File your Taxes for Free!
  • Get your maximum refund*
  • 100% accurate calculations guaranteed*

TurboTax Federal Free Edition - File Taxes Online

Don't let filing your taxes get you down! We'll help make it as easy as possible. With e-file and direct deposit, there's no faster way to get your refund!

Approved TurboTax Affiliate Site. TurboTax and TurboTax Online, among others, are registered trademarks and/or service marks of Intuit Inc. in the United States and other countries. Other parties' trademarks or service marks are the property of the respective owners.


© 2012 - 2018 All rights reserved.

This is an Approved TurboTax Affiliate site. TurboTax and TurboTax Online, among other are registered trademarks and/or service marks of Intuit, Inc. in the United States and other countries. Other parties' trademarks or service marks are the property of the respective owners.
When discussing "Free e-file", note that state e-file is an additional fee. E-file fees do not apply to New York state returns. Prices are subject to change without notice. E-file and get your refund faster
*If you pay an IRS or state penalty or interest because of a TurboTax calculations error, we'll pay you the penalty and interest.
*Maximum Refund Guarantee - or Your Money Back: If you get a larger refund or smaller tax due from another tax preparation method, we'll refund the applicable TurboTax federal and/or state purchase price paid. TurboTax Federal Free Edition customers are entitled to payment of $14.99 and a refund of your state purchase price paid. Claims must be submitted within sixty (60) days of your TurboTax filing date and no later than 6/15/14. E-file, Audit Defense, Professional Review, Refund Transfer and technical support fees are excluded. This guarantee cannot be combined with the TurboTax Satisfaction (Easy) Guarantee. *We're so confident your return will be done right, we guarantee it. Accurate calculations guaranteed. If you pay an IRS or state penalty or interest because of a TurboTax calculations error, we'll pay you the penalty and interest.
https://turbotax.intuit.com/corp/guarantees.jsp

Federal And State Income Tax Forms

Free Tax Filing For State And FederalSend Federal Income Tax Form 1040ezWww Hrblock ComH&r Free Federal Tax FilingFilling Out 1040xIrs State Tax ReturnFree State Tax EfilingEz 1040 E-fileIrs Free File 2012Www Freefile Dor In GovAmended Return FormHow To File An Amended Tax Return For 2012Can You Refile Your TaxesTurbotax Military Edition2011 Irs Form 10401040ez Form For 2014Www Freefilefillableforms ComIrs Ez Form1040x ExampleAmended Tax FormsNew TaxesTurbotax Amend1040ez Tax Form 2014Free 1040ez OnlineShould College Students File Taxes2012 Income Tax FormsFederal Income Tax Forms 2011Instructions For Form 1040ez2012 Income Tax ReturnsFree Tax ReturnsH&r Block Tax OnlineMilitary Tax Free ZonesState Tax Forms To Print OutAmendment Taxes1040ez Free Online FilingFile Old Tax Returns FreeHow Do You Amend TaxesTaxesFederal Ez FormFree Tax Filing For Low Income

Federal And State Income Tax Forms

Federal and state income tax forms Publication 523 - Main Content Table of Contents Main HomeVacant land. Federal and state income tax forms Factors used to determine main home. Federal and state income tax forms Figuring Gain or LossSelling Price Amount Realized Adjusted Basis Amount of Gain or Loss Dispositions Other Than Sales Determining BasisCost As Basis Basis Other Than Cost Adjusted Basis Excluding the GainMaximum Exclusion Ownership and Use Tests Reduced Maximum Exclusion Nonqualified Use Business Use or Rental of HomeUnrecaptured section 1250 gain. Federal and state income tax forms Property Used Partly for Business or Rental Reporting the SaleSeller-financed mortgage. Federal and state income tax forms Individual taxpayer identification number (ITIN). Federal and state income tax forms More information. Federal and state income tax forms Comprehensive Examples Special SituationsException for sales to related persons. Federal and state income tax forms Deducting Taxes in the Year of SaleForm 1099-S. Federal and state income tax forms More information. Federal and state income tax forms Recapturing (Paying Back) a Federal Mortgage Subsidy Recapture of First-Time Homebuyer CreditExample. Federal and state income tax forms Worksheets How To Get Tax HelpLow Income Taxpayer Clinics Main Home This section explains the term “main home. Federal and state income tax forms ” 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. Federal and state income tax forms To exclude gain under the rules in this publication, 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. Federal and state income tax forms Land. Federal and state income tax forms   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. Federal and state income tax forms Example. Federal and state income tax forms You buy a piece of land and move your main home to it. Federal and state income tax forms Then, you sell the land on which your main home was located. Federal and state income tax forms This sale is not considered a sale of your main home, and you cannot exclude any gain on the sale of the land. Federal and state income tax forms Vacant land. Federal and state income tax forms   The sale of vacant land is not a sale of your main home unless: The vacant land is adjacent to land containing your home, You owned and used the vacant land as part of your main home, The separate sale of your home satisfies the requirements for exclusion and occurs within 2 years before or 2 years after the date of the sale of the vacant land, and The other requirements for excluding gain from the sale of a main home have been satisfied with respect to the vacant land. Federal and state income tax forms If these requirements are met, the sale of the home and the sale of the vacant land are treated as one sale and only one maximum exclusion can be applied to any gain. Federal and state income tax forms See Excluding the Gain , later. Federal and state income tax forms The destruction of your home is treated as a sale of your home. Federal and state income tax forms As a result, you may be able to meet these requirements if you sell vacant land used as a part of your main home within 2 years from the date of the destruction of your main home. Federal and state income tax forms For information, see Publication 547. Federal and state income tax forms More than one home. Federal and state income tax forms   If you have more than one home, you can exclude gain only from the sale of your main home. Federal and state income tax forms You must include in income the gain from the sale of any other home. Federal and state income tax forms If you have two homes and live in each of them, your main home is ordinarily the one you live in most of the time during the year. Federal and state income tax forms Example 1. Federal and state income tax forms You own two homes, one in New York and one in Florida. Federal and state income tax forms 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. Federal and state income tax forms In the absence of facts and circumstances indicating otherwise, the New York home is your main home. Federal and state income tax forms You would be eligible to exclude the gain from the sale of the New York home but not of the Florida home in 2013. Federal and state income tax forms Example 2. Federal and state income tax forms You own a house, but you live in another house that you rent. Federal and state income tax forms The rented house is your main home. Federal and state income tax forms Example 3. Federal and state income tax forms You own two homes, one in Virginia and one in New Hampshire. Federal and state income tax forms In 2009 and 2010, you lived in the Virginia home. Federal and state income tax forms In 2011 and 2012, you lived in the New Hampshire home. Federal and state income tax forms In 2013, you lived again in the Virginia home. Federal and state income tax forms Your main home in 2009, 2010, and 2013 is the Virginia home. Federal and state income tax forms Your main home in 2011 and 2012 is the New Hampshire home. Federal and state income tax forms You would be eligible to exclude gain from the sale of either home (but not both) in 2013. Federal and state income tax forms Factors used to determine main home. Federal and state income tax forms   In addition to the amount of time you live in each home, other factors are relevant in determining which home is your main home. Federal and state income tax forms Those factors include the following. Federal and state income tax forms Your place of employment. Federal and state income tax forms The location of your family members' main home. Federal and state income tax forms Your mailing address for bills and correspondence. Federal and state income tax forms The address listed on your: Federal and state tax returns, Driver's license, Car registration, and Voter registration card. Federal and state income tax forms The location of the banks you use. Federal and state income tax forms The location of recreational clubs and religious organizations of which you are a member. Federal and state income tax forms Property used partly as your main home. Federal and state income tax forms   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. Federal and state income tax forms For details, see Business Use or Rental of Home , later. Federal and state income tax forms 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. Federal and state income tax forms Subtract the adjusted basis from the amount realized to get your gain or loss. Federal and state income tax forms     Selling price     − Selling expenses       Amount realized     − Adjusted basis       Gain or loss   Gain. Federal and state income tax forms   Gain is the excess of the amount realized over the adjusted basis of the property. Federal and state income tax forms Loss. Federal and state income tax forms   Loss is the excess of the adjusted basis over the amount realized for the property. Federal and state income tax forms Selling Price The selling price is the total amount you receive for your home. Federal and state income tax forms 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. Federal and state income tax forms Personal property. Federal and state income tax forms   The selling price of your home does not include amounts you received for personal property sold with your home. Federal and state income tax forms Personal property is property that is not a permanent part of the home. Federal and state income tax forms Examples are furniture, draperies, rugs, a washer and dryer, and lawn equipment. Federal and state income tax forms Separately stated amounts you received for these items should not be shown on Form 1099-S (discussed later). Federal and state income tax forms Any gains from sales of personal property must be included in your income, but not as part of the sale of your home. Federal and state income tax forms Payment by employer. Federal and state income tax forms   You may have to sell your home because of a job transfer. Federal and state income tax forms 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. Federal and state income tax forms 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, or on Form 1040NR, line 8. Federal and state income tax forms Option to buy. Federal and state income tax forms   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. Federal and state income tax forms If the option is not exercised, you must report the amount as ordinary income in the year the option expires. Federal and state income tax forms Report this amount on Form 1040, line 21, or on Form 1040NR, line 21. Federal and state income tax forms Form 1099-S. Federal and state income tax forms   If you received Form 1099-S, box 2 (gross proceeds) should show the total amount you received for your home. Federal and state income tax forms   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. Federal and state income tax forms Instead, box 4 will be checked to indicate your receipt or expected receipt of these items. Federal and state income tax forms Amount Realized The amount realized is the selling price minus selling expenses. Federal and state income tax forms Selling expenses. Federal and state income tax forms   Selling expenses include: Commissions, Advertising fees, Legal fees, and Loan charges paid by the seller, such as loan placement fees or “points. Federal and state income tax forms ” Adjusted Basis While you owned your home, you may have made adjustments (increases or decreases) to the basis. Federal and state income tax forms This adjusted basis must be determined before you can figure gain or loss on the sale of your home. Federal and state income tax forms For information on how to figure your home's adjusted basis, see Determining Basis , later. Federal and state income tax forms Amount of Gain or Loss To figure the amount of gain or loss, compare the amount realized to the adjusted basis. Federal and state income tax forms Gain on sale. Federal and state income tax forms   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. Federal and state income tax forms Loss on sale. Federal and state income tax forms   If the amount realized is less than the adjusted basis, the difference is a loss. Federal and state income tax forms Generally, a loss on the sale of your main home cannot be deducted. Federal and state income tax forms Jointly owned