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1040x Irs

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1040x Irs

1040x irs 5. 1040x irs   Soil and Water Conservation Expenses Table of Contents Introduction Topics - This chapter discusses: Business of Farming Plan Certification Conservation ExpensesWater well. 1040x irs Assessment by Conservation DistrictAssessment for Depreciable Property 25% Limit on DeductionNet operating loss. 1040x irs When to Deduct or Capitalize Sale of a Farm Introduction If you are in the business of farming, you can choose to deduct certain expenses for: Soil or water conservation, Prevention of erosion of land used in farming, or Endangered species recovery. 1040x irs Otherwise, these are capital expenses that must be added to the basis of the land. 1040x irs (See chapter 6 for information on determining basis. 1040x irs ) Conservation expenses for land in a foreign country do not qualify for this special treatment. 1040x irs The deduction for conservation expenses cannot be more than 25% of your gross income from farming. 1040x irs See 25% Limit on Deduction , later. 1040x irs Although some expenses are not deductible as soil and water conservation expenses, they may be deductible as ordinary and necessary farm expenses. 1040x irs These include interest and taxes, the cost of periodically clearing brush from productive land, the regular removal of sediment from a drainage ditch, and expenses paid or incurred primarily to produce an agricultural crop that may also conserve soil. 1040x irs You must include in income most government payments for approved conservation practices. 1040x irs However, you can exclude some payments you receive under certain cost-sharing conservation programs. 1040x irs For more information, see Agricultural Program Payments in chapter 3. 1040x irs To get the full deduction to which you are entitled, you should maintain your records to clearly distinguish between your ordinary and necessary farm business expenses and your soil and water conservation expenses. 1040x irs Topics - This chapter discusses: Business of farming Plan certification Conservation expenses Assessment by conservation district 25% limit on deduction When to deduct or capitalize Sale of a farm Business of Farming For purposes of soil and water conservation expenses, you are in the business of farming if you cultivate, operate, or manage a farm for profit, either as an owner or a tenant. 1040x irs You are not in the business of farming if you cultivate or operate a farm for recreation or pleasure, rather than for profit. 1040x irs You are not farming if you are engaged only in forestry or the growing of timber. 1040x irs Farm defined. 1040x irs   A farm includes livestock, dairy, poultry, fish, fruit, and truck farms. 1040x irs It also includes plantations, ranches, ranges, and orchards. 1040x irs A fish farm is an area where fish and other marine animals are grown or raised and artificially fed, protected, etc. 1040x irs It does not include an area where they are merely caught or harvested. 1040x irs A plant nursery is a farm for purposes of deducting soil and water conservation expenses. 1040x irs Farm rental. 1040x irs   If you own a farm and receive farm rental payments based on farm production, either in cash or crop shares, you are in the business of farming. 1040x irs If you get cash rental for a farm you own that is not used in farm production, you cannot deduct soil and water conservation expenses for that farm. 1040x irs   If you receive a fixed rental payment that is not based on farm production, you are in the business of farming only if you materially participate in operating or managing the farm. 1040x irs Example. 1040x irs You own a farm in Iowa and live in California. 1040x irs You rent the farm for $175 in cash per acre and do not materially participate in producing or managing production of the crops grown on the farm. 1040x irs You cannot deduct your soil conservation expenses for this farm. 1040x irs You must capitalize the expenses and add them to the basis of the land. 1040x irs     For more information, see Material participation for landlords under Landlord Participation in Farming in chapter 12. 1040x irs Plan Certification You can deduct soil and water conservation expenses only if they are consistent with a plan approved by the Natural Resources Conservation Service (NRCS) of the Department of Agriculture. 1040x irs If no such plan exists, the expenses must be consistent with a soil conservation plan of a comparable state agency. 1040x irs Keep a copy of the plan with your books and records to support your deductions. 1040x irs Conservation plan. 1040x irs   A conservation plan includes the farming conservation practices approved for the area where your farmland is located. 1040x irs There are three types of approved plans. 1040x irs NRCS individual site plans. 1040x irs These plans are issued individually to farmers who request assistance from NRCS to develop a conservation plan designed specifically for their farmland. 1040x irs NRCS county plans. 1040x irs These plans include a listing of farm conservation practices approved for the county where the farmland is located. 1040x irs You can deduct expenses for conservation practices not included on the NRCS county plans only if the practice is a part of an individual site plan. 1040x irs Comparable state agency plans. 1040x irs These plans are approved by state agencies and can be approved individual site plans or county plans. 1040x irs   A list of NRCS conservation programs is available at www. 1040x irs nrcs. 1040x irs usda. 1040x irs gov/programs. 1040x irs Individual site plans can be obtained from NRCS offices and the comparable state agencies. 1040x irs Conservation Expenses You can deduct conservation expenses only for land you or your tenant are using, or have used in the past, for farming. 1040x irs These expenses include, but are not limited to, the following. 1040x irs The treatment or movement of earth, such as: Leveling, Conditioning, Grading, Terracing, Contour furrowing, and Restoration of soil fertility. 1040x irs The construction, control, and protection of: Diversion channels, Drainage ditches, Irrigation ditches, Earthen dams, and Watercourses, outlets, and ponds. 1040x irs The eradication of brush. 1040x irs The planting of windbreaks. 1040x irs You cannot deduct expenses to drain or fill wetlands, or to prepare land for center pivot irrigation systems, as soil and water conservation expenses. 1040x irs These expenses are added to the basis of the land. 1040x irs If you choose to deduct soil and water conservation expenses, you cannot exclude from gross income any cost-sharing payments you receive for those expenses. 1040x irs See chapter 3 for information about payments eligible for the cost-sharing exclusion. 1040x irs New farm or farmland. 1040x irs   If you acquire a new farm or new farmland from someone who was using it in farming immediately before you acquired the land, soil and water conservation expenses you incur on it will be treated as made on land used in farming at the time the expenses were paid or incurred. 1040x irs You can deduct soil and water conservation expenses for this land if your use of it is substantially a continuation of its use in farming. 1040x irs The new farming activity does not have to be the same as the old farming activity. 1040x irs For example, if you buy land that was used for grazing cattle and then prepare it for use as an apple orchard, you can deduct your conservation expenses. 1040x irs Land not used for farming. 1040x irs   If your conservation expenses benefit both land that does not qualify as land used for farming and land that does qualify, you must allocate the expenses between the two types of land. 1040x irs For example, if the expenses benefit 200 acres of your land, but only 120 acres of this land are used for farming, then you can deduct 60% (120 ÷ 200) of the expenses. 1040x irs You can use another method to allocate these expenses if you can clearly show that your method is more reasonable. 1040x irs Depreciable conservation assets. 1040x irs   You generally cannot deduct your expenses for depreciable conservation assets. 1040x irs However, you can deduct certain amounts you pay or incur for an assessment for depreciable property that a soil and water conservation or drainage district levies against your farm. 1040x irs See Assessment for Depreciable Property , later. 1040x irs   You must capitalize expenses to buy, build, install, or improve depreciable structures or facilities. 1040x irs These expenses include those for materials, supplies, wages, fuel, hauling, and moving dirt when making structures such as tanks, reservoirs, pipes, culverts, canals, dams, wells, or pumps composed of masonry, concrete, tile, metal, or wood. 1040x irs You recover your capital investment through annual allowances for depreciation. 1040x irs   You can deduct soil and water conservation expenses for nondepreciable earthen items. 1040x irs Nondepreciable earthen items include certain dams, ponds, and terraces described under Property Having a Determinable Useful Life in chapter 7. 1040x irs Water well. 1040x irs   You cannot deduct the cost of drilling a water well for irrigation and other agricultural purposes as a soil and water conservation expense. 1040x irs It is a capital expense. 1040x irs You recover your cost through depreciation. 1040x irs You also must capitalize your cost for drilling a test hole. 1040x irs If the test hole produces no water and you continue drilling, the cost of the test hole is added to the cost of the producing well. 1040x irs You can recover the total cost through depreciation deductions. 1040x irs   If a test hole, dry hole, or dried-up well (resulting from prolonged lack of rain, for instance) is abandoned, you can deduct your unrecovered cost in the year of abandonment. 1040x irs Abandonment means that all economic benefits from the well are terminated. 1040x irs For example, filling or sealing a well excavation or casing so that all economic benefits from the well are terminated constitutes an abandonment. 1040x irs Endangered species recovery expenses. 1040x irs   If you are in the business of farming and meet other specific requirements, you can choose to deduct the conservation expenses discussed earlier as endangered species recovery expenses. 1040x irs Otherwise, these are capital expenses that must be added to the basis of the land. 1040x irs   The expenses must be paid or incurred for the purpose of achieving site-specific management actions recommended in a recovery plan approved under section 4(f) of the Endangered Species Act of 1973. 1040x irs See Internal Revenue Code section 175 for more information. 1040x irs Assessment by Conservation District In some localities, a soil or water conservation or drainage district incurs expenses for soil or water conservation and levies an assessment against the farmers who benefit from the expenses. 1040x irs You can deduct as a conservation expense amounts you pay or incur for the part of an assessment that: Covers expenses you could deduct if you had paid them directly, or Covers expenses for depreciable property used in the district's business. 1040x irs Assessment for Depreciable Property You generally can deduct as a conservation expense amounts you pay or incur for the part of a conservation or drainage district assessment that covers expenses for depreciable property. 