| Publication 17, Your Federal Income Tax |
2006 Tax Year |
This is archived information that pertains only to the 2006 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
Gulf Opportunity Zone Act of 2005 (Act). This Act provides tax relief for persons affected by Hurricanes Katrina, Rita, and Wilma. Under this Act, the rules for recapture
of a federal
mortgage subsidy have changed if you received a qualified home improvement loan (QHIL) funded by a qualified mortgage bond
that is a qualified Gulf
Opportunity Zone Bond or a QHIL for an owner-occupied home in the Gulf Opportunity Zone (GO Zone), Rita GO Zone, or Wilma
GO Zone. For more
information, see Recapturing (Paying Back) a Federal Mortgage Subsidy, later.
New credits affecting the basis of a home. If you claim the nonbusiness energy property credit or the residential energy efficient property credit in 2006, you must
decrease the basis of
your home by the amount of the credit claimed. See Adjusted Basis, later. For more information about these credits, see also Form 5695,
Residential Energy Credits.
Change of address. If you change your mailing address, be sure to notify the IRS using Form 8822, Change of Address. Mail it to the Internal
Revenue Service Center
for your old address. (Addresses for the Service Centers are on the back of the form.)
Home sold with undeducted points. If you have not deducted all the points you paid to secure a mortgage on your old home, you may be able to deduct the remaining
points in the year
of the sale. See Mortgage ending early under Points in chapter 23.
This chapter explains the tax rules that apply when you sell your main home. Generally, your main home is the one in which
you live most of the
time.
If you sold your main home in 2006, you may be able to exclude from income any gain up to a limit of $250,000 ($500,000 on
a joint return in most
cases). See Excluding the Gain, later. If you can exclude all of the gain, you do not need to report the sale on your tax return.
If you have gain that cannot be excluded, it is taxable. Report it on Schedule D (Form 1040). You may also have to include
Form 4797, Sales of
Business Property. See Reporting the Sale, later.
If you have a loss on the sale, you cannot deduct it on your return.
The following are main topics in this chapter.
-
Figuring gain or loss.
-
Basis.
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Excluding the gain.
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Ownership and use tests.
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Reporting the sale.
Other topics include the following.
Useful Items - You may want to see:
This section explains the term “main home.” Usually, the home you live in most of the time is your main home and can be a:
To exclude gain under the rules of this chapter, you generally must have owned and lived in the property as your main home
for at least 2 years
during the 5-year period ending on the date of sale.
Land.
If you sell the land on which your main home is located, but not the house itself, you cannot exclude any gain you
have from the sale of the land.
Example.
On March 4, 2006, you sell the land on which your main home is located. You buy another piece of land and move your house
to it. This sale is not
considered a sale of your main home, and you cannot exclude any gain on the sale of the land.
More than one home.
If you have more than one home, you can exclude gain only from the sale of your main home. You must include in income
gain from the sale of any
other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time.
Example 1.
You own and live in a house in the city. You also own a beach house, which you use during summer months. The house in the
city is your main home.
Example 2.
You own a house, but you live in another house that you rent. The rented house is your main home.
Property used partly as your main home.
If you use only part of the property as your main home, the rules discussed in this chapter apply only to the gain
or loss on the sale of that part
of the property. For details, see Business Use or Rental of Home, later.
To figure the gain or loss on the sale of your main home, you must know the selling price, the amount realized, and the adjusted
basis. Subtract
the adjusted basis from the amount realized to get your gain or loss.
The selling price is the total amount you receive for your home. It includes money, all notes, mortgages, or other debts assumed
by the buyer as
part of the sale, and the fair market value of any other property or any services you receive.
Payment by employer.
You may have to sell your home because of a job transfer. If your employer pays you for a loss on the sale or for
your selling expenses, do not
include the payment as part of the selling price. Your employer will include it as wages in box 1 of your Form W-2 and you
will include it on Form
1040, line 7, or on Form 1040NR, line 8.
Option to buy.
If you grant an option to buy your home and the option is exercised, add the amount you receive for the option to
the selling price of your home.
If the option is not exercised, you must report the amount as ordinary income in the year the option expires. Report this
amount on Form 1040, line
21, or on Form 1040NR, line 21.
Form 1099-S.
If you received Form 1099-S, Proceeds From Real Estate Transactions, box 2 (gross proceeds) should show the total
amount you received for your
home.