home. Federal and state income tax forms   If you and your spouse sell your jointly owned home and file a joint return, you figure your gain or loss as one taxpayer. Federal and state income tax forms Separate returns. Federal and state income tax forms   If you file separate returns, each of you must figure your own gain or loss according to your ownership interest in the home. Federal and state income tax forms Your ownership interest is generally determined by state law. Federal and state income tax forms Joint owners not married. Federal and state income tax forms   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. Federal and state income tax forms Each of you applies the rules discussed in this publication on an individual basis. Federal and state income tax forms Dispositions Other Than Sales Some special rules apply to other dispositions of your main home. Federal and state income tax forms Foreclosure or repossession. Federal and state income tax forms   If your home was foreclosed on or repossessed, you have a disposition. Federal and state income tax forms See Publication 4681 to determine if you have ordinary income, gain, or loss. Federal and state income tax forms More information. Federal and state income tax forms   If part of a home is used for business or rental purposes, see Foreclosures and Repossessions in chapter 1 of Publication 544 for more information. Federal and state income tax forms Publication 544 has examples of how to figure gain or loss on a foreclosure or repossession. Federal and state income tax forms Abandonment. Federal and state income tax forms   If you abandon your home, see Publication 4681 to determine if you have ordinary income, gain, or loss. Federal and state income tax forms Trading (exchanging) homes. Federal and state income tax forms   If you trade your home for another home, treat the trade as a sale and a purchase. Federal and state income tax forms Example. Federal and state income tax forms You owned and lived in a home with an adjusted basis of $41,000. Federal and state income tax forms 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. Federal and state income tax forms This is treated as a sale of your old home for $50,000 with a gain of $9,000 ($50,000 − $41,000). Federal and state income tax forms 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). Federal and state income tax forms Transfer to spouse. Federal and state income tax forms   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 (unless the Exception, discussed next, applies). Federal and state income tax forms This is true even if you receive cash or other consideration for the home. Federal and state income tax forms As a result, the rules explained in this publication do not apply. Federal and state income tax forms   If you owned your home jointly with your spouse and transfer your interest in the home to your spouse, or to your former spouse incident to your divorce, the same rule applies. Federal and state income tax forms You have no gain or loss. Federal and state income tax forms Exception. Federal and state income tax forms   These transfer rules do not apply if your spouse or former spouse is a nonresident alien. Federal and state income tax forms In that case, you generally will have a gain or loss. Federal and state income tax forms More information. Federal and state income tax forms    See Property Settlements in Publication 504, Divorced or Separated Individuals, for more information. Federal and state income tax forms Involuntary conversion. Federal and state income tax forms   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. Federal and state income tax forms 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 (see Home destroyed or condemned ). Federal and state income tax forms Determining Basis You need to know your basis in your home to figure any gain or loss when you sell it. Federal and state income tax forms Your basis in your home is determined by how you got the home. Federal and state income tax forms Generally, your basis is its cost if you bought it or built it. Federal and state income tax forms If you got it in some other way (inheritance, gift, etc. Federal and state income tax forms ), your basis is generally either its fair market value when you received it or the adjusted basis of the previous owner. Federal and state income tax forms While you owned your home, you may have made adjustments (increases or decreases) to your home's basis. Federal and state income tax forms 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. Federal and state income tax forms To figure your adjusted basis, you can use Worksheet 1, near the end of this publication. Federal and state income tax forms Filled-in examples of that worksheet are included in the Comprehensive Examples , later. Federal and state income tax forms Cost As Basis The cost of property is the amount you paid for it in cash, debt obligations, other property, or services. Federal and state income tax forms Purchase. Federal and state income tax forms   If you bought your home, your basis is its cost to you. Federal and state income tax forms This includes the purchase price and certain settlement or closing costs. Federal and state income tax forms 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. Federal and state income tax forms If you build, or contract to build, a new home, your purchase price can include costs of construction, as discussed later. Federal and state income tax forms Seller-paid points. Federal and state income tax forms   If the person who sold you your home paid points on your loan, you may have to reduce your home's basis by the amount of the points, as shown in the following chart. Federal and state income tax forms    IF you bought your home. Federal and state income tax forms . Federal and state income tax forms . Federal and state income tax forms THEN reduce your home's basis by the seller-paid points. Federal and state income tax forms . Federal and state income tax forms . Federal and state income tax forms after 1990 but before April 4, 1994 only if you deducted them as home mortgage interest in the year paid. Federal and state income tax forms after April 3, 1994 even if you did not deduct them. Federal and state income tax forms Settlement fees or closing costs. Federal and state income tax forms   When you bought your home, you may have paid settlement fees or closing costs in addition to the contract price of the property. Federal and state income tax forms 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. Federal and state income tax forms 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). Federal and state income tax forms   Settlement fees do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Federal and state income tax forms   Some of the settlement fees or closing costs that you can include in your basis are: Abstract fees (abstract of title fees), Charges for installing utility services, Legal fees (including fees for the title search and preparing the sales contract and deed), Recording fees, Survey fees, Transfer or stamp taxes, Owner's title insurance, and Any amounts the seller owes that you agree to pay, such as: Certain real estate taxes (discussed later), Back interest, Recording or mortgage fees, Charges for improvements or repairs, and Sales commissions. Federal and state income tax forms   Some settlement fees and closing costs you cannot include in your basis are: Fire insurance premiums, Rent for occupancy of the house before closing, Charges for utilities or other services related to occupancy of the house before closing, Any fee or cost that you deducted as a moving expense (allowed for certain fees and costs before 1994), Charges connected with getting a mortgage loan, such as: Mortgage insurance premiums (including funding fees connected with loans guaranteed by the Department of Veterans Affairs), Loan assumption fees, Cost of a credit report, Fee for an appraisal required by a lender, and Fees for refinancing a mortgage. Federal and state income tax forms Real estate taxes. Federal and state income tax forms   Real estate taxes for the year you bought your home may affect your basis, as shown in the following chart. Federal and state income tax forms    IF. Federal and state income tax forms . Federal and state income tax forms . Federal and state income tax forms AND. Federal and state income tax forms . Federal and state income tax forms . Federal and state income tax forms THEN the taxes. Federal and state income tax forms . Federal and state income tax forms . Federal and state income tax forms you pay taxes that the seller owed on the home up to the date of sale the seller does not reimburse you are added to the basis of your home. Federal and state income tax forms the seller reimburses you do not affect the basis of your home. Federal and state income tax forms the seller pays taxes for you (taxes owed beginning on the date of sale) you do not reimburse the seller are subtracted from the basis of your home. Federal and state income tax forms you reimburse the seller do not affect the basis of your home. Federal and state income tax forms Construction. Federal and state income tax forms   If you contracted to have your house built on land you own, your basis is: The cost of the land, plus The amount it cost you to complete the house, including: The cost of labor and materials, Any amounts paid to a contractor, Any architect's fees, Building permit charges, Utility meter and connection charges, and Legal fees directly connected with building the house. Federal and state income tax forms   Your cost includes your down payment and any debt such as a first or second mortgage or notes you gave the seller or builder. Federal and state income tax forms It also includes certain settlement or closing costs. Federal and state income tax forms You may have to reduce your basis by points the seller paid for you. Federal and state income tax forms For more information, see Seller-paid points and Settlement fees or closing costs , earlier. Federal and state income tax forms Built by you. Federal and state income tax forms   If you built all or part of your house yourself, its basis is the total amount it cost you to complete it. Federal and state income tax forms Do not include in the cost of the house: The value of your own labor, or The value of any other labor you did not pay for. Federal and state income tax forms Temporary housing. Federal and state income tax forms   If a builder gave you temporary housing while your home was being finished, you must reduce your basis by the part of the contract price that was for the temporary housing. Federal and state income tax forms To figure the amount of the reduction, multiply the contract price by a fraction. Federal and state income tax forms The numerator is the value of the temporary housing, and the denominator is the sum of the value of the temporary housing plus the value of the new home. Federal and state income tax forms Cooperative apartment. Federal and state income tax forms   If you are a tenant-stockholder in a cooperative housing corporation, your basis in the cooperative apartment used as your home is usually the cost of your stock in the corporation. Federal and state income tax forms This may include your share of a mortgage on the apartment building. Federal and state income tax forms Condominium. Federal and state income tax forms   To determine your basis in a condominium apartment used as your home, use the same rules as for any other home. Federal and state income tax forms Basis Other Than Cost You must use a basis other than cost, such as adjusted basis or fair market value, if you received your home as a gift, inheritance, a trade, or from your spouse. Federal and state income tax forms These situations are discussed in the following pages. Federal and state income tax forms Also, the instructions for Worksheet 1 (near the end of the publication) address each of these issues. Federal and state income tax forms Other special rules may apply in certain situations. Federal and state income tax forms If you converted the property, or some part of it, to business or rental use, see Property Changed to Business or Rental Use, in Publication 551. Federal and state income tax forms Home received as gift. Federal and state income tax forms   Use the following chart to find the basis of a home you received as a gift. Federal and state income tax forms IF the donor's adjusted basis at the time of the gift was. Federal and state income tax forms . Federal and state income tax forms . Federal and state income tax forms THEN your basis is. Federal and state income tax forms . Federal and state income tax forms . Federal and state income tax forms more than the fair market value of the home at that time the same as the donor's adjusted basis at the time of the gift. Federal and state income tax forms   Exception: If using the donor's adjusted basis results in a loss when you sell the home, you must use the fair market value of the home at the time of the gift as your basis. Federal and state income tax forms If using the fair market value results in a gain, you have neither gain nor loss. Federal and state income tax forms equal to or less than the fair market value at that time, and you received the gift before 1977 the smaller of the: • donor's adjusted basis, plus  any federal gift tax paid on  the gift, or • the home's fair market value  at the time of the gift. Federal and state income tax forms equal to or less than the fair market value at that time, and you received the gift after 1976 the same as the donor's adjusted basis, plus the part of any federal gift tax paid that is due to the net increase in value of the home (explained next). Federal and state income tax forms Fair market value. Federal and state income tax forms   The fair market value of property at the time of the gift is the value of the property as appraised for purposes of the federal gift tax. Federal and state income tax forms If the gift was not subject to the federal gift tax, the fair market value is the value as appraised for the purposes of a state gift tax. Federal and state income tax forms Part of federal gift tax due to net increase in value. Federal and state income tax forms   Figure the part of the federal gift tax paid that is due to the net increase in value of the home by multiplying the total federal gift tax paid by a fraction. Federal and state income tax forms The numerator of the fraction is the net increase in the value of the home, and the denominator is the value of the home for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. Federal and state income tax forms The net increase in the value of the home is its fair market value minus the donor's adjusted basis immediately before the gift. Federal and state income tax forms Home acquired from a decedent who died before or after 2010. Federal and state income tax forms   If you inherited your home from a decedent who died before or after 2010, your basis is the fair market value of the property on the date of the decedent's death (or the later alternate valuation date chosen by the personal representative of the estate). Federal and state income tax forms If an estate tax return was filed or required to be filed, the value of the property listed on the estate tax return is your basis. Federal and state income tax forms If a federal estate tax return did not have to be filed, your basis in the home is the same as its appraised value at the date of death, for purposes of state inheritance or transmission taxes. Federal and state income tax forms Surviving spouse. Federal and state income tax forms   If you are a surviving spouse and you owned your home jointly, your basis in the home will change. Federal and state income tax forms The new basis for the interest your spouse owned will be its fair market value on the date of death (or alternate valuation date). Federal and state income tax forms The basis in your interest will remain the same. Federal and state income tax forms Your new basis in the home is the total of these two amounts. Federal and state income tax forms   If you and your spouse owned the home either as tenants by the entirety or as joint tenants with right of survivorship, you will each be considered to have owned one-half of the home. Federal and state income tax forms Example. Federal and state income tax forms Your jointly owned home (owned as joint tenants with right of survivorship) had an adjusted basis of $50,000 on the date of your spouse's death, and the fair market value on that date was $100,000. Federal and state income tax forms Your new basis in the home is $75,000 ($25,000 for one-half of the adjusted basis plus $50,000 for one-half of the fair market value). Federal and state income tax forms Community property. Federal and state income tax forms   In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), each spouse is usually considered to own half of the community property. Federal and state income tax forms When either spouse dies, the total fair market value of the community property becomes the basis of the entire property, including the part belonging to the surviving spouse. Federal and state income tax forms For this to apply, at least half the value of the community property interest must be includible in the decedent's gross estate, whether or not the estate must file a return. Federal and state income tax forms   For more information about community property, see Publication 555, Community Property. Federal and state income tax forms    If you are selling a home in which you acquired an interest from a decedent who died in 2010, see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, to determine your basis. Federal and state income tax forms Home received as trade. Federal and state income tax forms   If you acquired your home as a trade for other property, in most cases, the basis of your home is the fair market value (at the time of the trade) of the property you gave up. Federal and state income tax forms If you traded one home for another, you have made a sale and purchase. Federal and state income tax forms In that case, you may have a gain. Federal and state income tax forms See Trading (exchanging) homes under Dispositions Other Than Sales, earlier, for an example of figuring the gain. Federal and state income tax forms Home received from spouse. Federal and state income tax forms   If you received your home from your spouse or from your former spouse incident to your divorce, your basis in the home depends on the date of the transfer. Federal and state income tax forms Transfers after July 18, 1984. Federal and state income tax forms   If you received the home after July 18, 1984, there was no gain or loss on the transfer. Federal and state income tax forms In most cases, your basis in this home is the same as your spouse's (or former spouse's) adjusted basis just before you received it. Federal and state income tax forms This rule applies even if you received the home in exchange for cash, the release of marital rights, the assumption of liabilities, or other considerations. Federal and state income tax forms   If you owned a home jointly with your spouse and your spouse transferred his or her interest in the home to you, in most cases, your basis in the half interest received from your spouse is the same as your spouse's adjusted basis just before the transfer. Federal and state income tax forms This also applies if your former spouse transferred his or her interest in the home to you incident to your divorce. Federal and state income tax forms Your basis in the half interest you already owned does not change. Federal and state income tax forms Your new basis in the home is the total of these two amounts. Federal and state income tax forms Transfers before July 19, 1984. Federal and state income tax forms   If you received your home before July 19, 1984, in exchange for your release of marital rights, in most cases, your basis in the home is generally its fair market value at the time you received it. Federal and state income tax forms More information. Federal and state income tax forms   For more information on property received from a spouse or former spouse, see Property Settlements in Publication 504. Federal and state income tax forms Involuntary conversion. Federal and state income tax forms   If your home is destroyed or condemned, you may receive insurance proceeds or a condemnation award. Federal and state income tax forms If you acquired a replacement home with these proceeds, the basis is its cost decreased by any gain not recognized on the conversion under the rules explained in: Publication 547, in the case of a home that was destroyed, or Chapter 1 of Publication 544, in the case of a home that was condemned. Federal and state income tax forms Example. Federal and state income tax forms A fire destroyed your home that you owned and used for only 6 months. Federal and state income tax forms The home had an adjusted basis of $80,000 and the insurance company paid you $130,000 for the loss. Federal and state income tax forms Your gain is $50,000 ($130,000 − $80,000). Federal and state income tax forms You bought a replacement home for $100,000. Federal and state income tax forms The part of your gain that is taxable is $30,000 ($130,000 − $100,000), the unspent part of the payment from the insurance company. Federal and state income tax forms The rest of the gain ($20,000) is not taxable, so that amount reduces your basis in the new home. Federal and state income tax forms The basis of the new home is figured as follows. Federal and state income tax forms Cost of replacement home $100,000 Minus: Gain not recognized 20,000 Basis of the replacement home $80,000 More information. Federal and state income tax forms   For more information about basis, see Publication 551. Federal and state income tax forms Adjusted Basis Adjusted basis is your cost or other basis increased or decreased by certain amounts. Federal and state income tax forms To figure your adjusted basis, you can use Worksheet 1, found toward the end of this publication. Federal and state income tax forms Filled-in examples of that worksheet are included in Comprehensive Examples , later. Federal and state income tax forms Recordkeeping. Federal and state income tax forms You should keep records to prove your home's adjusted basis. Federal and state income tax forms 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. Federal and state income tax forms 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. Federal and state income tax forms Keep records proving the basis of both homes as long as they are needed for tax purposes. Federal and state income tax forms 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 exclude 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. Federal and state income tax forms Increases to Basis These include the following. Federal and state income tax forms Additions and other improvements that have a useful life of more than 1 year. Federal and state income tax forms Special assessments for local improvements. Federal and state income tax forms Amounts you spent after a casualty to restore damaged property. Federal and state income tax forms Improvements. Federal and state income tax forms   These add to the value of your home, prolong its useful life, or adapt it to new uses. Federal and state income tax forms You add the cost of additions and other improvements to the basis of your property. Federal and state income tax forms   The following chart lists some other examples of improvements. Federal and state income tax forms Examples of Improvements That Increase Basis Additions Bedroom Bathroom Deck Garage Porch Patio Heating & Air Conditioning Heating system Central air conditioning Furnace Duct work Central humidifier Filtration system Lawn & Grounds Landscaping Driveway Walkway Fence  Retaining wall Sprinkler system Swimming pool  Miscellaneous Storm windows, doors New roof Central vacuum Wiring upgrades Satellite dish Security system  Plumbing Septic system Water heater Soft water system Filtration system  Interior Improvements Built-in appliances  Kitchen modernization  Flooring Wall-to-wall carpeting  Insulation Attic Walls Floors Pipes and duct work Improvements no longer part of home. Federal and state income tax forms   Your home's adjusted basis does not include the cost of any improvements that are replaced and are no longer part of the home. Federal and state income tax forms Example. Federal and state income tax forms You put wall-to-wall carpeting in your home 15 years ago. Federal and state income tax forms Later, you replaced that carpeting with new wall-to-wall carpeting. Federal and state income tax forms The cost of the old carpeting you replaced is no longer part of your home's adjusted basis. Federal and state income tax forms Repairs. Federal and state income tax forms   These maintain your home in good condition but do not add to its value or prolong its life. Federal and state income tax forms You do not add their cost to the basis of your property. Federal and state income tax forms Examples. Federal and state income tax forms Repainting your house inside or outside, fixing your gutters or floors, repairing leaks or plastering, and replacing broken window panes are examples of repairs. Federal and state income tax forms Exception. Federal and state income tax forms   The entire job is considered an improvement if items that would otherwise be considered repairs are done as part of an extensive remodeling or restoration of your home. Federal and state income tax forms For example, if you have a casualty and your home is damaged, increase your basis by the amount you spend on repairs that restore the property to its pre-casualty condition. Federal and state income tax forms Decreases to Basis These include the following. Federal and state income tax forms Discharge of qualified principal residence indebtedness that was excluded from income (but not below zero). Federal and state income tax forms For details, see Publication 4681. Federal and state income tax forms Some or all of the cancellation of debt income that was excluded due to your bankruptcy or insolvency. Federal and state income tax forms For details, see Publication 4681. Federal and state income tax forms Gain you postponed from the sale of a previous home before May 7, 1997. Federal and state income tax forms Deductible casualty losses. Federal and state income tax forms Insurance payments you received or expect to receive for casualty losses. Federal and state income tax forms Payments you received for granting an easement or right-of-way. Federal and state income tax forms Depreciation allowed or allowable if you used your home for business or rental purposes. Federal