1040x irs This includes items such as pumps, locks, concrete structures (including dams and weir gates), draglines, and similar equipment. 1040x irs The depreciable property must be used in the district's soil and water conservation activities. 1040x irs However, the following limits apply to these assessments. 1040x irs The total assessment limit. 1040x irs The yearly assessment limit. 1040x irs After you apply these limits, the amount you can deduct is added to your other conservation expenses for the year. 1040x irs The total for these expenses is then subject to the 25% of gross income from farming limit on the deduction, discussed later. 1040x irs See Table 5-1 for a brief summary of these limits. 1040x irs Table 5-1. 1040x irs Limits on Deducting an Assessment by a Conservation District for Depreciable Property Total Limit on Deduction for Assessment for Depreciable Property Yearly Limit on Deduction for Assessment for Depreciable Property Yearly Limit for All Conservation Expenses 10% of: $500 + 10% of: 25% of: Total assessment against all members of the district for the property. 1040x irs Your deductible share of the cost to the district for the property. 1040x irs Your gross income from farming. 1040x irs No one taxpayer can deduct more than 10% of the total assessment. 1040x irs Any amount over 10% is a capital expense and is added to the basis of your land. 1040x irs If an assessment is paid in installments, each payment must be prorated between the conservation expense and the capital expense. 1040x irs If the amount you pay or incur for any year is more than the limit, you can deduct for that year only 10% of your deductible share of the cost. 1040x irs You can deduct the remainder in equal amounts over the next 9 tax years. 1040x irs Limit for all conservation expenses, including assessments for depreciable property. 1040x irs Amounts greater than 25% can be carried to the following year and added to that year's expenses. 1040x irs The total is then subject to the 25% of gross income from farming limit in that year. 1040x irs To ensure your deduction is within the deduction limits, keep records to show the following. 1040x irs The total assessment against all members of the district for the depreciable property. 1040x irs Your deductible share of the cost to the district for the depreciable property. 1040x irs Your gross income from farming. 1040x irs Total assessment limit. 1040x irs   You cannot deduct more than 10% of the total amount assessed to all members of the conservation or drainage district for the depreciable property. 1040x irs This applies whether you pay the assessment in one payment or in installments. 1040x irs If your assessment is more than 10% of the total amount assessed, both the following rules apply. 1040x irs The amount over 10% is a capital expense and is added to the basis of your land. 1040x irs If the assessment is paid in installments, each payment must be prorated between the conservation expense and the capital expense. 1040x irs Yearly assessment limit. 1040x irs   The maximum amount you can deduct in any one year is the total of 10% of your deductible share of the cost as explained earlier, plus $500. 1040x irs If the amount you pay or incur is equal to or less than the maximum amount, you can deduct it in the year it is paid or incurred. 1040x irs If the amount you pay or incur is more, you can deduct in that year only 10% of your deductible share of the cost. 1040x irs You can deduct the remainder in equal amounts over the next 9 tax years. 1040x irs Your total conservation expense deduction for each year is also subject to the 25% of gross income from farming limit on the deduction, discussed later. 1040x irs Example 1. 1040x irs This year, the soil conservation district levies and you pay an assessment of $2,400 against your farm. 1040x irs Of the assessment, $1,500 is for digging drainage ditches. 1040x irs You can deduct this part as a soil or conservation expense as if you had paid it directly. 1040x irs The remaining $900 is for depreciable equipment to be used in the district's irrigation activities. 1040x irs The total amount assessed by the district against all its members for the depreciable equipment is $7,000. 1040x irs The total amount you can deduct for the depreciable equipment is limited to 10% of the total amount assessed by the district against all its members for depreciable equipment, or $700. 1040x irs The $200 excess ($900 − $700) is a capital expense you must add to the basis of your farm. 1040x irs To figure the maximum amount you can deduct for the depreciable equipment this year, multiply your deductible share of the total assessment ($700) by 10%. 1040x irs Add $500 to the result for a total of $570. 1040x irs Your deductible share, $700, is greater than the maximum amount deductible in one year, so you can deduct only $70 of the amount you paid or incurred for depreciable property this year (10% of $700). 1040x irs You can deduct the balance at the rate of $70 a year over the next 9 years. 1040x irs You add $70 to the $1,500 portion of the assessment for drainage ditches. 1040x irs You can deduct $1,570 of the $2,400 assessment as a soil and water conservation expense this year, subject to the 25% of gross income from farming limit on the deduction, discussed later. 1040x irs Example 2. 1040x irs Assume the same facts in Example 1 except that $1,850 of the $2,400 assessment is for digging drainage ditches and $550 is for depreciable equipment. 1040x irs The total amount assessed by the district against all its members for depreciable equipment is $5,500. 1040x irs The total amount you can deduct for the depreciable equipment is limited to 10% of this amount, or $550. 1040x irs The maximum amount you can deduct this year for the depreciable equipment is $555 (10% of your deductible share of the total assessment, $55, plus $500). 1040x irs Since your deductible share is less than the maximum amount deductible in one year, you can deduct the entire $550 this year. 1040x irs You can deduct the entire assessment, $2,400, as a soil and water conservation expense this year, subject to the 25% of gross income from farming limit on the deduction, discussed below. 1040x irs Sale or other disposal of land during 9-year period. 1040x irs   If you dispose of the land during the 9-year period for deducting conservation expenses subject to the yearly limit, any amounts you have not yet deducted because of this limit are added to the basis of the property. 1040x irs Death of farmer during 9-year period. 1040x irs   If a farmer dies during the 9-year period, any remaining amounts not yet deducted are deducted in the year of death. 1040x irs 25% Limit on Deduction The total deduction for conservation expenses in any tax year is limited to 25% of your gross income from farming for the year. 1040x irs Gross income from farming. 1040x irs   Gross income from farming is the income you derive in the business of farming from the production of crops, fish, fruits, other agricultural products, or livestock. 1040x irs Gains from sales of draft, breeding, or dairy livestock are included. 1040x irs Gains from sales of assets such as farm machinery, or from the disposition of land, are not included. 1040x irs Carryover of deduction. 1040x irs   If your deductible conservation expenses in any year are more than 25% of your gross income from farming for that year, you can carry the unused deduction over to later years. 1040x irs However, the deduction in any later year is limited to 25% of the gross income from farming for that year as well. 1040x irs Example. 1040x irs In 2012, you have gross income of $32,000 from two farms. 1040x irs During the year, you incurred $10,000 of deductible soil and water conservation expenses for one of the farms. 1040x irs However, your deduction is limited to 25% of $32,000, or $8,000. 1040x irs The $2,000 excess ($10,000 − $8,000) is carried over to 2013 and added to deductible soil and water conservation expenses made in that year. 1040x irs The total of the 2012 carryover plus 2013 expenses is deductible in 2013, subject to the limit of 25% of your gross income from farming in 2013. 1040x irs Any expenses over the limit in that year are carried to 2014 and later years. 1040x irs Net operating loss. 1040x irs   The deduction for soil and water conservation expenses, after applying the 25% limit, is included when figuring a net operating loss (NOL) for the year. 1040x irs If the NOL is carried to another year, the soil and water conservation deduction included in the NOL is not subject to the 25% limit in the year to which it is carried. 1040x irs When to Deduct or Capitalize If you choose to deduct soil and water conservation expenses, you must deduct the total allowable amount on your tax return for the first year you pay or incur these expenses. 1040x irs If you do not choose to deduct the expenses, you must capitalize them. 1040x irs Change of method. 1040x irs   If you want to change your method for the treatment of soil and water conservation expenses, or you want to treat the expenses for a particular project or a single farm in a different manner, you must get the approval of the IRS. 1040x irs To get this approval, submit a written request by the due date of your return for the first tax year you want the new method to apply. 1040x irs You or your authorized representative must sign the request. 1040x irs   The request must include the following information. 1040x irs Your name and address. 1040x irs The first tax year the method or change of method is to apply. 1040x irs Whether the method or change of method applies to all your soil and water conservation expenses or only to those for a particular project or farm. 1040x irs If the method or change of method does not apply to all your expenses, identify the project or farm to which the expenses apply. 1040x irs The total expenses you paid or incurred in the first tax year the method or change of method is to apply. 1040x irs A statement that you will account separately in your books for the expenses to which this method or change of method relates. 1040x irs Send your request to the following  address. 1040x irs  Department of the Treasury Internal Revenue Service Center Cincinnati, OH 45999  For more information, see Change in  Accounting Method in chapter 2. 1040x irs Sale of a Farm If you sell your farm, you cannot adjust the basis of the land at the time of the sale for any unused carryover of soil and water conservation expenses (except for deductions of assessments for depreciable property, discussed earlier). 1040x irs However, if you acquire another farm and return to the business of farming, you can start taking deductions again for the unused carryovers. 1040x irs Gain on sale of farmland. 1040x irs   If you held the land 5 years or less before you sold it, gain on the sale of the land is treated as ordinary income up to the amount you previously deducted for soil and water conservation expenses. 1040x irs If you held the land less than 10 but more than 5 years, the gain is treated as ordinary income up to a specified percentage of the previous deductions. 1040x irs See Section 1252 property under Other Gains in chapter 9. 1040x irs Prev  Up  Next   Home   More Online Publications
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U.S. Citizens and Resident Aliens Abroad

