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Free online tax 15. Free online tax   Selling Your Home Table of Contents Reminder Introduction Useful Items - You may want to see: Main Home Figuring Gain or LossSelling Price Amount Realized Adjusted Basis Amount of Gain or Loss Dispositions Other Than Sales Determining Basis Excluding the GainMaximum Exclusion Ownership and Use Tests Reduced Maximum Exclusion Business Use or Rental of Home Reporting the SaleSeller-financed mortgage. Free online tax More information. Free online tax Special SituationsException for sales to related persons. Free online tax Recapturing (Paying Back) a Federal Mortgage Subsidy Reminder Home sold with undeducted points. Free online tax  If you have not deducted all the points you paid to secure a mortgage on your old home, you may be able to deduct the remaining points in the year of the sale. Free online tax See Mortgage ending early under Points in chapter 23. Free online tax Introduction This chapter explains the tax rules that apply when you sell your main home. Free online tax In most cases, your main home is the one in which you live most of the time. Free online tax If you sold your main home in 2013, you may be able to exclude from income any gain up to a limit of $250,000 ($500,000 on a joint return in most cases). Free online tax See Excluding the Gain , later. Free online tax Generally, if you can exclude all the gain, you do not need to report the sale on your tax return. Free online tax If you have gain that cannot be excluded, it is taxable. Free online tax Report it on Form 8949, Sales and Other Dispositions of Capital Assets, and Schedule D (Form 1040). Free online tax You may also have to complete Form 4797, Sales of Business Property. Free online tax See Reporting the Sale , later. Free online tax If you have a loss on the sale, you generally cannot deduct it on your return. Free online tax However, you may need to report it. Free online tax See Reporting the Sale , later. Free online tax The following are main topics in this chapter. Free online tax Figuring gain or loss. Free online tax Basis. Free online tax Excluding the gain. Free online tax Ownership and use tests. Free online tax Reporting the sale. Free online tax Other topics include the following. Free online tax Business use or rental of home. Free online tax Recapturing a federal mortgage subsidy. Free online tax Useful Items - You may want to see: Publication 523 Selling Your Home 530 Tax Information for Homeowners 547 Casualties, Disasters, and Thefts Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 982 Reduction of Tax Attributes Due to Discharge of Indebtedness 8828 Recapture of Federal Mortgage Subsidy 8949 Sales and Other Dispositions of Capital Assets Main Home This section explains the term “main home. Free online tax ” 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. Free online tax To exclude gain under the rules of this chapter, you in most cases must have owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date of sale. Free online tax Land. Free online tax   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. Free online tax However, if you sell vacant land used as part of your main home and that is adjacent to it, you may be able to exclude the gain from the sale under certain circumstances. Free online tax See Vacant land under Main Home in Publication 523 for more information. Free online tax Example. Free online tax You buy a piece of land and move your main home to it. Free online tax Then you sell the land on which your main home was located. Free online tax This sale is not considered a sale of your main home, and you cannot exclude any gain on the sale of the land. Free online tax More than one home. Free online tax   If you have more than one home, you can exclude gain only from the sale of your main home. Free online tax You must include in income gain from the sale of any other home. Free online tax If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time during the year. Free online tax Example 1. Free online tax You own two homes, one in New York and one in Florida. Free online tax 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. Free online tax In the absence of facts and circumstances indicating otherwise, the New York home is your main home. Free online tax You would be eligible to exclude the gain from the sale of the New York home but not of the Florida home in 2013. Free online tax Example 2. Free online tax You own a house, but you live in another house that you rent. Free online tax The rented house is your main home. Free online tax Example 3. Free online tax You own two homes, one in Virginia and one in New Hampshire. Free online tax In 2009 and 2010, you lived in the Virginia home. Free online tax In 2011 and 2012, you lived in the New Hampshire home. Free online tax In 2013, you lived again in the Virginia home. Free online tax Your main home in 2009, 2010, and 2013 is the Virginia home. Free online tax Your main home in 2011 and 2012 is the New Hampshire home. Free online tax You would be eligible to exclude gain from the sale of either home (but not both) in 2013. Free online tax Property used partly as your main home. Free online tax   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. Free online tax For details, see Business Use or Rental of Home , later. Free online tax 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. Free online tax Subtract the adjusted basis from the amount realized to get your gain or loss. Free online tax     Selling price     − Selling expenses       Amount realized       Amount realized     − Adjusted