (365 × 3) during the 5-year pe-riod. Short temporary absences for vacations or otherseasonal absences, even if you rent out the propertyduring the absences, are counted as periods of use.See Ownership and use tests met at different times,later.

Example 1. From 1990 through 1994 JosephMooney lived with his son and daughter-in-law in ahouse owned by his son. On January 5, 1995, hebought this house from his son. He continued to livethere until January 29, 1997, when he sold it. AlthoughJoseph lived in the property as his main home for morethan 3 years, he cannot exclude his gain on the sale.This is because he did not own the property for therequired 3 years.

Example 2. Professor John Thomas bought andmoved into a house on January 4, 1994. He lived in itas his main home continuously until February 1, 1996,when he went abroad for a 1-year sabbatical leave.During part of the period of leave, the property was

Gain On Salea) Selling price of old home ........................ $87,000b) Minus: Selling expenses ......................... 5,200c) Amount realized on sale ......................... $81,800d) Minus: Adjusted basis of old home ........ $63,000e) Gain on sale ........................................... $18,800

Gain Taxed in 1997f) Amount realized on sale ......................... $81,800g) Minus: Fixing-up expenses ..................... 500h) Adjusted sales price ............................... $81,300i) Minus: Cost of new home ...................... 77,200j) Excess of adjusted sales price over cost

of new home ........................................... $4,100k) Gain taxed in 1997 [lesser of (e) or (j)] .. $4,100

Gain Not Taxed in 1997l) Gain on sale [line (e)] ............................. $18,800m)Minus: Gain taxed in 1997

[line (k)] ................................................... 4,100n) Gain not taxed in 1997 ........................... $14,700

Adjusted Basis of New Homeo) Cost of new home [line (i)] ..................... $77,200p) Minus: Gain not taxed in 1997 [line (n)] . 14,700q) Adjusted basis of new home .................. $62,500


unoccupied, and during the rest of the period, he rentedit out. On March 4, 1997, he sold the house. Becausehis leave was not a short temporary absence, he cannotinclude the period of leave to meet the test of living inthe house as his main home for 3 years or more. Hecannot exclude his gain from income because he didnot live in the house for the required period.

Ownership and use tests met at different times. Youcan meet the ownership and use tests during different3-year periods. However, you must meet both testsduring the 5-year period ending on the date of the sale.

Example. In 1990, Grace Jones was 50 years oldand lived in a rented apartment. The apartment buildingwas later changed to a condominium and she boughther apartment on December 1, 1993. In 1995, Gracebecame ill and on April 14 of that year she moved toher daughter's home. On February 14, 1997, while stillliving in her daughter's home, she sold her apartment.

Grace can exclude gain on the sale of her apartmentbecause she met the age, ownership, and use tests.Grace was over 55 at the time of the sale. Her 5-yearperiod is from February 15, 1992, to February 14, 1997,the date she sold the apartment. She owned herapartment from December 1, 1993, to February 14,1997 (over 3 years). Grace lived in the apartment fromFebruary 15, 1992, to April 14, 1995 (over 3 years).

Joint owners who are married. Both you and yourspouse will meet the age, ownership, and use tests ifyou meet all of the following requirements.

1) You hold the home either as joint tenants, tenantsby the entirety, or community property on the dateof the sale.

2) You file a joint return for the tax year in which yousell the home.

3) Either you or your spouse has met the age, own-ership, and use tests.

Joint owners who are not married. If the joint ownersof a home were not husband and wife, each owner whochooses to exclude gain from income must meet theage, ownership, and use tests. If one owner meets thetests, that does not automatically qualify the otherowners to exclude their gain from income.

Each owner excludes gain on an individual basis. Ifone owner chooses to exclude gain, the other ownersdo not have to exclude their gain. They can choose toexclude gain when they sell a different home in thefuture.

Example. Frank Smith and his sister, Mary, eachown a one-half interest in their jointly owned home.Frank meets the age, ownership, and use tests, butMary does not. The adjusted basis of the home is$28,000, or $14,000 each. They sell the home in Feb-ruary 1997 for $180,000. Frank's interest in the amountrealized is $90,000 (1/2 × $180,000). He can choose toexclude from gross income his entire gain of $76,000($90,000 − $14,000). Mary's gain is also $76,000, butshe cannot exclude it. Mary must postpone tax on hergain if she meets the requirements explained earlier

under Postponing Gain. If not, she must include hergain in income for the year of sale.

Previous home destroyed or condemned. For theownership and use tests, you add the time you ownedand lived in a previous home that was destroyed orcondemned to the time you owned and lived in thehome on which you wish to exclude gain. This rule ap-plies if any part of the basis of the home you sold de-pended on the basis of the destroyed or condemnedhome. Otherwise, you must have owned and lived in thesame home for 3 of the 5 years before the sale toqualify for the exclusion.

Exception for individuals with a disability. There isan exception to the 3-out-of-5-year use test if you be-come physically or mentally unable to care for yourselfat any time during the 5-year period.

You qualify for this exception to the use test if, duringthe 5-year period before the sale of your home:

1) You became physically or mentally unable to carefor yourself, and

2) You owned and lived in your home as your mainhome for a total of at least 1 year.