If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. Your worldwide income is subject to U.S. income tax, regardless of where you reside.

When to File

If you are a U.S. citizen or resident alien residing overseas, or are in the military on duty outside the U.S., on the regular due date of your return, you are allowed an automatic 2-month extension to file your return and pay any amount due without requesting an extension. For a calendar year return, the automatic 2-month extension is to June 15.

If you are unable to file your return by the automatic 2-month extension date, you can request an additional extension to October 15 by filing Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, before the automatic 2-month extension date. However, any tax due payments made after June 15 will be subject to both interest charges and failure to pay penalties.

Where to File

If you are a U.S. citizen or resident alien (Green Card Holder) and you live in a foreign country, mail your U.S. tax return to:

Department of the Treasury
Internal Revenue Service Center
Austin, TX 73301-0215
USA

Estimated tax payments should be mailed with form 1040-ES to:

Internal Revenue Service
P.O. Box 1300
Charlotte, NC 28201-1300
USA

Taxpayers with an AGI (Adjusted Gross Income) of $58,000 or less can electronically file their tax return for free using freefile. Taxpayers with an AGI greater than $58,000 can either use the Free File Fillable Forms or efile by purchasing commercial software. A limited number of companies provide software that can accommodate foreign addresses. To determine which will work best for you, view the complete Free File Software list and the services provided.

Taxpayer Identification Number

Each taxpayer who files, or is claimed as a dependent on, a U.S. tax return will need a social security number (SSN) or individual taxpayer identification number (ITIN). To obtain a SSN, use form SS-5, Application for a Social Security Card. To get form SS-5, or to find out if you are eligible for a social security card, contact a Social Security Office or visit Social Security International Operations. If you, or your spouse, are not eligible for a SSN, you can obtain an ITIN by filing form W-7 along with appropriate documentation.

Exchange Rates

You must express the amounts you report on your U.S. tax return in U.S. dollars. If you receive all or part of your income or pay some or all of your expenses in foreign currency, you must translate the foreign currency into U.S. dollars. Taxpayers generally use the yearly average exchange rate to report foreign-earned income that was received regularly throughout the year. However, if you had foreign transactions on specific days, you may also use the exchange rates for those days. Exchange rates can be found at Foreign Currency and Currency Exchange Rates. Yearly average currency exchange rates for most countries can be found at Yearly Average Currency Exchange Rates.