However, box 2 will not include the fair market value of any property other than cash or notes, or any services, you
received or will receive.
Instead, box 4 will be checked to indicate your receipt or expected receipt of these items.
If you can exclude the entire gain, the person responsible for closing the sale generally will not have to report
it on Form 1099-S. If you do not
receive Form 1099-S, use sale documents and other records to figure the total amount you received for your home.
The amount realized is the selling price minus selling expenses.
Selling expenses.
Selling expenses include:
While you owned your home, you may have made adjustments (increases or decreases) to the basis. This adjusted basis must be
determined before you
can figure gain or loss on the sale of your home. For information on how to figure your home's adjusted basis, see Determining Basis,
later.
To figure the amount of gain or loss, compare the amount realized to the adjusted basis.
Gain on sale.
If the amount realized is more than the adjusted basis, the difference is a gain and, except for any part you can
exclude, generally is taxable.
Loss on sale.
If the amount realized is less than the adjusted basis, the difference is a loss. A loss on the sale of your main
home cannot be deducted.
Jointly owned home.
If you and your spouse sell your jointly owned home and file a joint return, you figure your gain or loss as one taxpayer.
Separate returns.
If you file separate returns, each of you must figure your own gain or loss according to your ownership interest in
the home. Your ownership
interest is determined by state law.
Joint owners not married.
If you and a joint owner other than your spouse sell your jointly owned home, each of you must figure your own gain
or loss according to your
ownership interest in the home. Each of you applies the rules discussed in this chapter on an individual basis.
The following rules apply to foreclosures and repossessions, abandonments, trades, and transfers to a spouse.
Foreclosure or repossession.
If your home was foreclosed on or repossessed, you have a sale.
You figure the gain or loss from the sale in generally the same way as gain or loss from any sale. But the selling
price of your home used to
figure the amount of your gain or loss depends, in part, on whether you were personally liable for repaying the debt secured
by the home. See
Publication 523 for more information.
Form 1099-A and Form 1099-C.
Generally, you will receive Form 1099-A, Acquisition or Abandonment of Secured Property, from your lender. This form
will have the information you
need to determine the amount of your gain or loss and any ordinary income from cancellation of debt. If your debt is canceled,
you may receive Form
1099-C, Cancellation of Debt.
Abandonment.
If you abandon your home, you may have ordinary income. If the abandoned home secures a debt for which you are personally
liable and the debt is
canceled, you have ordinary income equal to the amount of the canceled debt. See Publication 523 for more information.
Trading homes.
If you trade your old home for another home, treat the trade as a sale and a purchase.
Example.
You owned and lived in a home with an adjusted basis of $41,000. A real estate dealer accepted your old home as a trade-in
and allowed you $50,000
toward a new home priced at $80,000. This is treated as a sale of your old home for $50,000 with a gain of $9,000 ($50,000
- $41,000).
If the dealer had allowed you $27,000 and assumed your unpaid mortgage of $23,000 on your old home, your sales price would
still be $50,000 (the
$27,000 trade-in allowed plus the $23,000 mortgage assumed).
Transfer to spouse.
If you transfer your home to your spouse, or to your former spouse incident to your divorce, you generally have no
gain or loss. This is true even
if you receive cash or other consideration for the home. Therefore, the rules in this chapter do not apply.
More information.
If you need more information, see Transfer to spouse in Publication 523 and Property Settlements in Publication 504, Divorced
or Separated Individuals.
You need to know your basis in your home to determine any gain or loss when you sell it. Your basis in your home is determined
by how you got the
home. Your basis is its cost if you bought it or built it. If you got it in some other way (inheritance, gift, etc.), its
basis is either its fair
market value when you got it or the adjusted basis of the person you got it from.
While you owned your home, you may have made adjustments (increases or decreases) to your home's basis. The result of these
adjustments is your
home's adjusted basis, which is used to figure gain or loss on the sale of your home. See Adjusted Basis, later.
You can find more information on basis and adjusted basis in chapter 13 of this publication and in Publication 523.
The cost of property is the amount you pay for it in cash, debt obligations, other property, or services.
Purchase.
If you buy your home, your basis is its cost to you. This includes the purchase price and certain settlement or closing
costs. Generally, your
purchase price includes your down payment and any debt, such as a first or second mortgage or notes you gave the seller in
payment for the home. If
you build, or contract to build, a new home, your purchase price can include costs of construction, as discussed in Publication
523.