and state income tax forms Energy-related credits allowed for expenditures made on the residence. Federal and state income tax forms (Reduce the increase in basis otherwise allowable for expenditures on the residence by the amount of credit allowed for those expenditures. Federal and state income tax forms ) Adoption credit you claimed for improvements added to the basis of your home. Federal and state income tax forms Nontaxable payments from an adoption assistance program of your employer you used for improvements you added to the basis of your home. Federal and state income tax forms 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. Federal and state income tax forms 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. Federal and state income tax forms District of Columbia first-time homebuyer credit allowed on the purchase of a principal residence in the District of Columbia. Federal and state income tax forms General sales taxes 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. Federal and state income tax forms Discharges of qualified principal residence indebtedness. Federal and state income tax forms   You may be able to exclude from gross income a discharge of qualified principal residence indebtedness. Federal and state income tax forms This exclusion applies to discharges made after 2006 and before 2014. Federal and state income tax forms If you choose to exclude this income, you must reduce (but not below zero) the basis of your principal residence by the amount excluded from gross income. Federal and state income tax forms   File Form 982 with your tax return. Federal and state income tax forms See the form's instructions for detailed information. Federal and state income tax forms    A decrease in basis due to a discharge of qualified principal residence indebtedness that is excluded from income occurs only if you retain ownership of the principal residence after a discharge. Federal and state income tax forms In most cases, this would occur in a refinancing or a restructuring of the mortgage. Federal and state income tax forms Excluding the Gain You may qualify to exclude from your income all or part of any gain from the sale of your main home. Federal and state income tax forms 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. Federal and state income tax forms To qualify, you must meet the ownership and use tests described later. Federal and state income tax forms 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. Federal and state income tax forms This choice can be made (or revoked) at any time before the expiration of a 3-year period beginning on the due date of your return (not including extensions) for the year of the sale. Federal and state income tax forms You can use Worksheet 2 (near the end of this publication) to figure the amount of your exclusion and your taxable gain, if any. Federal and state income tax forms If you have any taxable gain from the sale of your home, you may have to increase your withholding or make estimated tax payments. Federal and state income tax forms See Publication 505, Tax Withholding and Estimated Tax. Federal and state income tax forms 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. Federal and state income tax forms You meet the ownership test. Federal and state income tax forms You meet the use test. Federal and state income tax forms During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home. Federal and state income tax forms For details on gain allocated to periods of nonqualified use, see Nonqualified Use , later. Federal and state income tax forms If you and another person owned the home jointly but file separate returns, each of you can exclude up to $250,000 of gain from the sale of your interest in the home if each of you meets the three conditions just listed. Federal and state income tax forms 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 . Federal and state income tax forms Ownership and Use Tests To claim the exclusion, you must meet the ownership and use tests. Federal and state income tax forms 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). Federal and state income tax forms Exception. Federal and state income tax forms   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. Federal and state income tax forms However, the maximum amount you may be able to exclude will be reduced. Federal and state income tax forms See Reduced Maximum Exclusion , later. Federal and state income tax forms Example 1—home owned and occupied for at least 2 years. Federal and state income tax forms Mya bought and moved into her main home in September 2011. Federal and state income tax forms She sold the home at a gain in October 2013. Federal and state income tax forms 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. Federal and state income tax forms She meets the ownership and use tests. Federal and state income tax forms Example 2—ownership test met but use test not met. Federal and state income tax forms Ayden bought a home, lived in it for 6 months, moved out, and never occupied the home again. Federal and state income tax forms He later sold the home for a gain in June 2013. Federal and state income tax forms He owned the home during the entire 5-year period ending on the date of sale. Federal and state income tax forms He meets the ownership test but not the use test. Federal and state income tax forms He cannot exclude any part of his gain on the sale unless he qualified for a reduced maximum exclusion (explained later). Federal and state income tax forms 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. Federal and state income tax forms 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. Federal and state income tax forms Example. Federal and state income tax forms Naomi bought and moved into a house in July 2009. Federal and state income tax forms She lived there for 13 months and then moved in with a friend. Federal and state income tax forms She later moved back into her house and lived there for 12 months until she sold it in August 2013. Federal and state income tax forms Naomi meets the ownership and use tests because, during the 5-year period ending on the date of sale, she owned the house for more than 2 years and lived in it for a total of 25 (13 + 12) months. Federal and state income tax forms Temporary absence. Federal and state income tax forms   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. Federal and state income tax forms The following examples assume that the reduced maximum exclusion (discussed later) does not apply to the sales. Federal and state income tax forms Example 1. Federal and state income tax forms David Johnson, who is single, bought and moved into his home on February 1, 2011. Federal and state income tax forms Each year during 2011 and 2012, David left his home for a 2-month summer vacation. Federal and state income tax forms David sold the house on March 1, 2013. Federal and state income tax forms Although the total time David lived in his home is less than 2 years (21 months), he meets the use requirement and may exclude gain. Federal and state income tax forms 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. Federal and state income tax forms Example 2. Federal and state income tax forms Professor Paul Beard, who is single, bought and moved into a house in December 2010, went abroad for a 1-year sabbatical leave in January 2012, returned to the house in January 2013, and sold it at a gain in February 2013. Federal and state income tax forms Because his leave was not a short temporary absence, he cannot include the period of leave to meet the 2-year use test. Federal and state income tax forms He cannot exclude any part of his gain because he did not use the residence for the required 2 years. Federal and state income tax forms Ownership and use tests met at different times. Federal and state income tax forms   You can meet the ownership and use tests during different 2-year periods. Federal and state income tax forms However, you must meet both tests during the 5-year period ending on the date of the sale. Federal and state income tax forms Example. Federal and state income tax forms Beginning in 2002, Helen Jones lived in a rented apartment. Federal and state income tax forms The apartment building was later converted to condominiums, and she bought her same apartment on December 3, 2010. Federal and state income tax forms In 2011, Helen became ill and on April 14 of that year she moved to her daughter's home. Federal and state income tax forms On July 12, 2013, while still living in her daughter's home, she sold her condominium. Federal and state income tax forms 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. Federal and state income tax forms She owned her condominium from December 3, 2010, to July 12, 2013 (more than 2 years). Federal and state income tax forms She lived in the property from July 13, 2008 (the beginning of the 5-year period), to April 14, 2011 (more than 2 years). Federal and state income tax forms 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. Federal and state income tax forms Cooperative apartment. Federal and state income tax forms   If you sold stock as a tenant-shareholder 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 entitled you to occupy as your main home for at least 2 years. Federal and state income tax forms Exceptions to Ownership and Use Tests The following sections contain exceptions to the ownership and use tests for certain taxpayers. Federal and state income tax forms Exception for individuals with a disability. Federal and state income tax forms   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. Federal and state income tax forms 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. Federal and state income tax forms   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. Federal and state income tax forms Previous home destroyed or condemned. Federal and state income tax forms   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. Federal and state income tax forms This rule applies if any part of the basis of the home you sold depended on the basis of the destroyed or condemned home (see Involuntary Conversions in Publication 551). Federal and state income tax forms 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. Federal and state income tax forms Members of the uniformed services or Foreign Service, employees of the intelligence community, or employees or volunteers of the Peace Corps. Federal and state income tax forms   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 (defined later) as a member of the uniformed services or Foreign Service of the United States, or as an employee of the intelligence community. Federal and state income tax forms 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 (defined later) or as an enrolled volunteer or volunteer leader of the Peace Corps. Federal and state income tax forms 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. Federal and state income tax forms   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. Federal and state income tax forms Example. Federal and state income tax forms John bought and moved into a home in 2005. Federal and state income tax forms He lived in it as his main home for 2½ years. Federal and state income tax forms For the next 6 years, he did not live in it because he was on qualified official extended duty with the Army. Federal and state income tax forms He then sold the home at a gain in 2013. Federal and state income tax forms To meet the use test, John chooses to suspend the 5-year test period for the 6 years he was on qualified official extended duty. Federal and state income tax forms This means he can disregard those 6 years. Federal and state income tax forms Therefore, John's 5-year test period consists of the 5 years before he went on qualified official extended duty. Federal and state income tax forms He meets the ownership and use tests because he owned and lived in the home for 2½ years during this test period. Federal and state income tax forms Period of suspension. Federal and state income tax forms   The period of suspension cannot last more than 10 years. Federal and state income tax forms Together, the 10-year suspension period and the 5-year test period can be as long as, but no more than, 15 years. Federal and state income tax forms You cannot suspend the 5-year period for more than one property at a time. Federal and state income tax forms You can revoke your choice to suspend the 5-year period at any time. Federal and state income tax forms Example. Federal and state income tax forms Mary bought a home on April 1, 1997. Federal and state income tax forms She used it as her main home until August 31, 2000. Federal and state income tax forms On September 1, 2000, she went on qualified official extended duty with the Navy. Federal and state income tax forms She did not live in the house again before selling it on July 31, 2013. Federal and state income tax forms Mary chooses to use the entire 10-year suspension period. Federal and state income tax forms Therefore, the suspension period would extend back from July 31, 2013, to August 1, 2003, and the 5-year test period would extend back to August 1, 1998. Federal and state income tax forms During that period, Mary owned the house all 5 years and lived in it as her main home from August 1, 1998, until August 31, 2000, a period of more than 24 months. Federal