How to Get Tax Help

The IRS Office in Philadelphia provides international tax assistance. This office is open Monday through Friday from 6:00 a.m. to 11:00 p.m. EST and can be contacted by:

  • Phone: 1 (267) 941-1000 (not toll-free)
  • FAX:1 (267) 941-1055
  • Email: Email the IRS
    (e-mail is for general tax questions; NOT questions regarding your tax account)
  • Mail: Internal Revenue Service
    Philadelphia, Pa 19255-0725

The IRS has customer service personnel available to provide tax assistance in the following Embassies and Consulates abroad:

 

Permanent IRS Offices Outside the United States
Office Address Office Phone Numbers and Email

U.S. Consulate
Internal Revenue Service
Frankfurt
Giessener Str.
30
60435 Frankfurt am Main
Germany

Walk-in assistance by appointment only
Tuesdays 9:00 a.m.-12:30 p.m.
Call (49) (69) 7535-3811 to request an appointment.

Phone Service
Tel: [49] (69) 7535-3823
9:00 a.m.-12:30 p.m. and 1:30 p.m.-3:30 p.m.
Monday through Thursday
U.S. Embassy
Internal Revenue Service
London
24/31 Grosvenor Square
London W1A 1 AE
England
Walk-in assistance
Tuesday through Thursday
9:00 a.m. - 1:00 p.m. and 2:00 p.m. - 4:00 p.m.

Phone Service
Tel: [44] (207) 894-0477
Monday 9 a.m. to 4 p.m.
Tuesday through Thursday 9 a.m. to 12:00 noon.
Fax: [44] (207) 495-4224
U.S. Embassy
Internal Revenue Service
2 Avenue Gabriel
75382 Paris Cedex 08
France
Walk-in assistance
Monday through Friday
9:00 a.m.- 12:00 noon

Phone Service
Tel. [33] (1) 4312-2555
Monday - Friday 9:00 a.m. - 12:00 noon and 1:30 p.m. - 3:30 p.m.
Fax: +33-1-4312-2303
Email: irs.paris@irs.gov
U.S. Embassy Beijing
Internal Revenue Service
No. 55 An Jia Lou Lu
Beijing 100600
Peoples Republic of China
Walk-in assistance by appointment only.
Wednesdays 1:00 p.m. – 4:00 p.m.
Call or email to request an appointment.

Phone Service
Tel: [86] (10) 8531-3983
Fax: [86] (10) 8531-4287
Email: irs.beijing@irs.gov (for all inquiries)

 

Help with Unresolved Tax Problems

If you are experiencing a tax problem that is causing you economic harm or has not been resolved through normal channels, you can contact the Taxpayer Advocate.