Under this exception, you are considered to live in yourhome during any time that you own the home and re-side in a facility (including a nursing home) that is li-censed by a state or political subdivision to care forpersons in your condition.

If you meet this exception to the use test, you stillhave to meet the 3-out-of-5-year ownership test to claimthe exclusion.

Home of spouse who died. You will meet the own-ership and use tests if your spouse is deceased on thedate you sell your main home, and:

1) You have not remarried,

2) Your deceased spouse had met the ownership anduse tests for that main home, and

3) Your deceased spouse had not previously chosenor joined in choosing to exclude gain on the saleof another main home after July 26, 1978.

You must still meet the age test (be at least age 55 onthe date of sale) to qualify for the exclusion.

Example. Ellen and Doug Smith were married Jan-uary 6, 1995. After their marriage, their main home wasproperty Doug had owned and lived in as his mainhome since January 2, 1985. Doug died on January 2,1997. He had never chosen or joined in choosing toexclude gain on the sale of any home.

Ellen inherited the property and continued to live init as her main home until April 10, 1997, when she soldit. At the date of sale she was 56 years old, had notremarried, and had never chosen or joined in choosingto exclude gain on the sale of any home. Ellen canchoose to exclude up to $125,000 of the gain from thesale of her home. This is because she meets the agetest and Doug met the 3-out-of-5-year ownership anduse tests for the property.


Sale by executor. Gain from the sale of a home by theexecutor of an estate may qualify for this exclusion. Toqualify, the sale must be made under a contract enteredinto before death by a taxpayer who met the age,ownership, and use tests.

Rent-controlled apartment. If you receive a paymentto give up your rights in a rent-controlled apartment, thisgain does not qualify for the exclusion. You do not meetthe ownership test when you rent an apartment.

Part of property used as main home. You may useonly part of the property as your main home, as ex-plained in chapter 2 under Property used partly as yourhome and partly for business or rental. In this case, youcan claim an exclusion only for the gain on the part ofthe property used as your main home.

Example. Dr. Martin Russell met the age, owner-ship, and use tests when he sold his main home.However, for the whole time he owned the home, heused half of it exclusively as an office for treating hispatients. Only the half of the property used as his homequalifies for the exclusion.

For an example of how to divide the gain betweenthe part of the property used as your home and the partused for business or other purposes, see Property usedpartly as your home and partly for business or rental in chapter 2.

Note: If the business use of your old home was notmore than 2 years of the 5-year period ending on thedate of the sale, you do not have to divide the gain.However, you must decrease your basis in the oldhome by the depreciation allowed or allowable for thebusiness use of it.

Gain From Casualtyor CondemnationYou can exclude gain if your home was destroyed bya casualty or condemned.

Home destroyed. If your home was destroyed by fire,storm, or other casualty, you can choose to excludegain from insurance proceeds or other compensation.You must follow the rules explained earlier in this sec-tion. However, if you have any gain remaining after theexclusion, you cannot postpone the tax on the rest ofthe gain by using the rules explained earlier underPostponing Gain. The rest may qualify, however, underthe postponement-of-gain rules explained in Publication547.

Home condemned. If your home was condemned forpublic use, you can treat the transaction as a sale of thehome. If you choose to exclude gain from the con-demnation, you must follow the rules explained earlierin this section. If you have any gain remaining after theexclusion, you may have to postpone the tax on the restof the gain as explained earlier under Postponing Gain.

Or, you can postpone it under the rules for a condem-nation, as explained under Involuntary Conversions inchapter 1 of Publication 544.

Effect of Marital StatusFor purposes of the exclusion, your marital status isdetermined as of the date of sale of your home. If youare legally separated under a decree of divorce or ofseparate maintenance, you are not considered married.

Your marital status on the date of the sale deter-mines:

• The amount you can exclude,

• Whether your spouse must join you in the choice toexclude gain, and

• Whether each spouse can choose to exclude gainlater.

Married persons must choose exclusion jointly. Ifyou are married when you sell your main home, youcannot choose to exclude the gain unless your spousejoins you in making the choice. Your spouse must joinyou in the choice even if:

1) You or your spouse owned the home separately,

2) You and your spouse file separate returns, or

3) The spouse not owning an interest in the home hadnot lived in it for the required period before the sale.

Death of spouse after sale. If your spouse diedafter the sale, but before making the choice to excludethe gain, his or her personal representative (adminis-trator or executor, for example) must join with you inmaking the choice. You, as the surviving spouse, areconsidered the personal representative of your de-ceased spouse if no one else has been appointed.

Home not jointly owned. If the home was not jointlyowned, the spouse who owns it must meet the age,ownership, and use tests. The other spouse must joinin making the choice.

Separate return. If you are married on the date of sale,file a separate return, and meet the age, ownership, anduse tests, you can exclude no more than $62,500 ofgain on the sale of your main home. Your spouse mustshow agreement to your choice by writing in the bottommargin on page 1 of Form 2119, or on an attachedstatement, “I agree to the Part II election.” Your spousemust also sign his or her name.

You or your spouse can exclude gain only once.If you or your spouse chooses to exclude gain from asale after July 26, 1978, neither of you can choose toexclude gain again under the rules described in thischapter. (You may be able to exclude gain on a saleafter May 6, 1997, under the rules in chapter 2.) Thechart below shows how this rule applies in certainspecific situations.