and state income tax forms She meets the ownership and use tests because she owned and lived in the home for at least 2 years during this test period. Federal and state income tax forms Uniformed services. Federal and state income tax forms   The uniformed services are: The Armed Forces (the Army, Navy, Air Force, Marine Corps, and Coast Guard), The commissioned corps of the National Oceanic and Atmospheric Administration, and The commissioned corps of the Public Health Service. Federal and state income tax forms Foreign Service member. Federal and state income tax forms   For purposes of the choice to suspend the 5-year test period for ownership and use, you are a member of the Foreign Service if you are any of the following. Federal and state income tax forms A Chief of mission. Federal and state income tax forms An Ambassador at large. Federal and state income tax forms A member of the Senior Foreign Service. Federal and state income tax forms A Foreign Service officer. Federal and state income tax forms Part of the Foreign Service personnel. Federal and state income tax forms Employee of the intelligence community. Federal and state income tax forms   For purposes of the choice to suspend the 5-year test period for ownership and use, you are an employee of the intelligence community if you are an employee of any of the following. Federal and state income tax forms The Office of the Director of National Intelligence. Federal and state income tax forms The Central Intelligence Agency. Federal and state income tax forms The National Security Agency. Federal and state income tax forms The Defense Intelligence Agency. Federal and state income tax forms The National Geospatial-Intelligence Agency. Federal and state income tax forms The National Reconnaissance Office and any other office within the Department of Defense for the collection of specialized national intelligence through reconnaissance programs. Federal and state income tax forms Any of the intelligence elements of the Army, the Navy, the Air Force, the Marine Corps, the Federal Bureau of Investigation, the Department of Treasury, the Department of Energy, and the Coast Guard. Federal and state income tax forms The Bureau of Intelligence and Research of the Department of State. Federal and state income tax forms Any of the elements of the Department of Homeland Security concerned with the analyses of foreign intelligence information. Federal and state income tax forms Qualified official extended duty. Federal and state income tax forms   You are on qualified official extended duty if you are on extended duty while: Serving at a duty station at least 50 miles from your main home, or Living in Government quarters under Government orders. Federal and state income tax forms   You are on extended duty when you are called or ordered to active duty for a period of more than 90 days or for an indefinite period. Federal and state income tax forms 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. Federal and state income tax forms (But see Special rules for joint returns, next. Federal and state income tax forms ) Special rules for joint returns. Federal and state income tax forms   You can exclude up to $500,000 of the gain on the sale of your main home if all of the following are true. Federal and state income tax forms You are married and file a joint return for the year. Federal and state income tax forms Either you or your spouse meets the ownership test. Federal and state income tax forms Both you and your spouse meet the use test. Federal and state income tax forms 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. Federal and state income tax forms 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. Federal and state income tax forms For this purpose, each spouse is treated as owning the property during the period that either spouse owned the property. Federal and state income tax forms Example 1—one spouse sells a home. Federal and state income tax forms Emily sells her home in June 2013 for a gain of $300,000. Federal and state income tax forms She marries Jamie later in the year. Federal and state income tax forms She meets the ownership and use tests, but Jamie does not. Federal and state income tax forms Emily can exclude up to $250,000 of gain on a separate or joint return for 2013. Federal and state income tax forms The $500,000 maximum exclusion for certain joint returns does not apply because Jamie does not meet the use test. Federal and state income tax forms Example 2—each spouse sells a home. Federal and state income tax forms 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. Federal and state income tax forms He meets the ownership and use tests on his home, but Emily does not. Federal and state income tax forms Emily can exclude $250,000 of gain and Jamie can exclude $200,000 of gain on the respective sales of their individual homes. Federal and state income tax forms However, Emily cannot use Jamie's unused exclusion to exclude more than $250,000 of gain. Federal and state income tax forms Therefore, Emily and Jamie must recognize $50,000 of gain on the sale of Emily's home. Federal and state income tax forms 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. Federal and state income tax forms Sale of main home by surviving spouse. Federal and state income tax forms   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. Federal and state income tax forms   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. Federal and state income tax forms The sale or exchange took place after 2008. Federal and state income tax forms The sale or exchange took place no more than 2 years after the date of death of your spouse. Federal and state income tax forms You have not remarried. Federal and state income tax forms You and your spouse met the use test at the time of your spouse's death. Federal and state income tax forms You or your spouse met the ownership test at the time of your spouse's death. Federal and state income tax forms Neither you nor your spouse excluded gain from the sale of another home during the last 2 years before the date of death. Federal and state income tax forms The ownership and use tests were described earlier. Federal and state income tax forms Example. Federal and state income tax forms Harry owned and used a house as his main home since 2009. Federal and state income tax forms Harry and Wilma married on July 1, 2013, and from that date they used Harry's house as their main home. Federal and state income tax forms Harry died on August 15, 2013, and Wilma inherited the property. Federal and state income tax forms Wilma sold the property on September 1, 2013, at which time she had not remarried. Federal and state income tax forms 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. Federal and state income tax forms Home transferred from spouse. Federal and state income tax forms   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. Federal and state income tax forms Use of home after divorce. Federal and state income tax forms   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. Federal and state income tax forms 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. Federal and state income tax forms 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. Federal and state income tax forms In both cases, to qualify for a reduced exclusion, the sale of your main home must be due to one of the following reasons. Federal and state income tax forms A change in place of employment. Federal and state income tax forms Health. Federal and state income tax forms Unforeseen circumstances. Federal and state income tax forms Qualified individual. Federal and state income tax forms   For purposes of the reduced maximum exclusion, a qualified individual is any of the following. Federal and state income tax forms You. Federal and state income tax forms Your spouse. Federal and state income tax forms A co-owner of the home. Federal and state income tax forms A person whose main home is the same as yours. Federal and state income tax forms Primary reason for sale. Federal and state income tax forms   One of the three reasons above will be considered to be the primary reason you sold your home if either (1) or (2) is true. Federal and state income tax forms You qualify under a “safe harbor. Federal and state income tax forms ” This is a specific set of facts and circumstances that, if applicable, qualifies you to claim a reduced maximum exclusion. Federal and state income tax forms Safe harbors corresponding to the reasons listed above are described later. Federal and state income tax forms A safe harbor does not apply, but you can establish, based on facts and circumstances, that the primary reason for the sale is a change in place of employment, health, or unforeseen circumstances. Federal and state income tax forms  Factors that may be relevant in determining your primary reason for sale include whether: Your sale and the circumstances causing it were close in time, The circumstances causing your sale occurred during the time you owned and used the property as your main home, The circumstances causing your sale were not reasonably foreseeable when you began using the property as your main home, Your financial ability to maintain the property became materially impaired, The suitability of the property as your main home materially changed, and During the time you owned the property, you used it as your home. Federal and state income tax forms Change in Place of Employment You may qualify for a reduced exclusion if the primary reason for the sale of your main home is a change in the location of employment of a qualified individual. Federal and state income tax forms Employment. Federal and state income tax forms   For this purpose, employment includes the start of work with a new employer or continuation of work with the same employer. Federal and state income tax forms It also includes the start or continuation of self-employment. Federal and state income tax forms Distance safe harbor. Federal and state income tax forms   A change in place of employment is considered to be the reason you sold your home if: The change occurred during the period you owned and used the property as your main home, and The new place of employment is at least 50 miles farther from the home you sold than was the former place of employment (or, if there was no former place of employment, the distance between your new place of employment and the home sold is at least 50 miles). Federal and state income tax forms Example. Federal and state income tax forms Justin was unemployed and living in a townhouse in Florida he had owned and used as his main home since 2012. Federal and state income tax forms He got a job in North Carolina and sold his townhouse in 2013. Federal and state income tax forms Because the distance between Justin's new place of employment and the home he sold is at least 50 miles, the sale satisfies the conditions of the distance safe harbor. Federal and state income tax forms Justin's sale of his home is considered to be because of a change in place of employment, and he is entitled to claim a reduced maximum exclusion of gain from the sale. Federal and state income tax forms Health The sale of your main home is because of health if your primary reason for the sale is: To obtain, provide, or facilitate the diagnosis, cure, mitigation, or treatment of disease, illness, or injury of a qualified individual, or To obtain or provide medical or personal care for a qualified individual suffering from a disease, illness, or injury. Federal and state income tax forms The sale of your home is not because of health if the sale merely benefits a qualified individual's general health or well-being. Federal and state income tax forms For purposes of this reason, a qualified individual includes, in addition to the individuals listed earlier under Qualified individual , any of the following family members of these individuals. Federal and state income tax forms Parent, grandparent, stepmother, stepfather. Federal and state income tax forms Child, grandchild, stepchild, adopted child, eligible foster child. Federal and state income tax forms Brother, sister, stepbrother, stepsister, half-brother, half-sister. Federal and state income tax forms Mother-in-law, father-in-law, brother-in-law, sister-in-law, son-in-law, or daughter-in-law. Federal and state income tax forms Uncle, aunt, nephew, niece, or cousin. Federal and state income tax forms Example. Federal and state income tax forms In 2012, Chase and Lauren, spouses, bought a house that they used as their main home. Federal and state income tax forms Lauren's father has a chronic disease and is unable to care for himself. Federal and state income tax forms In 2013, Chase and Lauren sold their home in order to move into Lauren's father's house to provide care for him. Federal and state income tax forms Because the primary reason for the sale of their home was to provide care for Lauren's father, Chase and Lauren are entitled to a reduced maximum exclusion. Federal and state income tax forms Doctor's recommendation safe harbor. Federal and state income tax forms   Health is considered to be the reason you sold your home if, for one or more of the reasons listed at the beginning of this discussion, a doctor recommends a change of residence. Federal and state income tax forms 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 that