References/Related Topics

Page Last Reviewed or Updated: 31-Jan-2014

The 1040x Irs

1040x irs 15. 1040x irs   Selling Your Home Table of Contents Reminder Introduction Useful Items - You may want to see: Main Home Figuring Gain or LossSelling Price Amount Realized Adjusted Basis Amount of Gain or Loss Dispositions Other Than Sales Determining Basis Excluding the GainMaximum Exclusion Ownership and Use Tests Reduced Maximum Exclusion Business Use or Rental of Home Reporting the SaleSeller-financed mortgage. 1040x irs More information. 1040x irs Special SituationsException for sales to related persons. 1040x irs Recapturing (Paying Back) a Federal Mortgage Subsidy Reminder Home sold with undeducted points. 1040x irs  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. 1040x irs See Mortgage ending early under Points in chapter 23. 1040x irs Introduction This chapter explains the tax rules that apply when you sell your main home. 1040x irs In most cases, your main home is the one in which you live most of the time. 1040x irs If you sold your main home in 2013, 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). 1040x irs See Excluding the Gain , later. 1040x irs Generally, if you can exclude all the gain, you do not need to report the sale on your tax return. 1040x irs If you have gain that cannot be excluded, it is taxable. 1040x irs Report it on Form 8949, Sales and Other Dispositions of Capital Assets, and Schedule D (Form 1040). 1040x irs You may also have to complete Form 4797, Sales of Business Property. 1040x irs See Reporting the Sale , later. 1040x irs If you have a loss on the sale, you generally cannot deduct it on your return. 1040x irs However, you may need to report it. 1040x irs See Reporting the Sale , later. 1040x irs The following are main topics in this chapter. 1040x irs Figuring gain or loss. 1040x irs Basis. 1040x irs Excluding the gain. 1040x irs Ownership and use tests. 1040x irs Reporting the sale. 1040x irs Other topics include the following. 1040x irs Business use or rental of home. 1040x irs Recapturing a federal mortgage subsidy. 1040x irs Useful Items - You may want to see: Publication 523 Selling Your Home 530 Tax Information for Homeowners 547 Casualties, Disasters, and Thefts Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 982 Reduction of Tax Attributes Due to Discharge of Indebtedness 8828 Recapture of Federal Mortgage Subsidy 8949 Sales and Other Dispositions of Capital Assets Main Home This section explains the term “main home. 1040x irs ” 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. 1040x irs To exclude gain under the rules of this chapter, you in most cases 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. 1040x irs Land. 1040x irs   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. 1040x irs However, if you sell vacant land used as part of your main home and that is adjacent to it, you may be able to exclude the gain from the sale under certain circumstances. 1040x irs See Vacant land under Main Home in Publication 523 for more information. 1040x irs Example. 1040x irs You buy a piece of land and move your main home to it. 1040x irs Then you sell the land on which your main home was located. 1040x irs This sale is not considered a sale of your main home, and you cannot exclude any gain on the sale of the land. 1040x irs More than one home. 1040x irs   If you have more than one home, you can exclude gain only from the sale of your main home. 1040x irs You must include in income gain from the sale of any other home. 1040x irs 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 during the year. 1040x irs Example 1. 1040x irs You own two homes, one in New York and one in Florida. 1040x irs From 2009 through 2013, you live in the New York home for 7 months and in the Florida residence for 5 months of each year. 1040x irs In the absence of facts and circumstances indicating otherwise, the New York home is your main home. 1040x irs You would be eligible to exclude the gain from the sale of the New York home but not of the Florida home in 2013. 1040x irs Example 2. 1040x irs You own a house, but you live in another house that you rent. 1040x irs The rented house is your main home. 1040x irs Example 3. 1040x irs You own two homes, one in Virginia and one in New Hampshire. 1040x irs In 2009 and 2010, you lived in the Virginia home. 1040x irs In 2011 and 2012, you lived in the New Hampshire home. 1040x irs In 2013, you lived again in the Virginia home. 1040x irs Your main home in 2009, 2010, and 2013 is the Virginia home. 1040x irs Your main home in 2011 and 2012 is the New Hampshire home. 1040x irs You would be eligible to exclude gain from the sale of either home (but not both) in 2013. 1040x irs Property used partly as your main home. 1040x irs   If you use only part of the property as your main home, the rules discussed in this publication apply only to the gain or loss on the sale of that part of the property. 1040x irs For details, see Business Use or Rental of Home , later. 1040x irs Figuring Gain or Loss 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. 1040x irs Subtract the adjusted basis from the amount realized to get your gain or loss. 1040x irs     Selling price     − Selling expenses       Amount realized       Amount realized     − Adjusted basis       Gain or loss   Selling Price The selling price is the total amount you receive for your home. 1040x irs It includes money and the fair market value of any other property or any other services you receive and all notes, mortgages or other debts assumed by the buyer as part of the sale. 1040x irs Payment by employer. 1040x irs   You may have to sell your home because of a job transfer. 1040x irs 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. 1040x irs Your employer will include it as wages in box 1 of your Form W-2, and you will include it in your income on Form 1040, line 7. 1040x irs Option to buy. 1040x irs   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. 1040x irs If the option is not exercised, you must report the amount as ordinary income in the year the option expires. 1040x irs Report this amount on Form 1040, line 21. 1040x irs Form 1099-S. 1040x irs   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. 1040x irs   However, box 2 will not include the fair market value of any services or property other than cash or notes you received or will receive. 1040x irs Instead, box 4 will be checked to indicate your receipt or expected receipt of these items. 1040x irs Amount Realized The amount realized is the selling price minus selling expenses. 1040x irs Selling expenses. 1040x irs   Selling expenses include: Commissions, Advertising fees, Legal fees, and Loan charges paid by the seller, such as loan placement fees or “points. 1040x irs ” Adjusted Basis While you owned your home, you may have made adjustments (increases or decreases) to the basis. 1040x irs This adjusted basis must be determined before you can figure gain or loss on the sale of your home. 1040x irs For information on how to figure your home's adjusted basis, see Determining Basis , later. 1040x irs Amount of Gain or Loss To figure the amount of gain or loss, compare the amount realized to the adjusted basis. 1040x irs Gain on sale. 1040x irs   If the amount realized is more than the adjusted basis, the difference is a gain and, except for any part you can exclude, in most cases is taxable. 1040x irs Loss on sale. 1040x irs   If the amount realized is less than the adjusted basis, the difference is a loss. 1040x irs A loss on the sale of your main home cannot be deducted. 1040x irs Jointly owned home. 1040x irs   If you and your spouse sell your jointly owned home and file a joint return, you figure your gain or loss as one taxpayer. 1040x irs Separate returns. 1040x irs   If you file separate returns, each of you must figure your own gain or loss according to your ownership interest in the home. 1040x irs Your ownership interest is generally determined by state law. 1040x irs Joint owners not married. 1040x irs   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. 1040x irs Each of you applies the rules discussed in this chapter on an individual basis. 1040x irs Dispositions Other Than Sales Some special rules apply to other dispositions of your main home. 1040x irs Foreclosure or repossession. 1040x irs   If your home was foreclosed on or repossessed, you have a disposition. 1040x irs See Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments, to determine if you have ordinary income, gain, or loss. 1040x irs Abandonment. 1040x irs   If you abandon your home, see Publication 4681 to determine if you have ordinary income, gain, or loss. 1040x irs Trading (exchanging) homes. 1040x irs   If you trade your old home for another home, treat the trade as a sale and a purchase. 1040x irs Example. 1040x irs You owned and lived in a home with an adjusted basis of $41,000. 1040x irs 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. 1040x irs This is treated as a sale of your old home for $50,000 with a gain of $9,000 ($50,000 – $41,000). 1040x irs 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). 1040x irs Transfer to spouse. 1040x irs   If you transfer your home to your spouse or you transfer it to your former spouse incident to your divorce, you in most cases have no gain or loss. 1040x irs This is true even if you receive cash or other consideration for the home. 1040x irs As a result, the rules in this chapter do not apply. 1040x irs More information. 1040x irs   If you need more information, see Transfer to spouse in Publication 523 and Property Settlements in Publication 504, Divorced or Separated Individuals. 1040x irs Involuntary conversion. 1040x irs   You have a disposition when your home is destroyed or condemned and you receive other property or money in payment, such as insurance or a condemnation award. 1040x irs This is treated as a sale and you may be able to exclude all or part of any gain from the destruction or condemnation of your home, as explained later under Special Situations . 1040x irs Determining Basis You need to know your basis in your home to figure any gain or loss when you sell it. 1040x irs Your basis in your home is determined by how you got the home. 1040x irs Generally, your basis is its cost if you bought it or built it. 1040x irs If you got it in some other way (inheritance, gift, etc. 1040x irs ), your basis is generally either its fair market value when you received it or the adjusted basis of the previous owner. 