This section discusses the rules that allowed you to choose to exclude from gross income all or part of your gain from the sale of your main home if you met certain age, ownership, and use tests at the time of the sale. This was a one-time exclusion of gain for sales after July 26, 1978, and before May 7, 1997. However, for sales after May 6, 1997, you may qualify for the exclusion described in chapter 2.

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

Exclusion Amount

If you met the age, ownership, and use tests, you can choose to exclude $125,000 of your gain. If you were married on the date of the sale and file a separate return, you can only choose to exclude $62,500. If there is gain remaining after the exclusion, you may have to postpone tax on it if, as explained earlier, you buy and live in another home. You must include in your income any gain that you cannot exclude or postpone.

Age, Ownership, and Use Tests for Sales Before May 7, 1997

You can claim the exclusion if you met all the following tests.

1. You were age 55 or older on the date of the sale.
2. During the 5-year period ending on the date of the sale, you:
   1. Owned your main home for at least 3 years, and
   2. Lived in your main home for at least 3 years.
3. Neither you nor your spouse have ever excluded gain on the sale of a home after July 26, 1978. However, see Effect of Marital Status, later, for more details.

Age 55 at time of sale. You must have been 55 by the date you sold the home to qualify for the exclusion. You do not meet the age 55 test if you sold the property during the year in which you became 55 but before you actually became 55. The earliest date on which you could sell your home and still qualify for the exclusion was your 55th birthday.

Ownership and use tests. The required 3 years of ownership and use (during the 5-year period ending on the date of the sale) do not have to be continuous. You meet the tests if you can show that you owned and lived in the property as your main home for either 36 full months or 1,095 days (365 x 3) during the 5-year period. Short temporary absences for vacations or other seasonal absences, even if you rented out the property during the absences, are counted as periods of use.

Ownership and use tests met at different times. You can meet the ownership and use tests during different 3-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale.

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

1. You held the home either as joint tenants, tenants by the entirety, or community property on the date of the sale.
2. You file a joint return for the tax year in which you sell the home.
3. Either you or your spouse has met the age, ownership, and use tests.

Previous home destroyed or condemned. For the ownership and use tests, you add the time you owned and lived in a previous home that was destroyed or condemned to the time you owned and lived in the home on which you wish to exclude gain. This rule applies if any part of the basis of the home you sold depended on the basis of the destroyed or condemned home. Otherwise, you must have owned and lived in the same home for 3 of the 5 years before the sale to qualify for the exclusion.

Exception for individuals with a disability. There is an exception to the 3-out-of-5-year use test if you become physically or mentally unable to care for yourself at any time during the 5-year period.

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

1. You became physically or mentally unable to care for yourself, and
2. You owned and lived in your home as your main home for a total of at least 1 year.

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

If you meet this exception to the use test, you still have to meet the 3-out-of-5-year ownership test to claim the exclusion.

Home of spouse who died. You will meet the ownership and use tests if your spouse was deceased on the date you sold your main home, and:

1. You have not remarried,
2. Your deceased spouse had met the ownership and use tests for that main home, and
3. Your deceased spouse had not previously chosen or joined in choosing to exclude gain on the sale of another main home after July 26, 1978.

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

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

Rent-controlled apartment. If you receive a payment to give up your rights in a rent-controlled apartment, this gain does not qualify for the exclusion. You do not meet the ownership test when you rent an apartment.

Part of property used as main home. You may have used only part of the property as your main home, while using the rest for business or rental. In that case, you can claim an exclusion only for the gain on the part of the property used as your main home.

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

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

Effect of Marital Status

For purposes of the exclusion, your marital status is determined as of the date of sale of your home. If you are legally separated under a decree of divorce or of separate maintenance, you are not considered married.

Your marital status on the date of the sale determines:

• The amount you can exclude,
• Whether your spouse must join you in the choice to exclude gain, and
• Whether each spouse can choose to exclude gain later.

Married persons must choose exclusion jointly. If you were married when you sold your main home, you cannot choose to exclude the gain unless your spouse joins you in making the choice. Your spouse must join you 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 had not lived in it for the required period before the sale.

Death of spouse after sale. If your spouse died after the sale, but before making the choice to exclude the gain, his or her personal representative (administrator or executor, for example) must join with you in making the choice. You, as the surviving spouse, are considered the personal representative of your deceased spouse if no one else has been appointed.

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

Separate return. If you were married on the date of sale, file a separate return, and meet the age, ownership, and use tests, you can exclude no more than $62,500 of the gain. Your spouse must show agreement to your choice by writing in the bottom margin on page 1 of Form 2119, or on an attached statement, "I agree to the Part II election." Your spouse must also sign his or her name.

You or your spouse can exclude gain only once. If you or your spouse chose to exclude gain from a sale after July 26, 1978, neither of you can choose to exclude gain again under the rules described in this chapter. (You may be able to exclude gain on a sale after May 6, 1997, under the rules in chapter 2.) The following chart shows how this rule applies in certain specific situations.

If you and your spouse owned separate homes.

Sale before marriage. If you met the age, ownership, and use tests when you sold your separately owned home, you can exclude gain up to $125,000. If you married before the end of the year of sale, you can take the exclusion whether you file a joint return or a separate return. This is because you were single on the date of the sale.

Joint exclusion not required. If one spouse sold a home before the marriage, the other spouse does not have to join in the choice to exclude gain. The spouse who did not join in that choice is eligible to exclude gain if he or she later sells a house, meets the age, ownership, and use tests, and at the time of sale is single or married to a different spouse who has never excluded gain or joined in a choice to do so.

You can exclude gain only once. If one spouse excludes gain from a house sold before marriage, that spouse 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 this chapter. This is because both spouses have to join in the choice, and one spouse has already excluded gain. However, see chapter 2 for the rules that apply to sales in 2000.

How To Make and Revoke a Choice To Exclude Gain

Under the rules explained in this chapter, you can exclude gain on the sale of your main home only once for sales after July 26, 1978.

However, for sales in 2000 you may be able to exclude gain under the rules explained in chapter 2.

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

1. Three years from the due date of the return for the year 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 make or revoke your choice in some cases. This is because the 3-year and 2-year periods just described are suspended during any period when you cannot manage your finances due to a medically determinable physical or mental impairment that has lasted or can be expected to last for a continuous period of at least 12 months or to result in death. But there is no suspension for any period when your spouse or someone else was authorized to act for you.

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

1. Your name, age, social security number, and marital status on the date of the sale. If the home was jointly 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 the property on the date of sale.
4. How long you were away from the home during the 5 years before the sale. Do not include vacation and other seasonal absences, even if you rented out the home during those absences.
5. Whether you or a joint owner ever chose to exclude gain on the sale of a home, and if you did, when and where you did so. If you revoked the choice, give the date you revoked it.

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

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

Extension of assessment period. If you revoke your choice to exclude gain when less than a year is left in the assessment period (time for determining your correct tax) for the return on which the choice was made, you must agree to extend the assessment period. Before the end of the period, you must file a statement that the assessment period will not end until 1 year after the date the statement is filed. The assessment period normally ends on the latest of the dates shown earlier under Time to exclude gain.

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