home. Federal and state income tax forms You are not considered to have an unforeseen circumstance if the primary reason you sold your home was that you preferred to get a different home or because your finances improved. Federal and state income tax forms Specific event safe harbors. Federal and state income tax forms   Unforeseen circumstances are considered to be the reason for selling your home if any of the following events occurred while you owned and used the property as your main home. Federal and state income tax forms An involuntary conversion of your home, such as when your home is destroyed or condemned. Federal and state income tax forms Natural or man-made disasters or acts of war or terrorism resulting in a casualty to your home, whether or not your loss is deductible. Federal and state income tax forms In the case of qualified individuals (listed earlier under Qualified individual ): Death, Unemployment (if the individual is eligible for unemployment compensation), A change in employment or self-employment status that results in the individual's inability to pay reasonable basic living expenses (listed under Reasonable basic living expenses , later) for his or her household, Divorce or legal separation under a decree of divorce or separate maintenance, or Multiple births resulting from the same pregnancy. Federal and state income tax forms An event the IRS determined to be an unforeseen circumstance in published guidance of general applicability. Federal and state income tax forms For example, the IRS determined the September 11, 2001, terrorist attacks to be an unforeseen circumstance. Federal and state income tax forms Reasonable basic living expenses. Federal and state income tax forms   Reasonable basic living expenses for your household include the following. Federal and state income tax forms Amounts spent for food. Federal and state income tax forms Amounts spent for clothing. Federal and state income tax forms Housing and related expenses. Federal and state income tax forms Medical expenses. Federal and state income tax forms Transportation expenses. Federal and state income tax forms Tax payments. Federal and state income tax forms Court-ordered payments. Federal and state income tax forms Expenses reasonably necessary to produce income. Federal and state income tax forms   Any of these amounts spent to maintain an affluent or luxurious standard of living are not reasonable basic living expenses. Federal and state income tax forms Nonqualified Use Gain from the sale or exchange of the main home is not excludable from income if it is allocable to periods of nonqualified use. Federal and state income tax forms Nonqualified use means any period after 2008 where neither you nor your spouse (or your former spouse) used the property as a main home, with certain exceptions (see next). Federal and state income tax forms Exceptions. Federal and state income tax forms   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. Federal and state income tax forms Calculation. Federal and state income tax forms   To figure the portion of the gain allocated to the period of nonqualified use, multiply the gain (net of any depreciation allowed or allowable on the property for periods after May 6, 1997) 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, later in this publication. Federal and state income tax forms   For examples of this calculation, see Business Use or Rental of Home , next. Federal and state income tax forms 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 if you meet the ownership and use tests. Federal and state income tax forms Example 1. Federal and state income tax forms On May 23, 2007, Amy, who is unmarried for all years in this example, bought a house. Federal and state income tax forms 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. Federal and state income tax forms The house was rented from June 1, 2009, to March 31, 2011. Federal and state income tax forms Amy claimed depreciation deductions in 2009 through 2011 totaling $10,000. Federal and state income tax forms 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. Federal and state income tax forms 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. Federal and state income tax forms Five-Year Period Used as Home Used as Rental 1/31/08 – 5/31/09 16 months   6/01/09 – 3/31/11   22 months 4/01/11 – 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. Federal and state income tax forms Because the gain attributable to periods of nonqualified use is $60,990, Amy can exclude $129,010 of her gain, as shown on Worksheet 2. Federal and state income tax forms Example 2. Federal and state income tax forms William owned and used a house as his main home from 2007 through 2010. Federal and state income tax forms On January 1, 2011, he moved to another state. Federal and state income tax forms He rented his house from that date until April 30, 2013, when he sold it. Federal and state income tax forms 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. Federal and state income tax forms Because it was rental property at the time of the sale, he must report the sale on Form 4797. Federal and state income tax forms 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. Federal and state income tax forms Because he met the ownership and use tests, he can exclude gain up to $250,000. Federal and state income tax forms 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. Federal and state income tax forms Depreciation after May 6, 1997. Federal and state income tax forms   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. Federal and state income tax forms 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. Federal and state income tax forms Unrecaptured section 1250 gain. Federal and state income tax forms   This is the part of any long-term capital gain from the sale of your home that is due to depreciation and cannot be excluded. Federal and state income tax forms To figure the amount of unrecaptured section 1250 gain to be reported on Schedule D (Form 1040), you must also take into account certain gains or losses from the sale of property other than your home. Federal and state income tax forms Use the Unrecaptured Section 1250 Gain Worksheet in the Schedule D instructions for this purpose. Federal and state income tax forms Worksheet 2. Federal and state income tax forms Taxable Gain on Sale of Home—Completed Example 1 for Amy Part 1. Federal and state income tax forms Gain or (Loss) on Sale       1. Federal and state income tax forms   Selling price of home 1. Federal and state income tax forms     2. Federal and state income tax forms   Selling expenses (including commissions, advertising and legal fees, and seller-paid loan charges) 2. Federal and state income tax forms     3. Federal and state income tax forms   Subtract line 2 from line 1. Federal and state income tax forms This is the amount realized 3. Federal and state income tax forms     4. Federal and state income tax forms   Adjusted basis of home sold (from Worksheet 1, line 13) 4. Federal and state income tax forms     5. Federal and state income tax forms   Gain or (loss) on the sale. Federal and state income tax forms Subtract line 4 from line 3. Federal and state income tax forms If this is a loss, stop here 5. Federal and state income tax forms 200,000   Part 2. Federal and state income tax forms Exclusion and Taxable Gain       6. Federal and state income tax forms   Enter any depreciation allowed or allowable on the property for periods after May 6, 1997. Federal and state income tax forms If none, enter -0- 6. Federal and state income tax forms 10,000   7. Federal and state income tax forms   Subtract line 6 from line 5. Federal and state income tax forms If the result is less than zero, enter -0- 7. Federal and state income tax forms 190,000   8. Federal and state income tax forms   Aggregate number of days of nonqualified use after 2008. Federal and state income tax forms If none, enter -0-. Federal and state income tax forms  If line 8 is equal to zero, skip to line 12 and enter the amount from line 7 on line 12 8. Federal and state income tax forms 668   9. Federal and state income tax forms   Number of days taxpayer owned the property 9. Federal and state income tax forms 2,080   10. Federal and state income tax forms   Divide the amount on line 8 by the amount on line 9. Federal and state income tax forms Enter the result as a decimal (rounded to at least 3 places). Federal and state income tax forms But do not enter an amount greater than 1. Federal and state income tax forms 00 10. Federal and state income tax forms 0. Federal and state income tax forms 321   11. Federal and state income tax forms   Gain allocated to nonqualified use. Federal and state income tax forms (Line 7 multiplied by line 10) 11. Federal and state income tax forms 60,990   12. Federal and state income tax forms   Gain eligible for exclusion. Federal and state income tax forms Subtract line 11 from line 7 12. Federal and state income tax forms 129,010   13. Federal and state income tax forms   If you qualify to exclude gain on the sale, enter your maximum exclusion (see Maximum Exclusion ). Federal and state income tax forms  If you qualify for a reduced maximum exclusion, enter the amount from Worksheet 3, line 7. Federal and state income tax forms If you do  not qualify to exclude gain, enter -0- 13. Federal and state income tax forms 250,000   14. Federal and state income tax forms   Exclusion. Federal and state income tax forms Enter the smaller of line 12 or line 13 14. Federal and state income tax forms 129,010   15. Federal and state income tax forms   Taxable gain. Federal and state income tax forms Subtract line 14 from line 5. Federal and state income tax forms Report your taxable gain as described under Reporting the Sale . Federal and state income tax forms If the amount on line 6 is more than zero, complete line 16 15. Federal and state income tax forms 70,990   16. Federal and state income tax forms   Enter the smaller of line 6 or line 15. Federal and state income tax forms Enter this amount on line 12 of the Unrecaptured Section 1250 Gain  Worksheet in the instructions for Schedule D (Form 1040) 16. Federal and state income tax forms 10,000 Property Used Partly for Business or Rental If you use property partly as a home and partly for business or to produce rental income, the treatment of any gain on the sale depends partly on whether the business or rental part of the property is part of your home or separate from it. Federal and state income tax forms Part of Home Used for Business or Rental If the part of your property used for business or to produce rental income is within your home, such as a room used as a home office for a business, you do not need to allocate gain on the sale of the property between the business part of the property and the part used as a home. Federal and state income tax forms In addition, you do not need to report the sale of the business or rental part on Form 4797. Federal and state income tax forms This is true whether or not you were entitled to claim any depreciation. Federal and state income tax forms However, you cannot exclude the part of any gain equal to any depreciation allowed or allowable after May 6, 1997. Federal and state income tax forms See Depreciation after May 6, 1997, earlier. Federal and state income tax forms Example 1. Federal and state income tax forms Ray sold his main home in 2013 at a $30,000 gain. Federal and state income tax forms He has no gains or losses from the sale of property other than the gain from the sale of his home. Federal and state income tax forms He meets the ownership and use tests to exclude the gain from his income. Federal and state income tax forms However, he used part of the home as a business office in 2012 and claimed $500 depreciation. Federal and state income tax forms Because the business office was part of his home (not separate from it), he does not have to allocate the gain on the sale between the business part of the property and the part used as a home. Federal and state income tax forms In addition, he does not have to report any part of the gain on Form 4797. Federal and state income tax forms Because Ray was entitled to take a depreciation deduction, he must recognize $500 of the gain as unrecaptured section 1250 gain. Federal and state income tax forms He reports his gain, exclusion, and the taxable gain of $500 on Form 8949 and Schedule D (Form 1040). Federal and state income tax forms Example 2. Federal and state income tax forms The facts are the same as in Example 1 except that Ray was not entitled to claim depreciation for the business use of his home. Federal and state income tax forms Since Ray did not claim any depreciation, he can exclude the entire $30,000 gain. Federal and state income tax forms Separate Part of Property Used for Business or Rental You may have used part of your property as your home and a separate part of it for business or to produce rental income. Federal and state income tax forms Examples are: A working farm on which your house was located, A duplex in w
Español

  • Avoid Jury Notices Rigged to Get Your ID
    There has been a resurgence of the 'jury duty scam,' first revealed by Scam Alert in May 2006. As in other telephone scams, the jury duty ruse can appear authentic because your caller ID screen may indicate that the call is coming from a local courthouse.