1040x irs While you owned your home, you may have made adjustments (increases or decreases) to your home's basis. 1040x irs 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. 1040x irs See Adjusted Basis , later. 1040x irs You can find more information on basis and adjusted basis in chapter 13 of this publication and in Publication 523. 1040x irs Cost As Basis The cost of property is the amount you paid for it in cash, debt obligations, other property, or services. 1040x irs Purchase. 1040x irs   If you bought your home, your basis is its cost to you. 1040x irs This includes the purchase price and certain settlement or closing costs. 1040x irs In most cases, 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. 1040x irs If you build, or contract to build, a new home, your purchase price can include costs of construction, as discussed in Publication 523. 1040x irs Settlement fees or closing costs. 1040x irs   When you bought your home, you may have paid settlement fees or closing costs in addition to the contract price of the property. 1040x irs You can include in your basis some of the settlement fees and closing costs you paid for buying the home, but not the fees and costs for getting a mortgage loan. 1040x irs 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). 1040x irs    Chapter 13 lists some of the settlement fees and closing costs that you can include in the basis of property, including your home. 1040x irs It also lists some settlement costs that cannot be included in basis. 1040x irs   Also see Publication 523 for additional items and a discussion of basis other than cost. 1040x irs Adjusted Basis Adjusted basis is your cost or other basis increased or decreased by certain amounts. 1040x irs To figure your adjusted basis, you can use Worksheet 1 in Publication 523. 1040x irs Do not use Worksheet 1 if you acquired an interest in your home from a decedent who died in 2010 and whose executor filed Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent. 1040x irs Increases to basis. 1040x irs   These include the following. 1040x irs Additions and other improvements that have a useful life of more than 1 year. 1040x irs Special assessments for local improvements. 1040x irs Amounts you spent after a casualty to restore damaged property. 1040x irs Improvements. 1040x irs   These add to the value of your home, prolong its useful life, or adapt it to new uses. 1040x irs You add the cost of additions and other improvements to the basis of your property. 1040x irs   For example, 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. 1040x irs An addition to your house, such as a new deck, a sunroom, or a new garage, is also an improvement. 1040x irs Repairs. 1040x irs   These maintain your home in good condition but do not add to its value or prolong its life. 1040x irs You do not add their cost to the basis of your property. 1040x irs   Examples of repairs include repainting your house inside or outside, fixing your gutters or floors, repairing leaks or plastering, and replacing broken window panes. 1040x irs Decreases to basis. 1040x irs   These include the following. 1040x irs Discharge of qualified principal residence indebtedness that was excluded from income. 1040x irs Some or all of the cancellation of debt income that was excluded due to your bankruptcy or insolvency. 1040x irs For details, see Publication 4681. 1040x irs Gain you postponed from the sale of a previous home before May 7, 1997. 1040x irs Deductible casualty losses. 1040x irs Insurance payments you received or expect to receive for casualty losses. 1040x irs Payments you received for granting an easement or right-of-way. 1040x irs Depreciation allowed or allowable if you used your home for business or rental purposes. 1040x irs Energy-related credits allowed for expenditures made on the residence. 1040x irs (Reduce the increase in basis otherwise allowable for expenditures on the residence by the amount of credit allowed for those expenditures. 1040x irs ) Adoption credit you claimed for improvements added to the basis of your home. 1040x irs Nontaxable payments from an adoption assistance program of your employer you used for improvements you added to the basis of your home. 1040x irs 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. 1040x irs An energy conservation measure is an installation or modification primarily designed either to reduce consumption of electricity or natural gas or to improve the management of energy demand for a home. 1040x irs District of Columbia first-time homebuyer credit (allowed on the purchase of a principal residence in the District of Columbia beginning on August 5, 1997 and before January 1, 2012). 1040x irs General sales taxes (allowed beginning 2004 and ending before 2014) claimed as an itemized deduction on Schedule A (Form 1040) that were imposed on the purchase of personal property, such as a houseboat used as your home or a mobile home. 1040x irs Discharges of qualified principal residence indebtedness. 1040x irs   You may be able to exclude from gross income a discharge of qualified principal residence indebtedness. 1040x irs This exclusion applies to discharges made after 2006 and before 2014. 1040x irs If you choose to exclude this income, you must reduce (but not below zero) the basis of the principal residence by the amount excluded from your gross income. 1040x irs   File Form 982 with your tax return. 1040x irs See the form's instructions for detailed information. 1040x irs Recordkeeping. 1040x irs You should keep records to prove your home's adjusted basis. 1040x irs 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. 1040x irs 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. 1040x irs Keep records proving the basis of both homes as long as they are needed for tax purposes. 1040x irs The records you should keep include: Proof of the home's purchase price and purchase expenses, Receipts and other records for all improvements, additions, and other items that affect the home's adjusted basis, Any worksheets or other computations 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, Any Form 982 you filed to report any discharge of qualified principal residence indebtedness, Any Form 2119, Sale of Your Home, you filed to postpone gain from the 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 Worksheet or the Capital Improvements Worksheet from the Form 2119 instructions, or other source of computations. 1040x irs Excluding the Gain You may qualify to exclude from your income all or part of any gain from the sale of your main home. 1040x irs 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. 1040x irs To qualify, you must meet the ownership and use tests described later. 1040x irs 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. 1040x irs You can use Worksheet 2 in Publication 523 to figure the amount of your exclusion and your taxable gain, if any. 1040x irs If you have any taxable gain from the sale of your home, you may have to increase your withholding or make estimated tax payments. 1040x irs See Publication 505, Tax Withholding and Estimated Tax. 1040x irs Maximum Exclusion You can exclude up to $250,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if all of the following are true. 1040x irs You meet the ownership test. 1040x irs You meet the use test. 1040x irs During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home. 1040x irs For details on gain allocated to periods of nonqualified use, see Periods of nonqualified use , later. 1040x irs You may be able to exclude up to $500,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if you are married and file a joint return and meet the requirements listed in the discussion of the special rules for joint returns, later, under Married Persons . 1040x irs Ownership and Use Tests To claim the exclusion, you must meet the ownership and use tests. 1040x irs This means that during the 5-year period ending on the date of the sale, you must have: Owned the home for at least 2 years (the ownership test), and Lived in the home as your main home for at least 2 years (the use test). 1040x irs Exception. 1040x irs   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. 1040x irs However, the maximum amount you may be able to exclude will be reduced. 1040x irs See Reduced Maximum Exclusion , later. 1040x irs Example 1—home owned and occupied for at least 2 years. 1040x irs Mya bought and moved into her main home in September 2011. 1040x irs She sold the home at a gain in October 2013. 1040x irs During the 5-year period ending on the date of sale in October 2013, she owned and lived in the home for more than 2 years. 1040x irs She meets the ownership and use tests. 1040x irs Example 2—ownership test met but use test not met. 1040x irs Ayden bought a home, lived in it for 6 months, moved out, and never occupied the home again. 1040x irs He later sold the home for a gain. 1040x irs He owned the home during the entire 5-year period ending on the date of sale. 1040x irs He meets the ownership test but not the use test. 1040x irs He cannot exclude any part of his gain on the sale unless he qualified for a reduced maximum exclusion (explained later). 1040x irs 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 nor do they both have to occur at the same time. 1040x irs 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. 1040x irs Temporary absence. 1040x irs   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. 1040x irs The following examples assume that the reduced maximum exclusion (discussed later) does not apply to the sales. 1040x irs Example 1. 1040x irs David Johnson, who is single, bought and moved into his home on February 1, 2011. 1040x irs Each year during 2011 and 2012, David left his home for a 2-month summer vacation. 1040x irs David sold the house on March 1, 2013. 1040x irs Although the total time David used his home is less than 2 years (21 months), he meets the requirement and may exclude gain. 1040x irs 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. 1040x irs Example 2. 1040x irs Professor Paul Beard, who is single, bought and moved into a house on August 18, 2010. 