Settlement fees or closing costs.
When you bought your home, you may have paid settlement fees or closing costs in addition to the contract price of
the property. You can include in
your basis some of the settlement fees and closing costs you paid for buying the home. You cannot include in your basis the
fees and costs for getting
a mortgage loan. A fee paid for buying the home is any fee you would have had to pay even if you paid cash for the home (that
is, without the need for
financing).
Chapter 13 lists some of the settlement fees and closing costs that you can include in the basis of property, including
your home. It also lists
some settlement costs that cannot be included in basis.
Also see Publication 523 for additional items and a discussion of basis other than cost.
Adjusted basis is your basis increased or decreased by certain amounts.
Increases to basis.
These include any:
-
Additions and other improvements that have a useful life of more than 1 year,
-
Special assessments for local improvements, and
-
Amounts you spent after a casualty to restore damaged property.
Decreases to basis.
These include any:
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Gain you postponed from the sale of a previous home before May 7, 1997,
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Deductible casualty losses,
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Insurance payments you received or expect to receive for casualty losses,
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Payments you received for granting an easement or right-of-way,
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Depreciation allowed or allowable if you used your home for business or rental purposes,
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Residential energy credit (generally allowed from 1977 through 1987) claimed for the cost of energy improvements that you
added to the basis
of your home,
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Nonbusiness energy property credit (allowed beginning in 2006) claimed for making certain energy saving improvements that
you added to the
basis of your home,
-
Residential energy efficient property credit (allowed beginning in 2006) claimed for making certain energy saving improvements
that you
added to the basis of your home,
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Adoption credit you claimed for improvements added to the basis of your home,
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Nontaxable payments from an adoption assistance program of your employer that you used for improvements you added to the basis
of your home,
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Energy conservation subsidy excluded from your gross income because you received it (directly or indirectly) from a public
utility after
1992 to buy or install any energy conservation measure. An energy conservation measure is an installation or modification
that is primarily designed
either to reduce consumption of electricity or natural gas or to improve the management of energy demand for a home, and
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District of Columbia first-time homebuyer credit (allowed on the purchase of a principal residence in the District of Columbia
from August
5, 1997, through December 31, 2005).
At the time this publication went to print, Congress was considering legislation that would extend the District of Columbia
first-time homebuyer
credit that expired for homes purchased after 2005. To find out if this legislation was enacted, and for more details, go
to
www.irs.gov, click on More Forms and Publications , and then on What's Hot in forms and publications ,
or see Publication 553, Highlights of 2006 Tax Changes.
Improvements.
These add to the value of your home, prolong its useful life, or adapt it to new uses. You add the cost of additions
and other improvements to the
basis of your property.
Examples.
Putting a recreation room or another bathroom in your unfinished basement, putting up a new fence, putting in new plumbing
or wiring, putting on a
new roof, or paving your unpaved driveway are improvements. An addition to your house, such as a new deck, a sunroom, or a
new garage, is also an
improvement.
Repairs.
These maintain your home in good condition but do not add to its value or prolong its life. You do not add their cost
to the basis of your
property.
Examples.
Repainting your house inside or outside, fixing your gutters or floors, repairing leaks or plastering, and replacing broken
window panes are
examples of repairs.
Recordkeeping.
You should keep records to prove your home's adjusted basis. Ordinarily, you must keep records for 3 years
after the due date for filing your return for the tax year in which you sold your home. But if you sold a home before May
7, 1997, and postponed tax
on any gain, the basis of that home affects the basis of the new home you bought. Keep records proving the basis of both homes
as long as they are
needed for tax purposes.
The records you should keep include:
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Proof of the home's purchase price and purchase expenses,
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Receipts and other records for all improvements, additions, and other items that affect the home's adjusted basis,
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Any worksheets you used to figure the adjusted basis of the home you sold, the gain or loss on the sale, the exclusion, and
the taxable
gain,
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Any Form 2119, Sale of Your Home, that you filed to postpone gain from the sale of a previous home before May 7, 1997, and
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Any worksheets you used to prepare Form 2119, such as the Adjusted Basis of Home Sold Worksheet or the Capital Improvements
Worksheet from the Form 2119 instructions.