  • BBB Warns of Phishing Email Received from Epsilon Data Breach
    Just days after millions of customers' email addresses were stolen in one of the largest data breaches in U.S. history, the Better Business Bureau is seeing one of the first Epsilon data breach phishing scams. If you are a customer of one of the companies that had email data stolen, BBB is warning you to be on the lookout for phishing emails.
  • Digital Copier Identity Theft
    Did you know that digital copiers store what you've copied on a hard drive that if not wiped clean, can be retrieved when that copier is re-sold or junked after it is no longer useful to the company? It is scary to think about how much personal and company data could be on your organization's copier hard drive. Fortunately, there are some ways you can try to protect that information.
  • Fraudsters Claim a Red Cross Connection in New Phishing Scam
    The Federal Trade Commission is warning consumers about a scam targeting families of military members. A caller, claiming to work for the Red Cross, notifies an individual that their family member has been injured while on duty. To get immediate aid to the injured service member, the caller says, paperwork must be completed, and personal information must be verified.
  • FTC Cautions Consumers About Voter Registration Scams
    Have you received an unsolicited e-mail or phone call from someone who claims to represent your local election board or civic group and asks for your Social Security or credit card number to confirm your eligibility or registration to vote? According to the Federal Trade Commission scammers may send messages asking for your Social Security number or financial information supposedly to register you to vote -- or to confirm your registration -- when they really want to commit identity theft.
  • FTC Issues Alert about Identity Theft Scam -- Spammers Pose as Federal Government Operation
    A new Spam Scam Alert from the Federal Trade Commission could help consumers avoid becoming identity theft victims. The Alert, Someone Is Phishing For Your Information, warns that consumers may receive e-mails that claim to be from regulations.gov, a government Web site where consumers can comment on federal rule-making. The e-mails' subject lines typically read, "Official information," information.
  • OnGuardOnline.gov Urges Taxpayers to Contact the IRS If They Suspect Tax-Related Identity Theft
    OnGuardOnline.gov is informing consumers that an unexpected message from the Internal Revenue Service (IRS) could be a warning sign that their Social Security number is being misused by an identity thief.
  • Tips to Avoid Being Scammed This Holiday Season
    As the holidays approach, the FBI reminds the public to use caution when making online purchases. Cyber criminals continue to create ways to steal your money and personal information. If a deal looks too good to be true, it likely is. Here are some tips you can use to avoid becoming a victim of cyber fraud.

The Federal And State Income Tax Forms

Federal and state income tax forms 10. Federal and state income tax forms   Business Bad Debts Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Definition of Business Bad DebtAccrual method. Federal and state income tax forms Cash method. Federal and state income tax forms Debt acquired from a decedent. Federal and state income tax forms Liquidation. Federal and state income tax forms Types of Business Bad Debts When a Debt Becomes Worthless How To Claim a Business Bad DebtSpecific Charge-Off Method Nonaccrual-Experience Method Recovery of a Bad DebtNet operating loss (NOL) carryover. Federal and state income tax forms Introduction You have a bad debt if you cannot collect money owed to you. Federal and state income tax forms A bad debt is either a business bad debt or a nonbusiness bad debt. Federal and state income tax forms This chapter discusses only business bad debts. Federal and state income tax forms Generally, a business bad debt is one that comes from operating your trade or business. Federal and state income tax forms You can deduct business bad debts on Schedule C (Form 1040) or your applicable business income tax return. Federal and state income tax forms All other bad debts are nonbusiness bad debts and are deductible only as short-term capital losses. Federal and state income tax forms For more information on nonbusiness bad debts, see Publication 550. Federal and state income tax forms Topics - This chapter discusses: Definition of business bad debt When a debt becomes worthless How to claim a business bad debt Recovery of a bad debt Useful Items - You may want to see: Publication 525 Taxable and Nontaxable Income 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 556 Examination of Returns, Appeal Rights, and Claims for Refund Form (and Instructions) Schedule C (Form 1040) Profit or Loss From Business 1040X Amended U. Federal and state income tax forms S. Federal and state income tax forms Individual Income Tax Return 1045 Application for Tentative Refund 1139 Corporation Application for Tentative Refund 3115 Application for Change in Accounting Method See chapter 12 for information about getting publications and forms. Federal and state income tax forms Definition of Business Bad Debt A business bad debt is a loss from the worthlessness of a debt that was either: Created or acquired in your trade or business, or Closely related to your trade or business when it became partly or totally worthless. Federal and state income tax forms A debt is closely related to your trade or business if your primary motive for incurring the debt is business related. Federal and state income tax forms Bad debts of a corporation (other than an S corporation) are always business bad debts. Federal and state income tax forms Credit sales. Federal and state income tax forms   Business bad debts are mainly the result of credit sales to customers. Federal and state income tax forms Goods that have been sold, but not yet paid for, and services that have been performed, but not yet paid for, are recorded in your books as either accounts receivable or notes receivable. Federal and state income tax forms After a reasonable period of time, if you have tried to collect the amount due, but are unable to do so, the uncollectible part becomes a business bad debt. Federal and state income tax forms   Accounts or notes receivable valued at fair market value (FMV) when received are deductible only at that value, even though the FMV may be less than the face value. Federal and state income tax forms If you purchased an account receivable for less than its face value, and the receivable subsequently becomes worthless, the most you are allowed to deduct is the amount you paid to acquire it. Federal and state income tax forms    You can claim a business bad debt deduction only if the amount owed to you was previously included in gross income. Federal and state income tax forms This applies to amounts owed to you from all sources of taxable income, including sales, services, rents, and interest. Federal and state income tax forms Accrual method. Federal and state income tax forms   If you use the accrual method of accounting, you generally report income as you earn it. Federal and state income tax forms You can only claim a bad debt deduction for an uncollectible receivable if you have previously included the uncollectible amount in income. Federal and state income tax forms   If you qualify, you can use the nonaccrual-experience method of accounting discussed later. Federal and state income tax forms Under this method, you do not have to accrue income that, based on your experience, you do not expect to collect. Federal and state income tax forms Cash method. Federal and state income tax forms   If you use the cash method of accounting, you generally report income when you receive payment. Federal and state income tax forms You cannot claim a bad debt deduction for amounts owed to you because you never included those amounts in income. Federal and state income tax forms For example, a cash basis architect cannot claim a bad debt deduction if a client fails to pay the bill because the architect's fee was never included in income. Federal and state income tax forms Debts from a former business. Federal and state income tax forms   If you sell your business but retain its receivables, these debts are business debts because they arose out of your trade or business. Federal and state income tax forms If any of these receivables subsequently become worthless, the loss is still a business bad debt. Federal and state income tax forms Debt acquired from a decedent. Federal and state income tax forms   The character of a loss from debts of a business acquired from a decedent is determined in the same way as debts acquired on the purchase of a business. Federal and state income tax forms The executor of the decedent's estate treats any loss from the debts as a business bad debt if the debts were closely related to the decedent's trade or business when they became worthless. Federal and state income tax forms Otherwise, a loss from these debts becomes a nonbusiness bad debt for the decedent's estate. Federal and state income tax forms Liquidation. Federal and state income tax forms   If you liquidate your business and some of the accounts receivable that you retain become worthless, they become business bad debts. Federal and state income tax forms Types of Business Bad Debts Business bad debts may result from the following. Federal and state income tax forms Loans to clients and suppliers. Federal and state income tax forms   If you loan money to a client, supplier, employee, or distributor for a business reason and you are unable to collect the loan after attempting to do so, you have a business bad debt. Federal and state income tax forms Debts owed by political parties. Federal and state income tax forms   If a political party (or other organization that accepts contributions or spends money to influence elections) owes you money and the debt becomes worthless, you can claim a bad debt deduction only if all of the following requirements are met. Federal and state income tax forms You use the accrual method of accounting. Federal and state income tax forms The debt arose from the sale of goods or services in the ordinary course of your trade or business. Federal and state income tax forms More than 30% of your receivables accrued in the year of the sale were from sales to political parties. Federal and state income tax forms You made substantial and continuing efforts to collect on the debt. Federal and state income tax forms Loan or capital contribution. Federal and state income tax forms   You cannot claim a bad debt deduction for a loan you made to a corporation if, based on the facts and circumstances, the loan is actually a contribution to capital. Federal and state income tax forms Debts of an insolvent partner. Federal and state income tax forms   If your business partnership breaks up and one of your former partners becomes insolvent, you may have to pay more than your pro rata share of the partnership's debts. Federal and state income tax forms If you pay any part of the insolvent partner's share of the debts, you can claim a bad debt deduction for the amount you paid that is attributable to the insolvent partner's share. Federal and state income tax forms Business loan guarantee. Federal and state income tax forms   If you guarantee a debt that subsequently becomes worthless, the debt can qualify as a business bad debt if all the following requirements are met. Federal and state income tax forms You made the guarantee in the course of your trade or business. Federal and state income tax forms You have a legal duty to pay the debt. Federal and state income tax forms You made the guarantee before the debt became worthless. Federal and state income tax forms You meet this requirement if you reasonably expected you would not have to pay the debt without full reimbursement from the borrower. Federal and state income tax forms You received reasonable consideration for making the guarantee. Federal and state income tax forms You meet this requirement if you made the guarantee in accord with normal business practice or for a good faith business purpose. Federal and state income tax forms Example. Federal and state income tax forms Jane Zayne owns the Zayne Dress Company. Federal and state income tax forms She guaranteed payment of a $20,000 note for Elegant Fashions, a dress outlet. Federal and state income tax forms Elegant Fashions is one of Zayne's largest clients. Federal and state income tax forms Elegant Fashions later defaulted on the loan. Federal