IF ...

You and your spouseowned separatehomes before yourmarriage and soldboth homes after yourmarriage

You or your spouseexcluded gain from ahome sold before themarriage (and afterJuly 26, 1978)

THEN ...

You can exclude thegain on one of them,but not on both.

The spouse whoexcluded gain cannotjoin in another choiceto exclude gain. If thecouple sells a homeduring their marriage,neither can excludeany gain.

You or your spousechooses to excludegain from a sale madeafter July 26, 1978,and you later divorce

Neither of you canchoose to excludegain again.

If you remarry, you andyour new spousecannot exclude gainon sales after yourmarriage. (But youmay be able to revokethe earlier choice, asexplained later.)

Sale before marriage. If you meet the age, ownership,and use tests when you sell your separately ownedhome during the year, you can exclude gain up to$125,000. If you marry before the end of the year, youcan take the exclusion whether you file a joint returnor a separate return. This is because you were singleon the date of the sale.

Joint exclusion not required. If one spouse sellsa home before the marriage, the other spouse does nothave to join in the choice to exclude gain. The spousewho did not join in that choice is eligible to exclude gainif he or she later sells a house, meets the age, owner-ship, and use tests, and at the time of sale is single ormarried to a different spouse who has never excludedgain or joined in a choice to do so.

You can exclude gain only once. If one spouseexcludes gain from a house sold before marriage, thatspouse cannot join in another choice to exclude gain.If this couple then sells a home during their marriage,neither can exclude any gain under the rules in thischapter. This is because both spouses have to join inthe choice, and one spouse has already excluded gain.However, see chapter 2 for sales after May 6, 1997.

Example 1 – sale before marriage. Joe Johnsonand Betty Smith were single and each owned a home.In January 1997, they sold their homes and each hada gain of $125,000, for a total gain of $250,000. Eachmet the age, ownership, and use tests at the time ofsale.

Later that year, Joe and Betty married. Because Joeand Betty were single when they sold their homes, theyeach can choose to exclude $125,000 of gain($250,000 total). This is true whether they file a jointreturn or separate returns.

Example 2 – sales before marriage and aftermarriage ends. Tom Oak sold his main home in 1996.He met the age, ownership, and use tests to excludegain on the sale. Later in the year of sale, he marriedSusan Green. They filed a joint return for that year andTom chose to exclude the gain on the sale of his house.Susan did not have to join in Tom's choice since theywere not married on the date of the sale.

While married, Tom and Susan lived in Susan'sseparately owned house. Tom died in January 1997,and Susan sold her house in February 1997. She metthe age, ownership, and use tests to exclude gain onthe sale. She can exclude up to $125,000 of the gain.This is because she was single on the date of sale andshe has never made a choice to exclude gain before.She did not have to join in Tom's choice.

Example 3 – separate returns. David and BethPine sold their jointly owned home in March 1997. Theyboth met the ownership and use tests at the time ofsale, but David was 62 and Beth was 50. They decideto file separate returns for 1997. Because Beth did notmeet the age test, she cannot choose to exclude gainon her separate return. David can choose to excludeup to $62,500 of the gain on his separate return only ifBeth joins him in making his choice.

Example 4 – sale after divorce and remarriage.In 1996, Bill and Sally White were divorced. At that timethey had their jointly owned home up for sale. Sallymarried Ken Brown in January 1997. In April 1997, Billand Sally sold their home at a gain. Because Bill andSally were not married to each other at the time theysold their home and they each met the tests to excludegain, each can choose to exclude up to $125,000 gainbased on the part of the home each owned. (See theExample under Joint owners who are not married, onpage 29.)

Sally files a joint return with Ken and chooses toexclude up to $125,000 of her part of the gain. Kenmust join Sally in her choice because he was herspouse at the time of sale. Bill files a single return andchooses to exclude up to $125,000 of his gain.

Example 5 – divorce after sale. Frank and SheilaBrown were married in 1990. In 1995, they sold theirjointly owned home. Frank and Sheila met the age,ownership, and use tests, so they chose to exclude theirgain of $70,000 on their joint return for that year. TheBrowns divorced in 1996.

In July 1997, Sheila married Mike Jones. Mike hadsold his home in January 1997 when he was single.He met the age, ownership, and use tests at the timeof sale. Mike can choose to exclude up to $125,000gain on a separate or joint return. He can do this be-cause Sheila (who already excluded gain) does nothave to join in Mike's choice since he was single at thetime he sold his home. In contrast, Sheila had to joinFrank in choosing to exclude gain because they weremarried when they sold their home.


How To Make and Revoke aChoice To Exclude GainUnder the rules explained in this chapter, you can ex-clude gain on the sale of your main home only oncefor sales after July 26, 1978.

For sales after May 6, 1997, you may be able toexclude gain under the rules explained in chapter 2.

Time to exclude gain. You can make or revoke achoice to exclude gain from a particular sale at any timebefore the latest of the following dates.

1) Three years from the due date of the return for theyear of the sale.

2) Three years from the date you filed the return.

3) Two years from the date you paid the tax.