You may qualify to exclude from your income all or part of any gain from the sale of your main home. This means that, if you
qualify, you will not
have to pay tax on the gain up to the limit described under Maximum Exclusion, next. To qualify, you must meet the ownership and use tests
described later.
You can choose not to take the exclusion by including the gain from the sale in your gross income on your tax return for the
year of the sale.
You can exclude up to $250,000 of the gain on the sale of your main home if all of the following are true.
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You meet the ownership test.
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You meet the use test.
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During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home.
You can exclude up to $500,000 of the gain on the sale of your main home if all of the following are true.
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You are married and file a joint return for the year.
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Either you or your spouse meets the ownership test.
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Both you and your spouse meet the use test.
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During the 2-year period ending on the date of the sale, neither you nor your spouse excluded gain from the sale of another
home.
To claim the exclusion, you must meet the ownership and use tests. This means that during the 5-year period ending on the
date of the sale, you
must have:
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Owned the home for at least 2 years (the ownership test), and
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Lived in the home as your main home for at least 2 years (the use test).
Exception.
If you owned and lived in the property as your main home for less than 2 years, you can still claim an exclusion in
some cases. The maximum amount
you can claim will be reduced. See Reduced Maximum Exclusion, later.
Example 1—home owned and occupied for 3 years.
Amanda bought and moved into her main home in September 2003. She sold the home at a gain on September 15, 2006. During the
5-year period ending on
the date of sale (September 16, 2001 - September 15, 2006), she owned and lived in the home for 3 years. She meets the ownership
and use tests.
Example 2—met ownership test but not use test.
Dan bought a home in 2000. After living in it for 6 months, he moved out. He never lived in the home again and sold it at
a gain on June 28, 2006.
He owned the home during the entire 5-year period ending on the date of sale (June 29, 2001 - June 28, 2006). However, he
did not live in it for
the required 2 years. He meets the ownership test but not the use test. He cannot exclude any part of his gain on the sale,
unless he qualified for a
reduced maximum exclusion (explained later).
Period of Ownership and Use
The required 2 years of ownership and use during the 5-year period ending on the date of the sale do not have to be continuous.
You meet the tests if you can show that you owned and lived in the property as your main home for either 24 full months or
730 days (365 ×
2) during the 5-year period ending on the date of sale.
Temporary absence.
Short temporary absences for vacations or other seasonal absences, even if you rent out the property during the absences,
are counted as periods of
use. The following examples assume that the reduced maximum exclusion (discussed later) does not apply to the sales.
Example 1.
David Johnson, who is single, bought and moved into his home on February 1, 2004. Each year during 2004 and 2005, David left
his home for a 2-month
summer vacation. David sold the house on March 1, 2006. Although the total time David used his home is less than 2 years (21
months), he may exclude
any gain up to $250,000. The 2-month vacations are short temporary absences and are counted as periods of use in determining
whether David used the
home for the required 2 years.
Example 2.
Professor Paul Beard, who is single, bought and moved into a house on August 28, 2003. He lived in it as his main home continuously
until January
5, 2005, when he went abroad for a 1-year sabbatical leave. On February 6, 2006, 1 month after returning from the leave, Paul
sold the house at a
gain. Because his leave was not a short temporary absence, he cannot include the period of leave to meet the 2-year use test.
He cannot exclude any
part of his gain, because he did not use the residence for the required 2 years.
Ownership and use tests met at different times.
You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during
the 5-year period ending on the
date of the sale.
Example.
In 1997, Helen Jones lived in a rented apartment. The apartment building was later changed to a condominium, and she bought
her apartment on
December 3, 2003. In 2004, Helen became ill and on April 14 of that year she moved to her daughter's home. On July 12, 2006,
while still living in her
daughter's home, she sold her apartment.
Helen can exclude gain on the sale of her apartment because she met the ownership and use tests during the 5-year period from
July 13, 2001, to
July 12, 2006, the date she sold the apartment. She owned her apartment from December 3, 2003, to July 12, 2006 (more than
2 years). She lived in the
apartment from July 13, 2001 (the beginning of the 5-year period), to April 14, 2004 (more than 2 years).
The time Helen lived in her daughter's home during the 5-year period can be counted as a period of ownership, and the time
she lived in her rented
apartment during the 5-year period can be counted as a period of use.
Cooperative apartment.