and state income tax forms As a result, Ms. Federal and state income tax forms Zayne paid the remaining balance of the loan in full to the bank. Federal and state income tax forms She can claim a business bad debt deduction only for the amount she paid, since her guarantee was made in the course of her trade or business for a good faith business purpose. Federal and state income tax forms She was motivated by the desire to retain one of her better clients and keep a sales outlet. Federal and state income tax forms Deductible in the year paid. Federal and state income tax forms   If you make a payment on a loan you guaranteed, you can deduct it in the year paid, unless you have rights against the borrower. Federal and state income tax forms Rights against a borrower. Federal and state income tax forms   When you make payment on a loan you guaranteed, you may have the right to take the place of the lender. Federal and state income tax forms The debt is then owed to you. Federal and state income tax forms If you have this right, or some other right to demand payment from the borrower, you cannot claim a bad debt deduction until these rights become partly or totally worthless. Federal and state income tax forms Joint debtor. Federal and state income tax forms   If two or more debtors jointly owe you money, your inability to collect from one does not enable you to deduct a proportionate amount as a bad debt. Federal and state income tax forms Sale of mortgaged property. Federal and state income tax forms   If mortgaged or pledged property is sold for less than the debt, the unpaid, uncollectible balance of the debt is a bad debt. Federal and state income tax forms When a Debt Becomes Worthless A debt becomes worthless when there is no longer any chance the amount owed will be paid. Federal and state income tax forms This may occur when the debt is due or prior to that date. Federal and state income tax forms To demonstrate worthlessness, you must only show that you have taken reasonable steps to collect the debt but were unable to do so. Federal and state income tax forms It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. Federal and state income tax forms Bankruptcy of your debtor is generally good evidence of the worthlessness of at least a part of an unsecured and unpreferred debt. Federal and state income tax forms Property received for debt. Federal and state income tax forms   If you receive property in partial settlement of a debt, reduce the debt by the property's FMV, which becomes the property's basis. Federal and state income tax forms You can deduct the remaining debt as a bad debt if and when it becomes worthless. Federal and state income tax forms   If you later sell the property for more than its basis, any gain on the sale is due to the appreciation of the property. Federal and state income tax forms It is not a recovery of a bad debt. Federal and state income tax forms For information on the sale of an asset, see Publication 544. Federal and state income tax forms How To Claim a Business Bad Debt There are two methods to claim a business bad debt. Federal and state income tax forms The specific charge-off method. Federal and state income tax forms The nonaccrual-experience method. Federal and state income tax forms Generally, you must use the specific charge-off method. Federal and state income tax forms However, you may use the nonaccrual-experience method if you meet the requirements discussed later under Nonaccrual-Experience Method . Federal and state income tax forms Specific Charge-Off Method If you use the specific charge-off method, you can deduct specific business bad debts that become either partly or totally worthless during the tax year. Federal and state income tax forms However, with respect to partly worthless bad debts, your deduction is limited to the amount you charged off on your books during the year. Federal and state income tax forms Partly worthless debts. Federal and state income tax forms   You can deduct specific bad debts that become partly uncollectible during the tax year. Federal and state income tax forms Your tax deduction is limited to the amount you charge off on your books during the year. Federal and state income tax forms You do not have to charge off and deduct your partly worthless debts annually. Federal and state income tax forms You can delay the charge off until a later year. Federal and state income tax forms However, you cannot deduct any part of a debt after the year it becomes totally worthless. Federal and state income tax forms Significantly modified debt. Federal and state income tax forms   An exception to the charge-off rule exists for debt which has been significantly modified and on which the holder recognized gain. Federal and state income tax forms For more information, see Regulations section 1. Federal and state income tax forms 166-3(a)(3). Federal and state income tax forms Deduction disallowed. Federal and state income tax forms   Generally, you can claim a partial bad debt deduction only in the year you make the charge-off on your books. Federal and state income tax forms If, under audit, the IRS does not allow your deduction and the debt becomes partly worthless in a later tax year, you can deduct the amount you charged off in that year plus the disallowed amount charged off in the earlier year. Federal and state income tax forms The charge-off in the earlier year, unless reversed on your books, fulfills the charge-off requirement for the later year. Federal and state income tax forms Totally worthless debts. Federal and state income tax forms   If a debt becomes totally worthless in the current tax year, you can deduct the entire amount, less any amount deducted in an earlier tax year when the debt was only partly worthless. Federal and state income tax forms   You do not have to make an actual charge-off on your books to claim a bad debt deduction for a totally worthless debt. Federal and state income tax forms However, you may want to do so. Federal and state income tax forms If you do not and the IRS later rules the debt is only partly worthless, you will not be allowed a deduction for the debt in that tax year because a deduction of a partly worthless bad debt is limited to the amount actually charged off. Federal and state income tax forms See Partly worthless debts, earlier. Federal and state income tax forms Filing a claim for refund. Federal and state income tax forms   If you did not deduct a bad debt on your original return for the year it became worthless, you can file a claim for a credit or refund. Federal and state income tax forms If the bad debt was totally worthless, you must file the claim by the later of the following dates. Federal and state income tax forms 7 years from the date your original return was due (not including extensions). Federal and state income tax forms 2 years from the date you paid the tax. Federal and state income tax forms   If the claim is for a partly worthless bad debt, you must file the claim by the later of the following dates. Federal and state income tax forms 3 years from the date you filed your original return. Federal and state income tax forms 2 years from the date you paid the tax. Federal and state income tax forms You may have longer to file the claim if you were unable to manage your financial affairs due to a physical or mental impairment. Federal and state income tax forms Such an impairment requires proof of existence. Federal and state income tax forms   For details and more information about filing a claim, see Publication 556. Federal and state income tax forms Use one of the following forms to file a claim. Federal and state income tax forms For more information, see the instructions for the applicable form. Federal and state income tax forms Table 10-1. Federal and state income tax forms Forms Used To File a Claim IF you filed as a. Federal and state income tax forms . Federal and state income tax forms . Federal and state income tax forms THEN file. Federal and state income tax forms . Federal and state income tax forms . Federal and state income tax forms Sole proprietor or farmer Form 1040X Corporation Form 1120X S corporation Form 1120S and check box H(4) Partnership Form 1065X if filing on paper or  Form 1065 and check box G(5) if filing electronically Nonaccrual-Experience Method If you use an accrual method of accounting and qualify under the rules explained in this section, you can use the nonaccrual-experience method for bad debts. Federal and state income tax forms Under this method, you do not accrue service related income you expect to be uncollectible. Federal and state income tax forms Because the expected uncollectible amounts are not included in income, these amounts are not later deducted from income. Federal and state income tax forms Generally, you can use the nonaccrual-experience method for accounts receivable for services you performed only if: The services are provided in the fields of accounting, actuarial science, architecture, consulting, engineering, health, law, or the performing arts, or You meet the $5 million gross receipts test for all prior years. Federal and state income tax forms Service related income. Federal and state income tax forms   You can use the nonaccrual-experience method only for amounts earned by performing services. Federal and state income tax forms You cannot use this method for amounts owed to you from activities such as lending money, selling goods, or acquiring receivables or other rights to receive payment. Federal and state income tax forms Gross receipts test. Federal and state income tax forms   To find out if you meet the $5 million gross receipts test for all prior years, you must figure the average annual gross receipts for each prior year. Federal and state income tax forms If your average annual gross receipts for any year exceeds $5 million, you cannot use the non-accural experience method. Federal and state income tax forms   The average annual gross receipts for any year is the average of gross receipts from the year in question and the 2 previous years. Federal and state income tax forms For example, if you were figuring the average annual gross receipts for 2013, you would average your gross receipts for 2011, 2012, and 2013. Federal and state income tax forms Interest or penalty charged. Federal and state income tax forms   Generally, you cannot use the nonaccrual-experience method for amounts due on which you charge interest or a late payment penalty. Federal and state income tax forms However, do not treat a discount offered for early payment as the charging of interest or a penalty if both the following apply. Federal and state income tax forms You otherwise accrue the full amount due as gross income at the time you provide the services. Federal and state income tax forms You treat the discount allowed for early payment as an adjustment to gross income in the year of payment. Federal and state income tax forms Change in accounting method. Federal and state income tax forms   Generally, you must obtain consent to change to a nonaccrual-experience method (other than one of the safe harbor methods) or to change from one method to another. Federal and state income tax forms See Form 3115 and the Instructions for Form 3115 for more information. Federal and state income tax forms Recovery of a Bad Debt If you claim a deduction for a bad debt on your income tax return and later recover (collect) all or part of it, you may have to include all or part of the recovery in gross income. Federal and state income tax forms The amount you include is limited to the amount you actually deducted. Federal and state income tax forms However, you can exclude the amount deducted that did not reduce your tax. Federal and state income tax forms Report the recovery as “Other income” on the appropriate business form or schedule. Federal and state income tax forms See Recoveries in Publication 525 for more information. Federal and state income tax forms Net operating loss (NOL) carryover. Federal and state income tax forms   If a bad debt deduction increases an NOL carryover that has not expired before the beginning of the tax year in which the recovery takes place, you treat the deduction as having reduced your tax. Federal and state income tax forms A bad debt deduction that contributes to a NOL helps lower taxes in the year to which you carry the NOL. Federal and state income tax forms For more information about NOLs, see Publication 536. Federal and state income tax forms Also, see the Instructions for Form 1045, and the Instructions for Form 1139. Federal and state income tax forms Prev  Up  Next   Home   More Online Publications