Period of disability. You may have longer to makeor revoke your choice in some cases. This is becausethe 3–year and 2–year periods just described aresuspended during any period when you cannot manageyour finances due to a medically determinable physicalor mental impairment expected to last for a continuousperiod of at least 12 months or to result in death. Butthere is no suspension for any period when your spouseor someone else was authorized to act for you.

How to make the choice. You can choose to excludethe gain even if you originally included it on your taxreturn for the year of the sale. You do so by filing anamended return (Form 1040X) for that year. You mustsend a filled-in Form 2119 or a statement with youramended return. The statement must say you chooseto exclude from income the gain on the sale. It mustalso include the following information.

1) Your name, age, social security number, and mari-tal status on the date of the sale. If the home wasjointly owned, give this information for each owner.

2) The dates you bought and sold the home.

3) The amount realized and the adjusted basis of theproperty on the date of sale.

4) How long you were away from the home during the5 years before the sale. Do not include vacation andother seasonal absences, even if you rented out thehome during those absences.

5) Whether you or a joint owner ever chose to excludegain on the sale of a home, and if you did, whenand where you did so. If you revoked the choice,give the date you revoked it.

How to revoke the choice. You can revoke yourchoice to exclude gain by filing an amended return forthe year of sale using Form 1040X. Attach a newcompleted Form 2119 and, if needed, a Schedule D(Form 1040). Send the forms to the Internal RevenueService Center for the place where you live.

If you were married when you sold your home, yourspouse who joined you in making the choice must joinyou in revoking it. If your spouse is deceased, his orher personal representative must join you in revokingthe choice.

Example. On April 2, 1997, Joe Brown sold hisseparately owned home. Two months later his wifeJoyce died, leaving a will that appointed the First Na-tional Bank of Hometown as her executor. When pre-paring his 1997 tax return, Joe had the bank join himin making the choice. If later he wants to revoke thechoice, the bank must join him in revoking it.

Extension of assessment period. If you revokeyour choice to exclude gain when less than a year is leftin the assessment period (time for determining yourcorrect tax) for the return on which the choice wasmade, you must agree to extend the assessment pe-riod. Before the end of the period, you must file astatement that the assessment period will not end until1 year after the date the statement is filed. The as-sessment period normally ends on the latest of thedates shown earlier under Time to exclude gain.


Worksheet 4.

Part 1–Gain on Sale

Selling price of home

Selling expenses

Subtract line 2 from line 1

Adjusted basis of home sold (from Worksheet 1, line 15)

1.

2.

3.

4.

1998 Sales for Which You Choose To Use the Rules in Chapter 3

Part 2–One-Time Exclusion of Gain for People Age 55 or Older

If you choose to exclude gain, and you meet the age, ownership and use tests (see page 28),enter smaller of line 5 or $125,000 ($62,500 if married filing separate return). This is your exclusion

If line 6 is blank, enter amount from line 5. Otherwise, subtract line 6 from line 5

Fixing-up expenses

If line 6 is blank, enter amount from line 8. Otherwise, add lines 6 and 8

6.

7.

8.

9.

● If line 7 is zero, stop. You do not have a taxable gain and will not report the sale on your return.

● If line 7 is more than zero and you have bought or built a new home, go to line 8.

● All others stop here and enter amount from line 7 on Schedule D (Form 1040).

5. Subtract line 4 from line 3. If zero or less, enter -0-. This is the gain on the sale

(See Choosing To Use Rules in Chapter 3 on page 5.)

Part 3–Taxable Gain and Adjusted Basis of New Home

Subtract line 9 from line 3. This is your adjusted sales price

Enter the cost of your new home

10.

11.

Subtract line 11 from line 10. If zero or less, enter -0-

Enter the smaller of line 7 or line 12. This is your taxable gain

12.

13.

● If line 13 is zero, go to line 14.

● If reporting on the installment method, see below, then go to line 14.

● All others report the amount from line 13 on Schedule D (Form 1040) and go to line 14.

Subtract line 13 from line 7. This is your postponed gain

Subtract line 14 from line 11. This is the adjusted basis of your new home

14.

15.

Installment Method—If you report the gain on Form 6252 using the installment method:

● If you completed line 6 or line 14 of this worksheet, enter the total of those lines on line 15 ofForm 6252.

● Do not enter the gain from this worksheet on Schedule D. Your gain is reported on Form 6252.

● If neither of the above situations apply and you are reporting this sale on the installment method,stop here. The amount on line 7 is your taxable gain. See the instructions below.


Frank G. and Evelyn M. Smith 222 00 2222

444 00 4444

5 1 97

87,0005,200

81,80063,00018,800

18,800

500500

81,30077,200

4,1004,100

14,70062,500

4 20 98

OMB No. 1545-0072Sale of Your Home2119Form© Attach to Form 1040 for year of sale.

Department of the TreasuryInternal Revenue Service

AttachmentSequence No. 20© See separate instructions. © Please print or type.

Last nameYour first name and initial. If a joint return, also give spouse’s name and initial. Your social security number

Present address (no., street, and apt. no., rural route, or P.O. box no. if mail is not delivered to street address) Spouse’s social security numberIf you are filing thisform by itself and notwith your tax return,see instructions on

page 3.