If you sold stock in a cooperative housing corporation, the ownership and use tests are met if, during the 5-year
period ending on the date of
sale, you:
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Owned the stock for at least 2 years, and
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Lived in the house or apartment that the stock entitles you to occupy as your main home for at least 2 years.
Members of the uniformed services or Foreign Service.
You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse
serve on “ qualified official
extended duty” as a member of the uniformed services or Foreign Service of the United States. This means that you may be able to meet the
2-year
use test even if, because of your service, you did not actually live in your home for at least the required 2 years during
the 5-year period ending on
the date of sale.
If this helps you qualify to exclude gain, you can choose to have the 5-year test period suspended by filing a return
for the year of sale that
does not include the gain.
Example.
David bought and moved into a home in 1998. He lived in it as his main home for 2½ years. For the next 6 years, he did not
live in
it because he was on qualified official extended duty with the Army. He then sold the home at a gain in 2006. To meet the
use test, David chooses to
suspend the 5-year test period for the 6 years he was on qualified official extended duty. This means he can disregard those
6 years. Therefore,
David's 5-year test period consists of the 5 years before he went on qualified official extended duty. He meets the ownership
and use tests because he
owned and lived in the home for 2½ years during this test period.
Period of suspension.
The period of suspension cannot last more than 10 years. Together, the 10-year suspension period and the 5-year test
period can be as long as, but
no more than, 15 years. You cannot suspend the 5-year period for more than one property at a time. You can revoke your choice
to suspend the 5-year
period at any time.
For more information about the suspension of the 5-year test period, see Uniformed services or Foreign Service member in Publication
523.
Exception for individuals with a disability.
There is an exception to the use test if during the 5-year period before the sale of your home:
-
You become physically or mentally unable to care for yourself, and
-
You owned and lived in your home as your main home for a total of at least 1 year.
Under this exception, you are considered to live in your home during any time that you own the home and live 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 2-out-of-5-year ownership test to claim the
exclusion.
Previous home destroyed or condemned.
For the ownership and use tests, you add the time you owned and lived in a previous home that was destroyed or condemned
to the time you owned and
lived in the 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 2 of the 5 years before the sale
to qualify for the
exclusion.
If you and your spouse file a joint return for the year of sale, you can exclude gain if either spouse meets the ownership
and use tests. (But see
Maximum Exclusion, earlier.)
Example 1 — one spouse sells a home.
Emily sells her home in June 2006. She marries Jamie later in the year. She meets the ownership and use tests, but Jamie does
not. Emily can
exclude up to $250,000 of gain on a separate or joint return for 2006. The $500,000 maximum exclusion for certain joint returns
does not apply because
Jamie does not meet the use test.
Example 2 — each spouse sells a home.
The facts are the same as in Example 1 except that Jamie also sells a home in 2006 before he marries Emily. He meets the ownership and
use tests on his home, but Emily does not. Emily and Jamie can each exclude up to $250,000 of gain. The $500,000 maximum exclusion
for certain joint
returns does not apply because Emily and Jamie do not jointly meet the use test for the same home.
Death of spouse before sale.
If your spouse died and you did not remarry before the date of sale, you are considered to have owned and lived in
the property as your main home
during any period of time when your spouse owned and lived in it as a main home.
Home transferred from spouse.
If your home was transferred to you by your spouse (or former spouse if the transfer was incident to divorce), you
are considered to have owned it
during any period of time when your spouse owned it.
Use of home after divorce.
You are considered to have used property as your main home during any period when:
Reduced Maximum Exclusion
You can claim an exclusion, but the maximum amount of gain you can exclude will be reduced, if either of the following is
true.
-
You did not meet the ownership and use tests, but the reason you sold the home was:
-
A change in place of employment,
-
Health, or
-
Unforeseen circumstances (as defined later).
-
Your exclusion would have been disallowed because of the rule described in More Than One Home Sold During 2-Year Period, later,
except that the reason you sold the home was:
-
A change in place of employment,
-
Health, or
-
Unforeseen circumstances (as defined next).
Use Worksheet 3 in Publication 523 to figure your reduced maximum exclusion.
Unforeseen circumstances.
The sale of your main home is because of an unforeseen circumstance if your primary reason for the sale is the occurrence
of an event that you
could not reasonably have anticipated before buying and occupying your main home. For more information on unforeseen circumstances,
see Publication
523.