1040x irs He lived in it as his main home continuously until January 5, 2012, when he went abroad for a 1-year sabbatical leave. 1040x irs On February 6, 2013, 1 month after returning from the leave, Paul sold the house at a gain. 1040x irs Because his leave was not a short temporary absence, he cannot include the period of leave to meet the 2-year use test. 1040x irs He cannot exclude any part of his gain, because he did not use the residence for the required 2 years. 1040x irs Ownership and use tests met at different times. 1040x irs   You can meet the ownership and use tests during different 2-year periods. 1040x irs However, you must meet both tests during the 5-year period ending on the date of the sale. 1040x irs Example. 1040x irs Beginning in 2002, Helen Jones lived in a rented apartment. 1040x irs The apartment building was later converted to condominiums, and she bought her same apartment on December 3, 2010. 1040x irs In 2011, Helen became ill and on April 14 of that year she moved to her daughter's home. 1040x irs On July 12, 2013, while still living in her daughter's home, she sold her condominium. 1040x irs Helen can exclude gain on the sale of her condominium because she met the ownership and use tests during the 5-year period from July 13, 2008, to July 12, 2013, the date she sold the condominium. 1040x irs She owned her condominium from December 3, 2010, to July 12, 2013 (more than 2 years). 1040x irs She lived in the property from July 13, 2008 (the beginning of the 5-year period), to April 14, 2011 (more than 2 years). 1040x irs The time Helen lived in her daughter's home during the 5-year period can be counted toward her period of ownership, and the time she lived in her rented apartment during the 5-year period can be counted toward her period of use. 1040x irs Cooperative apartment. 1040x irs   If you sold stock as a tenant-stockholder 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: Owned the stock for at least 2 years, and Lived in the house or apartment that the stock entitles you to occupy as your main home for at least 2 years. 1040x irs Exceptions to Ownership and Use Tests The following sections contain exceptions to the ownership and use tests for certain taxpayers. 1040x irs Exception for individuals with a disability. 1040x irs   There is an exception to the use test if: 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 during the 5-year period before the sale of your home. 1040x irs Under this exception, you are considered to live in your home during any time within the 5-year period that you own the home and live in a facility (including a nursing home) licensed by a state or political subdivision to care for persons in your condition. 1040x irs 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. 1040x irs Previous home destroyed or condemned. 1040x irs   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 replacement home on whose sale you wish to exclude gain. 1040x irs This rule applies if any part of the basis of the home you sold depended on the basis of the destroyed or condemned home. 1040x irs 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. 1040x irs Members of the uniformed services or Foreign Service, employees of the intelligence community, or employees or volunteers of the Peace Corps. 1040x irs   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, or as an employee of the intelligence community. 1040x irs You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve outside the United States either as an employee of the Peace Corps on "qualified official extended duty" or as an enrolled volunteer or volunteer leader of the Peace Corps. 1040x irs 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. 1040x irs   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. 1040x irs For more information about the suspension of the 5-year test period, see Members of the uniformed services or Foreign Service, employees of the intelligence community, or employees or volunteers of the Peace Corps in Publication 523. 1040x irs Married Persons If you and your spouse file a joint return for the year of sale and one spouse meets the ownership and use tests, you can exclude up to $250,000 of the gain. 1040x irs (But see Special rules for joint returns , next. 1040x irs ) Special rules for joint returns. 1040x irs   You can exclude up to $500,000 of the gain on the sale of your main home if all of the following are true. 1040x irs You are married and file a joint return for the year. 1040x irs Either you or your spouse meets the ownership test. 1040x irs Both you and your spouse meet the use test. 1040x irs 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. 1040x irs If either spouse does not satisfy all these requirements, the maximum exclusion that can be claimed by the couple is the total of the maximum exclusions that each spouse would qualify for if not married and the amounts were figured separately. 1040x irs For this purpose, each spouse is treated as owning the property during the period that either spouse owned the property. 1040x irs Example 1—one spouse sells a home. 1040x irs Emily sells her home in June 2013 for a gain of $300,000. 1040x irs She marries Jamie later in the year. 1040x irs She meets the ownership and use tests, but Jamie does not. 1040x irs Emily can exclude up to $250,000 of gain on a separate or joint return for 2013. 1040x irs The $500,000 maximum exclusion for certain joint returns does not apply because Jamie does not meet the use test. 1040x irs Example 2—each spouse sells a home. 1040x irs The facts are the same as in Example 1 except that Jamie also sells a home in 2013 for a gain of $200,000 before he marries Emily. 1040x irs He meets the ownership and use tests on his home, but Emily does not. 1040x irs Emily can exclude $250,000 of gain and Jamie can exclude $200,000 of gain on the respective sales of their individual homes. 1040x irs However, Emily cannot use Jamie's unused exclusion to exclude more than $250,000 of gain. 1040x irs Therefore, Emily and Jamie must recognize $50,000 of gain on the sale of Emily's home. 1040x irs The $500,000 maximum exclusion for certain joint returns does not apply because Emily and Jamie do not both meet the use test for the same home. 1040x irs Sale of main home by surviving spouse. 1040x irs   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. 1040x irs   If you meet all of the following requirements, you may qualify to exclude up to $500,000 of any gain from the sale or exchange of your main home. 1040x irs The sale or exchange took place after 2008. 1040x irs The sale or exchange took place no more than 2 years after the date of death of your spouse. 1040x irs You have not remarried. 1040x irs You and your spouse met the use test at the time of your spouse's death. 1040x irs You or your spouse met the ownership test at the time of your spouse's death. 1040x irs Neither you nor your spouse excluded gain from the sale of another home during the last 2 years. 1040x irs Example. 1040x irs   Harry owned and used a house as his main home since 2009. 1040x irs Harry and Wilma married on July 1, 2013, and from that date they use Harry's house as their main home. 1040x irs Harry died on August 15, 2013, and Wilma inherited the property. 1040x irs Wilma sold the property on September 3, 2013, at which time she had not remarried. 1040x irs Although Wilma owned and used the house for less than 2 years, Wilma is considered to have satisfied the ownership and use tests because her period of ownership and use includes the period that Harry owned and used the property before death. 1040x irs Home transferred from spouse. 1040x irs   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. 1040x irs Use of home after divorce. 1040x irs   You are considered to have used property as your main home during any period when: You owned it, and Your spouse or former spouse is allowed to live in it under a divorce or separation instrument and uses it as his or her main home. 1040x irs Reduced Maximum Exclusion If you fail to meet the requirements to qualify for the $250,000 or $500,000 exclusion, you may still qualify for a reduced exclusion. 1040x irs This applies to those who: Fail to meet the ownership and use tests, or Have used the exclusion within 2 years of selling their current home. 1040x irs In both cases, to qualify for a reduced exclusion, the sale of your main home must be due to one of the following reasons. 1040x irs A change in place of employment. 1040x irs Health. 1040x irs Unforeseen circumstances. 1040x irs Unforeseen circumstances. 1040x irs   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. 1040x irs   See Publication 523 for more information and to use Worksheet 3 to figure your reduced maximum exclusion. 1040x irs Business Use or Rental of Home You may be able to exclude gain from the sale of a home you have used for business or to produce rental income. 1040x irs But you must meet the ownership and use tests. 1040x irs Periods of nonqualified use. 1040x irs   In most cases, gain from the sale or exchange of your main home will not qualify for the exclusion to the extent that the gains are allocated to periods of nonqualified use. 1040x irs Nonqualified use is any period after 2008 during which neither you nor your spouse (or your former spouse) used the property as a main home with the following exceptions. 1040x irs Exceptions. 1040x irs   A period of nonqualified use does not include: Any portion of the 5-year period ending on the date of the sale or exchange after the last date you (or your spouse) use the property as a main home; Any period (not to exceed an aggregate period of 10 years) during which you (or your spouse) are serving on qualified official extended duty: As a member of the uniformed services; As a member of the Foreign Service of the United States; or As an employee of the intelligence community; and Any other period of temporary absence (not to exceed an aggregate period of 2 years) due to change of employment, health conditions, or such other unforeseen circumstances as may be specified by the IRS. 1040x irs The gain resulting from the sale of the property is allocated between qualified and nonqualified use periods based on the amount of time the property was held for qualified and nonqualified use. 1040x irs Gain from the sale or exchange of a main home allocable to periods of qualified use will continue to qualify for the exclusion for the sale of your main home. 1040x irs Gain from the sale or exchange of property allocable to nonqualified use will not qualify for the exclusion. 