City, town or post office, state, and ZIP code

Gain on SaleDate your former main home was sold. If sold after May 6, 1997, see page 3 ©1 / /

2 Have you bought or built a new main home? NoYesIf any part of either main home was ever rented out or used for business, check here © and see page 3.3

4Selling price of home. Do not include personal property items you sold with your home45Expense of sale (see page 4)56Subtract line 5 from line 467Adjusted basis of home sold (see page 4)78Gain on sale. Subtract line 7 from line 6. If zero or less, stop and attach this form to your return8

If you haven’t replaced your home, do you plan to do so within the replacement period (see page 1)? NoYes

● If line 9 is “No,” you must go to Part II or Part III, whichever applies.

One-Time Exclusion of Gain for People Age 55 or Older—By completing this part, you are electing to takethe one-time exclusion (see page 2). If you are not electing to take the exclusion, go to Part III now.

Who was age 55 or older on the date of sale?

9

Did the person who was 55 or older own and use the property as his or her main home for a total of at least 3years of the 5-year period before the sale? See page 2 for exceptions. If “No,” go to Part III now NoYes

YouAt the time of sale, who owned the home? Your spouse Both of youSocial security number of spouse at the time of sale if you had a different spouse from theone above. If you were not married at the time of sale, enter “None” ©

Exclusion. Enter the smaller of line 8 or $125,000 ($62,500 if married filing separate return).Then, go to line 15

Adjusted Sales Price, Taxable Gain, and Adjusted Basis of New Home

10

If line 14 is blank, enter the amount from line 8. Otherwise, subtract line 14 from line 8● If line 15 is zero, stop and attach this form to your return.● If line 15 is more than zero and line 2 is “Yes,” go to line 16 now.● If you are reporting this sale on the installment method, stop and see page 4.● All others, stop and enter the amount from line 15 on Schedule D, line 4 or line 11.Fixing-up expenses (see page 4 for time limits)

11

12

Adjusted sales price. Subtract line 17 from line 6/ / 19bb Cost of new home (see page 5)Date you moved into new home ©

13

If line 14 is blank, enter amount from line 16. Otherwise, add lines 14 and 16

14

Subtract line 19b from line 18. If zero or less, enter -0-Taxable gain. Enter the smaller of line 15 or line 20● If line 21 is zero, go to line 22 and attach this form to your return.● If you are reporting this sale on the installment method, see the line 15 instructions and go to line 22.● All others, enter the amount from line 21 on Schedule D, line 4 or line 11, and go to line 22.Postponed gain. Subtract line 21 from line 15

15

13

Adjusted basis of new home. Subtract line 22 from line 19b

16

14

Form 2119 (1997)For Paperwork Reduction Act Notice, see page 6 of instructions.

● If line 9 is “Yes,” stop here, attach this form to your return, and see Additional filing requirements on page 1.

You Your spouse Both of you

Part I1

Cat. No. 11710J

171819a

21

2223

15

161718

2120

2223

20

Part III

Part II

1997

mo. day yr.

● For sales before May 7, 1997, you must go to Part II or Part III, whichever applies. But if line 2 is “No,” go to line 9.● For sales after May 6, 1997, you must go to Part IV on the back to figure any exclusion. But if you qualify and elect touse the rules for sales before May 7, 1997, go to Part II or Part III, whichever applies.

u

Chapter 3—1997 Sale of Main Home—Frank G. and Evelyn M. Smith Amended Form 2119


4.Recapture ofFederal Subsidy

If you financed your home under a federally subsi-dized program (loans from tax-exempt qualified mort-gage bonds or loans with mortgage credit certificates),you may have to recapture all or part of the benefit youreceived from that program when you sell or otherwisedispose of your home. You recapture the benefit byincreasing your federal income tax for the year of thesale. The postponement and exclusion of gain pro-visions discussed earlier in this publication do not applyto this recapture tax.

The recapture tax is figured on Form 8828. If yousell your home and your mortgage loan is subject to therecapture rules, you must file Form 8828 even if youdo not owe a recapture tax.

Loans subject to recapture rules. The recapture ofthe subsidy applies to loans provided after 1990 that:

1) Came from the proceeds of qualified mortgagebonds issued after August 15, 1986, or

2) Were based on mortgage credit certificates issuedafter 1990.

The recapture also applies to assumptions of theseloans.

Federal subsidy benefit. If you received a mortgageloan from the proceeds of a tax-exempt bond, you re-ceived the benefit of a lower interest rate than wascustomarily charged on other mortgage loans. If youreceived a mortgage credit certificate with your mort-gage loan, you were able to reduce your federal incometaxes by a mortgage interest tax credit. Both of thesebenefits are federal mortgage subsidies.

Sale or other disposition. The sale or other disposi-tion of your home includes an exchange, involuntaryconversion, or any other disposition.

For example, if you give away your home (other thanto your spouse or ex-spouse incident to divorce), youare considered to have “sold” it. You figure your re-capture tax as if you had sold your home for its fairmarket value on the date you gave it away.

When the recapture applies. The recapture of thefederal mortgage subsidy applies only if you meet bothof the following conditions.

1) You sell or otherwise dispose of your home:

a) At a gain, and

b) During the first 9 years after the date you closedyour mortgage loan.