More Than One Home Sold During 2-Year Period
You generally 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 or part of that gain. If you cannot exclude the gain, you must include it in your income.
Exception.
You still can claim an exclusion, but the maximum amount of gain you can exclude will be reduced, if the reason you
sold the home was:
For more information about this exception, see More Than One Home Sold During 2-Year Period in Publication 523.
Business Use or Rental of Home
You may be able to exclude gain from the sale of a home that you have used for business or to produce rental income. But you
must meet the
ownership and use tests.
Example 1.
On May 29, 2000, Amy bought a house. She moved in on that date and lived in it until May 31, 2002, when she moved out of the
house and put it up
for rent. The house was rented from June 1, 2002, to March 31, 2004. Amy moved back into the house on April 1, 2004, and lived
there until she sold it
on January 30, 2006. During the 5-year period ending on the date of the sale (January 31, 2001 - January 30, 2006), Amy owned
and lived in the
house for more than 2 years as shown in the following table.
Amy can exclude gain up to $250,000. However, she cannot exclude the part of the gain equal to the depreciation she claimed
or could have
claimed for renting the house, as explained after Example 2.
Example 2.
William owned and used a house as his main home from 2000 through 2003. On January 1, 2004, he moved to another state. He
rented his house from
that date until April 30, 2006, when he sold it. During the 5-year period ending on the date of sale (May 1, 2001 - April
30, 2006), William
owned and lived in the house for 32 months (more than 2 years). He must report the sale on Form 4797. He can exclude gain
up to $250,000. However, he
cannot exclude the part of the gain equal to the depreciation he claimed or could have claimed for renting the house, as explained
next.
Depreciation after May 6, 1997.
If you were entitled to take depreciation deductions because you used your home for business purposes or as rental
property, you cannot exclude the
part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997. If you can
show by adequate records or
other evidence that the depreciation allowed was less than the amount allowable, the amount you cannot exclude is the amount
allowed.
Property used partly for business or rental.
If you used property partly as a home and partly for business or to produce rental income, see Publication 523.
Do not report the 2006 sale of your main home on your tax return unless:
-
You have a gain and you do not qualify to exclude all of it, or
-
You have a gain and you choose not to exclude it.
If you have any taxable gain on the sale of your main home that cannot be excluded, report the entire
gain realized on Schedule D (Form 1040). Report it in column (f) of line 1 or line 8 of Schedule D, as short term or long
term capital gain depending
on how long you owned the home. If you qualify for an exclusion, show it on the line directly below the line on which you
report the gain. Write
“Section 121 exclusion” in column (a) of that line and show the amount of the exclusion in column (f) as a loss (in parentheses).
If you used the home for business or to produce rental income, you may have to use Form 4797
to report the sale of the business or rental part (or the sale of the entire property if used entirely for business or rental).
See Business Use
or Rental of Home in Publication 523.
Installment sale.
Some sales are made under arrangements that provide for part or all of the selling price to be paid in a later
year. These sales are called “ installment sales.” If you finance the buyer's purchase of your home yourself, instead of having the buyer get a
loan or mortgage from a bank, you probably have an installment sale. You may be able to report the part of the gain you cannot
exclude on the
installment basis.
Use Form 6252, Installment Sale Income, to report the sale. Enter your exclusion on line 15 of
Form 6252.
Seller-financed mortgage.
If you sell your home and hold a note, mortgage, or other financial agreement, the payments you receive generally
consist of both interest and
principal. You must separately report as interest income the interest you receive as part of each payment. If the buyer of
your home uses the property
as a main or second home, you must also report the name, address, and social security number (SSN) of the buyer on line 1
of either Schedule B (Form
1040) or Schedule 1 (Form 1040A). The buyer must give you his or her SSN and you must give the buyer your SSN. Failure to
meet these requirements may
result in a $50 penalty for each failure. If you or the buyer does not have and is not eligible to get an SSN, see Social Security Number
in chapter 1.
More information.
For more information on installment sales, see Publication 537, Installment Sales.
The situations that follow may affect your exclusion.
Sale of home acquired in like-kind exchange.
You cannot claim the exclusion if:
-
You acquired your home in a like-kind exchange (also known as a section 1031 exchange); or your basis in your home is determined
by
reference to the basis of the home in the hands of the person who acquired the property in a like-kind exchange (for example,
you received the home
from that person as a gift), and
-
You sold the home during the 5-year period beginning with the date your home was acquired in the like-kind exchange.