1040x irs Calculation. 1040x irs   To figure the portion of the gain allocated to the period of nonqualified use, multiply the gain by the following fraction:   Total nonqualified use during the period of ownership after 2008      Total period of ownership     This calculation can be found in Worksheet 2, line 10, in Publication 523. 1040x irs Example 1. 1040x irs On May 23, 2007, Amy, who is unmarried for all years in this example, bought a house. 1040x irs She moved in on that date and lived in it until May 31, 2009, when she moved out of the house and put it up for rent. 1040x irs The house was rented from June 1, 2009, to March 31, 2011. 1040x irs Amy claimed depreciation deductions in 2009 through 2011 totaling $10,000. 1040x irs Amy moved back into the house on April 1, 2011, and lived there until she sold it on January 31, 2013, for a gain of $200,000. 1040x irs During the 5-year period ending on the date of the sale (January 31, 2008-January 31, 2013), Amy owned and lived in the house for more than 2 years as shown in the following table. 1040x irs Five Year Period Used as  Home Used as  Rental 1/31/08 – 5/31/09 16 months       6/1/09 – 3/31/11   22 months 4/1/11 – 1/31/13 22 months         38 months 22 months During the period Amy owned the house (2,080 days), her period of nonqualified use was 668 days. 1040x irs Amy divides 668 by 2,080 and obtains a decimal (rounded to at least three decimal places) of 0. 1040x irs 321. 1040x irs To figure her gain attributable to the period of nonqualified use, she multiplies $190,000 (the gain not attributable to the $10,000 depreciation deduction) by 0. 1040x irs 321. 1040x irs Because the gain attributable to periods of nonqualified use is $60,990, Amy can exclude $129,010 of her gain. 1040x irs Example 2. 1040x irs William owned and used a house as his main home from 2007 through 2010. 1040x irs On January 1, 2011, he moved to another state. 1040x irs He rented his house from that date until April 30, 2013, when he sold it. 1040x irs During the 5-year period ending on the date of sale (May 1, 2008-April 30, 2013), William owned and lived in the house for more than 2 years. 1040x irs He must report the sale on Form 4797 because it was rental property at the time of sale. 1040x irs Because the period of nonqualified use does not include any part of the 5-year period after the last date William lived in the house, he has no period of nonqualified use. 1040x irs Because he met the ownership and use tests, he can exclude gain up to $250,000. 1040x irs 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. 1040x irs Depreciation after May 6, 1997. 1040x irs   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. 1040x irs If you can show by adequate records or other evidence that the depreciation allowed was less than the amount allowable, then you may limit the amount of gain recognized to the depreciation allowed. 1040x irs See Publication 544 for more information. 1040x irs Property used partly for business or rental. 1040x irs   If you used property partly as a home and partly for business or to produce rental income, see Publication 523. 1040x irs Reporting the Sale Do not report the 2013 sale of your main home on your tax return unless: You have a gain and do not qualify to exclude all of it, You have a gain and choose not to exclude it, or You received Form 1099-S. 1040x irs If any of these conditions apply, report the entire gain or loss. 1040x irs For details on how to report the gain or loss, see the Instructions for Schedule D (Form 1040) and the Instructions for Form 8949. 1040x irs 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). 1040x irs See Business Use or Rental of Home in Publication 523 and the Instructions for Form 4797. 1040x irs Installment sale. 1040x irs    Some sales are made under arrangements that provide for part or all of the selling price to be paid in a later year. 1040x irs These sales are called “installment sales. 1040x irs ” 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. 1040x irs You may be able to report the part of the gain you cannot exclude on the installment basis. 1040x irs    Use Form 6252, Installment Sale Income, to report the sale. 1040x irs Enter your exclusion on line 15 of Form 6252. 1040x irs Seller-financed mortgage. 1040x irs   If you sell your home and hold a note, mortgage, or other financial agreement, the payments you receive in most cases consist of both interest and principal. 1040x irs You must separately report as interest income the interest you receive as part of each payment. 1040x irs 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 Schedule B (Form 1040A or 1040). 1040x irs The buyer must give you his or her SSN, and you must give the buyer your SSN. 1040x irs Failure to meet these requirements may result in a $50 penalty for each failure. 1040x irs If either you or the buyer does not have and is not eligible to get an SSN, see Social Security Number in chapter 1. 1040x irs More information. 1040x irs   For more information on installment sales, see Publication 537, Installment Sales. 1040x irs Special Situations The situations that follow may affect your exclusion. 1040x irs Sale of home acquired in a like-kind exchange. 1040x irs   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. 1040x irs Gain from a like-kind exchange is not taxable at the time of the exchange. 1040x irs This means that gain will not be taxed until you sell or otherwise dispose of the property you receive. 1040x irs 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. 1040x irs For more information about like-kind exchanges, see Publication 544, Sales and Other Dispositions of Assets. 1040x irs Home relinquished in a like-kind exchange. 1040x irs   If you use your main home partly for business or rental purposes and then exchange the home for another property, see Publication 523. 1040x irs Expatriates. 1040x irs   You cannot claim the exclusion if the expatriation tax applies to you. 1040x irs The expatriation tax applies to certain U. 1040x irs S. 1040x irs citizens who have renounced their citizenship (and to certain long-term residents who have ended their residency). 1040x irs For more information about the expatriation tax, see Expatriation Tax in chapter 4 of Publication 519, U. 1040x irs S. 1040x irs Tax Guide for Aliens. 1040x irs Home destroyed or condemned. 1040x irs   If your home was destroyed or condemned, any gain (for example, because of insurance proceeds you received) qualifies for the exclusion. 1040x irs   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, in the case of a home that was destroyed, or Publication 544, chapter 1, in the case of a home that was condemned. 1040x irs Sale of remainder interest. 1040x irs   Subject to the other rules in this chapter, you can choose to exclude gain from the sale of a remainder interest in your home. 1040x irs 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. 1040x irs Exception for sales to related persons. 1040x irs   You cannot exclude gain from the sale of a remainder interest in your home to a related person. 1040x irs Related persons include your brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc. 1040x irs ), and lineal descendants (children, grandchildren, etc. 1040x irs ). 1040x irs Related persons also include certain corporations, partnerships, trusts, and exempt organizations. 1040x irs 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. 1040x irs You recapture the benefit by increasing your federal income tax for the year of the sale. 1040x irs 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. 1040x irs Loans subject to recapture rules. 1040x irs   The recapture applies to loans that: Came from the proceeds of qualified mortgage bonds, or Were based on mortgage credit certificates. 1040x irs The recapture also applies to assumptions of these loans. 1040x irs When recapture applies. 1040x irs   Recapture of the federal mortgage subsidy applies only if you meet both of the following conditions. 1040x irs You sell or otherwise dispose of your home at a gain within the first 9 years after the date you close your mortgage loan. 1040x irs 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). 1040x irs When recapture does not apply. 1040x irs   Recapture does not apply in any of the following situations. 1040x irs Your mortgage loan was a qualified home improvement loan (QHIL) of not more than $15,000 used for alterations, repairs, and improvements that protect or improve the basic livability or energy efficiency of your home. 1040x irs Your mortgage loan was a QHIL of not more than $150,000 in the case of a QHIL used to repair damage from Hurricane Katrina to homes in the hurricane disaster area; a 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. 1040x irs For more information, see Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma. 1040x irs Also see Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas. 1040x irs The home is disposed of as a result of your death. 1040x irs You dispose of the home more than 9 years after the date you closed your mortgage loan. 1040x irs You transfer the home to your spouse, or to your former spouse incident to a divorce, where no gain is included in your income. 1040x irs You dispose of the home at a loss. 1040x irs 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. 1040x irs The replacement period is extended for main homes destroyed in a federally declared disaster area, a Midwestern disaster area, the Kansas disaster area, and the Hurricane Katrina disaster area. 1040x irs For more information, see Replacement Period in Publication 547. 1040x irs You refinance your mortgage loan (unless you later meet the conditions listed previously under When recapture applies ). 1040x irs Notice of amounts. 1040x irs   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. 1040x irs How to figure and report the recapture. 1040x irs    The recapture tax is figured on Form 8828. 1040x irs 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. 1040x irs Attach Form 8828 to your Form 1040. 1040x irs For more information, see Form 8828 and its instructions. 1040x irs Prev  Up  Next   Home   More Online Publications