2) Your income for the year of disposition is more thanthat year's adjusted qualifying income for your

family size for that year (related to the income re-quirements a person must meet to qualify for thefederally subsidized program).

When recapture does not apply. The recapture doesnot apply if any of the following situations apply to you:

• Your mortgage loan was a qualified home im-provement loan of not more than $15,000,

• The home is disposed of as a result of your death,

• You dispose of the home more than 9 years afterthe date you closed your mortgage loan,

• You transfer the home to your spouse, or to yourformer spouse incident to a divorce, where no gainis included in your income,

• You dispose of the home at a loss,

• Your home is destroyed by a casualty, and you re-pair it or replace it on its original site within 2 yearsafter the end of the tax year when the destructionhappened, or

• You refinance your mortgage loan (unless you latermeet the conditions listed previously under Whenthe recapture applies).

Notice of amounts. At or near the time of settlementof your mortgage loan, you should receive a notice thatprovides the federally subsidized amount and other in-formation you will need to figure your recapture tax.

How to figure and report the recapture. See Form8828 and its instructions for information on how to figurethe recapture. Attach Form 8828 to your Form 1040.

5.How To GetMore Information

You can order free publications and forms, ask taxquestions, and get more information from the IRS inseveral ways. By selecting the method that is best foryou, you will have quick and easy access to tax help.

Free tax services. To find out what services areavailable, get Publication 910, Guide to Free Tax Ser-vices. It contains a list of free tax publications and anindex of tax topics. It also describes other free tax in-formation services, including tax education and assist-ance programs and a list of TeleTax topics.

Personal computer. With your personal com-puter and modem, you can access the IRS onthe Internet at www.irs.ustreas.gov . While

visiting our Web Site, you can select:

• Frequently Asked Tax Questions to find answers toquestions you may have.

Chapter 5 How To Get More Information Page 35

• Fill-in Forms to complete tax forms on-line.

• Forms and Publications to download forms andpublications or search publications by topic orkeyword.

• Comments & Help to E-mail us with commentsabout the site or with tax questions.

• Digital Dispatch and IRS Local News Net to receiveour electronic newsletters on hot tax issues andnews.

You can also reach us with your computer using anyof the following.

• Telnet at iris.irs.ustreas.gov

• File Transfer Protocol at ftp.irs.ustreas.gov

• Direct dial (by modem) 703–321–8020

TaxFax Service. Using the phone attached toyour fax machine, you can receive forms, in-structions, and tax information by calling

703–368–9694. Follow the directions from the prompts.When you order forms, enter the catalog number for theform you need. The items you request will be faxed toyou.

Phone. Many services are available by phone.

• Ordering forms, instructions, and publications. Call1–800–829–3676 to order current and prior yearforms, instructions, and publications.

• Asking tax questions. Call the IRS with your taxquestions at 1–800–829–1040.

• TTY/TDD equipment. If you have access toTTY/TDD equipment, call 1–800– 829–4059 to asktax questions or to order forms and publications.

• TeleTax topics. Call 1–800–829–4477 to listen topre-recorded messages covering various tax topics.

Evaluating the quality of our telephone services.To ensure that IRS representatives give accurate,courteous, and professional answers, we evaluate thequality of our telephone services in several ways.

• A second IRS representative sometimes monitorslive telephone calls. That person only evaluates theIRS assistor and does not keep a record of anytaxpayer's name or tax identification number.

• We sometimes record telephone calls to evaluateIRS assistors objectively. We hold these recordings

no longer than one week and use them only tomeasure the quality of assistance.

• We value our customers' opinions. Throughout thisyear, we will be surveying our customers for theiropinions on our service.

Walk-in. You can pick up certain forms, in-structions, and publications at many post of-fices, libraries, and IRS offices. Some libraries

and IRS offices have an extensive collection of productsavailable to print from a CD-ROM or photocopy fromreproducible proofs.

Mail. You can send your order for forms, in-structions, and publications to the DistributionCenter nearest to you and receive a response

7 to 15 workdays after your request is received. Findthe address that applies to your part of the country.

• Western part of U.S.: Western Area Distribution CenterRancho Cordova, CA 95743–0001

• Central part of U.S.: Central Area Distribution CenterP.O. Box 8903Bloomington, IL 61702–8903

• Eastern part of U.S. and foreign addresses:Eastern Area Distribution CenterP.O. Box 85074Richmond, VA 23261–5074

CD-ROM. You can order IRS Publication 1796,Federal Tax Products on CD-ROM, and obtain:

• Current tax forms, instructions, and publications.

• Prior-year tax forms, instructions, and publications.

• Popular tax forms which may be filled-in electron-ically, printed out for submission, and saved forrecordkeeping.

• Internal Revenue Bulletins.

The CD-ROM can be purchased from National Techni-cal Information Service (NTIS) for $25.00 by calling1–877–233–6767 or for $18.00 on the Internet atwww.irs.ustreas.gov/cdorders . The first release isavailable in mid-December and the final release isavailable in late January.