Gain from a like-kind exchange is not taxable. This means that gain will not be recognized until you sell the property you
receive. To defer
gain from a like-kind exchange, you must have exchanged business or investment property for business or investment property
of a like kind. For more
information about like-kind exchanges, see Publication 544, Sales and Other Dispositions of Assets.
Home relinquished in an like-kind exchange.
If you use your main home partly for business or rental purposes and then exchange the home for another property,
see Publication 523.
Expatriates.
You cannot claim the exclusion if the expatriation tax applies to you. The expatriation tax applies to U.S. citizens
who have renounced their
citizenship (and long-term residents who have ended their residency). For more information about the expatriation tax, see
chapter 4 of Publication
519, U.S. Tax Guide for Aliens.
Home destroyed or condemned.
If your home was destroyed or condemned, any gain (for example, because of insurance proceeds you received) qualifies
for the exclusion.
Any part of the gain that cannot be excluded (because it is more than the maximum exclusion) can be postponed under
the rules explained in:
-
Publication 547, Casualties, Disasters, and Thefts, in the case of a home that was destroyed, or
-
Chapter 1 of Publication 544, in the case of a home that was condemned.
Sale of remainder interest.
Subject to the other rules in this chapter, you can choose to exclude gain from the sale of a remainder interest in
your home. If you make this
choice, you cannot choose to exclude gain from your sale of any other interest in the home that you sell separately.
Exception for sales to related persons.
You cannot exclude gain from the sale of a remainder interest in your home to a related person. Related persons include
your brothers 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.
Recapturing (Paying Back) a Federal Mortgage Subsidy
If you financed your home under a federally subsidized program (loans from tax-exempt qualified mortgage bonds or loans with
mortgage credit
certificates), you may have to recapture all or part of the benefit you received from that program when you sell or otherwise
dispose of your home.
You recapture the benefit by increasing your federal income tax for the year of the sale. You may have to pay this recapture
tax even if you can
exclude your gain from income under the rules discussed earlier; that exclusion does not affect the recapture tax.
Loans subject to recapture rules.
The recapture applies to loans that:
-
Came from the proceeds of qualified mortgage bonds, or
-
Were based on mortgage credit certificates.
The recapture also applies to assumptions of these loans.
When the recapture applies.
The recapture of the federal mortgage subsidy applies only if you meet both of the following conditions.
-
Within the first 9 years after the date you close your mortgage loan, you sell or otherwise dispose of your home at a gain.
-
Your income for the year of disposition is more than that year's adjusted qualifying income for your family size for that
year (related to
the income requirements a person must meet to qualify for the federally subsidized program).
When recapture does not apply.
The recapture does not apply if any of the following situations apply to you.
-
Your mortgage loan was a qualified home improvement loan (QHIL) of not more than $15,000 ($150,000 for a QHIL used to repair
damage from
Hurricane Katrina to homes in the hurricane disaster area; for a QHIL funded by a qualified mortgage bond that is a qualified
Gulf Opportunity Zone
Bond; or for a QHIL for an owner-occupied home in the Gulf Opportunity Zone (GO Zone), Rita GO Zone, or Wilma GO Zone. See
Publication 4492,
Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma, for more information).
-
The home is disposed of as a result of your death.
-
You dispose of the home more than 9 years after the date you closed your mortgage loan.
-
You transfer the home to your spouse, or to your former spouse incident to a divorce, where no gain is included in your income.
-
You dispose of the home at a loss.
-
Your home is destroyed by a casualty, and you replace it on its original site within 2 years after the end of the tax year
when the
destruction happened (within 5 years if the home was in the Hurricane Katrina disaster area and was destroyed by reason of
the hurricane after August
24, 2005).
-
You refinance your mortgage loan (unless you later meet the conditions listed previously under When the recapture applies).
Notice of amounts.
At or near the time of settlement of your mortgage loan, you should receive a notice that provides the federally subsidized
amount and other
information you will need to figure your recapture tax.
How to figure and report the recapture.
The recapture tax is figured on Form 8828, Recapture of Federal Mortgage Subsidy.
If you sell your home and your mortgage is subject to recapture rules, you must file Form 8828 even if you do not owe a recapture
tax. Attach Form
8828 to your Form 1040. For more information, see Form 8828 and its instructions.
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