Page 36

Index

A Abandonment .......................... 4 Address:

Change of ............................ 1 Adjusted basis ......................... 8

Adjusted sales price .............. 22 Amended return ..................... 21 Amount realized ...................... 3 Armed Forces .................. 19, 20

B Basis ........................................ 5

Business use ofhome ............... 14, 15, 22, 24,

30

C Capital gains .......................... 27

Capital gains, tax rate ........... 15Capital gains, tax rates ......... 27Casualties ........... 13, 15, 23, 29,

30Change of address .................. 1Changed to rental

property ........................ 22, 23 Closing costs ..................... 5, 24

Combat zone service ...... 19, 20 Community property ................ 8 Condemned prop-erty .................. 13, 15, 23, 29,

30 Cooperative apartment ...... 7, 13

Cost as basis ........................... 5Cost of new home ................. 24

DDeceased spouse ...... 25, 29, 30

Depreciation .......................... 15 Divorced individuals:Divorce after sale ............... 27Home received from spouse 7Home replaced by separate

new homes ..................... 26Home transferred to spouse 4

Main home ......................... 14

E Examples, illustrated ....... 16, 28

Exclusion of gain:Sales before May 7, 1997 . 28Sales in 1998 ..................... 10 Expatriates ............................. 15

FFair market value .................... 7

Federal subsidy ..................... 35 Fixing-up expenses ............... 22 Foreclosure .............................. 4

Form: 1099–A ................................. 4 1099–C ................................ 4 1099–S ................................. 3 2119 ............................. 26, 32 8828 ................................... 35

Forms (See More information) Free tax services ................... 35

GGain on sale:

Defined ................................. 4 Exclusion of ................. 10, 28 Postponing ......................... 18 When taxable ....................... 5

Gift ..................................... 7, 25

HHelp (See More information)

Holding period ....................... 24Home owned by one spouse 25How to report ................... 15, 26

I Improvements .......................... 8 Individual taxpayer identificationnumber ............................... 16

Individuals with disability . 13, 29 Inheritance ......................... 7, 25 Installment sale ............... 15, 27

LLoss on sale .................. 4, 5, 26

M Main home:Changed to rental prop-

erty ........................... 22, 23 Defined ................................. 2

More than one ............... 3, 24 Married individuals:Basis of home received from

spouse .............................. 7 Community property ............ 8 Deceasedspouse .......... 14, 25, 29, 30

Divorce after sale ............... 27Home not jointly owned ..... 30Home owned by one

spouse ............................ 25Jointly owned home ....... 4, 29Main home after divorce .... 14

Outside U.S. ...................... 19Sales after May 6, 1997 .... 13

Separate homes ................ 26 Separate returns ................ 30

Spouse in ArmedForces ...................... 20, 21

Surviving spouse, basis ofhome ................................ 7

Title not held by eitherspouse ............................ 24

Transfer of home to spouse 4 More information ................... 35

Mail .................................... 35 Personal computer ............. 35 Phone ................................. 35 Walk-in ............................... 35

More than one home ......... 3, 24 Mortgage, seller-financed ...... 15

Move, work related ................ 24

NNew home ................... 3, 23, 27

O Old home:Business use of ................. 22

Casualties .................... 23, 29Changed to rental prop-

erty ........................... 22, 23 Condemned ................. 23, 29 Not replaced ...................... 27

Partly rental property ......... 22Ownership and use tests 12, 28

PPartly used as

home ................ 14, 22, 24, 30Payment by employer ......... 3, 5People outside the U.S. ........ 19Points ............................. 1, 5, 24

Postponing gain ..................... 18 Protective claim ..................... 21

Publications (See Moreinformation)

RReceived from spouse ...... 7, 14

Recordkeeping ...................... 10Rental property .... 14, 22, 23, 24

Repairs .................................. 10 Replacement period .............. 18

Reporting the sale ........... 15, 26 Repossession .......................... 4 Retirement home ................... 24

SSales to related persons, ex-

ception ............................... 15Second sale in replacement

period ................................. 24 Seller-financed mortgage ...... 15 Selling expenses ..................... 3 Selling price ............................. 3

Page 37

Separate homes replaced bysingle home ....................... 26 Separate returns ...................... 4 Settlement fees ................. 5, 24

Single home replaced by sepa-rate homes ......................... 26

Statute of limitations .............. 27

TTax help (See More information)

Tax home .............................. 19 Taxes:Real estate ............... 6, 16, 24

Transfer .............................. 16

Title not held by you orspouse ............................... 24 Trade ................................... 4, 8

Transfer to/from spouse 4, 7, 14 TTY/TDD information ............ 35

�

Page 38

Tax Publications for Individual Taxpayers

General Guides

Your Rights as a TaxpayerYour Federal Income Tax (ForIndividuals)Farmer’s Tax GuideTax Guide for Small BusinessTax Calendars for 1999Highlights of 1998 Tax Changes

Guide to Free Tax Services

Specialized Publications

Armed Forces’ Tax GuideFuel Tax Credits and RefundsTravel, Entertainment, Gift, and CarExpensesExemptions, Standard Deduction,and Filing InformationMedical and Dental ExpensesChild and Dependent Care ExpensesDivorced or Separated IndividualsTax Withholding and Estimated TaxEducational ExpensesForeign Tax Credit for IndividualsU.S. Government Civilian EmployeesStationed AbroadSocial Security and OtherInformation for Members of theClergy and Religious WorkersU.S. Tax Guide for AliensScholarships and FellowshipsMoving ExpensesSelling Your HomeCredit for the Elderly or the DisabledTaxable and Nontaxable IncomeCharitable ContributionsResidential Rental Property

Commonly Used Tax Forms

Miscellaneous Deductions

Tax Information for First-TimeHomeownersReporting Tip IncomeSelf-Employment TaxDepreciating Property Placed inService Before 1987Installment SalesPartnershipsSales and Other Dispositions ofAssetsCasualties, Disasters, and Thefts(Business and Nonbusiness)Investment Income and ExpensesBasis of AssetsRecordkeeping for IndividualsOlder Americans’ Tax GuideCommunity PropertyExamination of Returns, AppealRights, and Claims for RefundSurvivors, Executors, andAdministratorsDetermining the Value of DonatedPropertyMutual Fund DistributionsTax Guide for Individuals WithIncome From U.S. PossessionsPension and Annuity IncomeNonbusiness Disaster, Casualty, andTheft Loss WorkbookBusiness Use of Your Home(Including Use by Day-CareProviders)Individual Retirement Arrangements(IRAs) (Including Roth IRAs andEducation IRAs)Tax Highlights for U.S. Citizens andResidents Going AbroadUnderstanding the Collection ProcessEarned Income CreditTax Guide to U.S. Civil ServiceRetirement Benefits

Tax Highlights for Persons withDisabilitiesBankruptcy Tax GuideDirect SellersSocial Security and EquivalentRailroad Retirement BenefitsIs My Withholding Correct for 1999?Passive Activity and At-Risk RulesHousehold Employer’s Tax GuideTax Rules for Children andDependentsHome Mortgage Interest DeductionHow To Depreciate PropertyPractice Before the IRS and Powerof AttorneyIntroduction to Estate and Gift TaxesIRS Will Figure Your Tax

Per Diem RatesReporting Cash Payments of Over$10,000The Problem Resolution Programof the Internal Revenue Service

Derechos del ContribuyenteCómo Preparar la Declaración deImpuesto Federal

Crédito por Ingreso del TrabajoEnglish-Spanish Glossary of Wordsand Phrases Used in PublicationsIssued by the Internal RevenueService

U.S. Tax Treaties

Spanish Language Publications

Tax Highlights for CommercialFishermen

910

595553509334225

171

3378463

501

502503504505508514516

517

519520521523524525526527529

530

531533534

537

544

547

550551552554

541

555556

559

561

564570

575584

587

590

593

594596721

901907

908

915

919925926929

946

911

936

950

1542

967

1544

1546

596SP

1SP

850

579SP

Comprendiendo el Proceso de Cobro594SP

947

Tax Benefits for Adoption968

Informe de Pagos en Efectivo enExceso de $10,000 (Recibidos enuna Ocupación o Negocio)

1544SP

See How To Get More Information for a variety of ways to get forms, including by computer,fax, phone, and mail. For fax orders only, use the catalog numbers when ordering.

U.S. Individual Income Tax ReturnItemized Deductions & Interest andOrdinary Dividends

Profit or Loss From BusinessNet Profit From Business

Capital Gains and LossesSupplemental Income and Loss

Earned Income CreditProfit or Loss From Farming

Credit for the Elderly or the Disabled

Income Tax Return for Single and Joint Filers With No Dependents

Self-Employment TaxU.S. Individual Income Tax Return

Interest and Ordinary Dividends forForm 1040A FilersChild and Dependent CareExpenses for Form 1040A FilersCredit for the Elderly or the Disabled for Form 1040A Filers

Estimated Tax for IndividualsAmended U.S. Individual Income TaxReturn

Unreimbursed Employee BusinessExpenses

Underpayment of Estimated Tax byIndividuals, Estates and Trusts

Power of Attorney and Declarationof Representative

Child and Dependent Care Expenses

Moving ExpensesDepreciation and AmortizationApplication for Automatic Extension of TimeTo File U.S. Individual Income Tax ReturnInvestment Interest Expense DeductionAdditional Taxes Attributable to IRAs, OtherQualified Retirement Plans, Annuities,Modified Endowment Contracts, and MSAsAlternative Minimum Tax–IndividualsNoncash Charitable Contributions

Change of AddressExpenses for Business Use of Your Home

Nondeductible IRAsPassive Activity Loss Limitations

1040Sch A & B

Sch CSch C-EZSch DSch ESch EICSch FSch H Household Employment Taxes

Sch RSch SE

1040EZ

1040ASch 1

Sch 2

Sch 3

1040-ES1040X

2106 Employee Business Expenses2106-EZ

2210

24412848

390345624868

49525329

6251828385828606

88228829

Form Number and TitleCatalogNumber

Sch J Farm Income Averaging

Additional Child Tax Credit8812

Education Credits8863

CatalogNumber

1170020604

11744

1186211980

124901290613141

1317713329

1360062294637046396610644120811323225379

11320

Form Number and Title

11330

113341437411338113441133911346121872551311359113581132712075

10749

12064

11329

1134011360

See How To Get More Information for a variety of ways to get publications,including by computer, phone, and mail.

970 Tax Benefits for Higher Education971 Innocent Spouse Relief

Page 39

Documents

Cat. No. 15044W Selling Your Home · 2012. 7. 16. · 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