basis       Gain or loss   Selling Price The selling price is the total amount you receive for your home. Free online tax 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. Free online tax Payment by employer. Free online tax   You may have to sell your home because of a job transfer. Free online tax 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. Free online tax 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. Free online tax Option to buy. Free online tax   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. Free online tax If the option is not exercised, you must report the amount as ordinary income in the year the option expires. Free online tax Report this amount on Form 1040, line 21. Free online tax Form 1099-S. Free online tax   If you received Form 1099-S, Proceeds From Real Estate Transactions, box 2 (Gross proceeds) should show the total amount you received for your home. Free online tax   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. Free online tax Instead, box 4 will be checked to indicate your receipt or expected receipt of these items. Free online tax Amount Realized The amount realized is the selling price minus selling expenses. Free online tax Selling expenses. Free online tax   Selling expenses include: Commissions, Advertising fees, Legal fees, and Loan charges paid by the seller, such as loan placement fees or “points. Free online tax ” Adjusted Basis While you owned your home, you may have made adjustments (increases or decreases) to the basis. Free online tax This adjusted basis must be determined before you can figure gain or loss on the sale of your home. Free online tax For information on how to figure your home's adjusted basis, see Determining Basis , later. Free online tax Amount of Gain or Loss To figure the amount of gain or loss, compare the amount realized to the adjusted basis. Free online tax Gain on sale. Free online tax   If the amount realized is more than the adjusted basis, the difference is a gain and, except for any part you can exclude, in most cases is taxable. Free online tax Loss on sale. Free online tax   If the amount realized is less than the adjusted basis, the difference is a loss. Free online tax A loss on the sale of your main home cannot be deducted. Free online tax Jointly owned home. Free online tax   If you and your spouse sell your jointly owned home and file a joint return, you figure your gain or loss as one taxpayer. Free online tax Separate returns. Free online tax   If you file separate returns, each of you must figure your own gain or loss according to your ownership interest in the home. Free online tax Your ownership interest is generally determined by state law. Free online tax Joint owners not married. Free online tax   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. Free online tax Each of you applies the rules discussed in this chapter on an individual basis. Free online tax Dispositions Other Than Sales Some special rules apply to other dispositions of your main home. Free online tax Foreclosure or repossession. Free online tax   If your home was foreclosed on or repossessed, you have a disposition. Free online tax See Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments, to determine if you have ordinary income, gain, or loss. Free online tax Abandonment. Free online tax   If you abandon your home, see Publication 4681 to determine if you have ordinary income, gain, or loss. Free online tax Trading (exchanging) homes. Free online tax   If you trade your old home for another home, treat the trade as a sale and a purchase. Free online tax Example. Free online tax You owned and lived in a home with an adjusted basis of $41,000. Free online tax 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. Free online tax This is treated as a sale of your old home for $50,000 with a gain of $9,000 ($50,000 – $41,000). Free online tax 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). Free online tax Transfer to spouse. Free online tax   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. Free online tax This is true even if you receive cash or other consideration for the home. Free online tax As a result, the rules in this chapter do not apply. Free online tax More information. Free online tax   If you need more information, see Transfer to spouse in Publication 523 and Property Settlements in Publication 504, Divorced or Separated Individuals. Free online tax Involuntary conversion. Free online tax   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. Free online tax 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 . Free online tax Determining Basis You need to know your basis in your home to figure any gain or loss when you sell it. Free online tax Your basis in your home is determined by how you got the home. Free online tax Generally, your basis is its cost if you bought it or built it. Free online tax If you got it in some other way (inheritance, gift, etc. Free online tax ), your basis is generally either its fair market value when you received it or the adjusted basis of the previous owner. Free online tax While you owned your home, you may have made adjustments (increases or decreases) to your home's basis. Free online tax 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. Free online tax See Adjusted Basis , later. Free online tax You can find more information on basis and adjusted basis in chapter 13 of this publication and in Publication 523. Free online tax Cost As Basis The cost of property is the amount you paid for it in cash, debt obligations, other property, or services. Free online tax Purchase. Free online tax   If you bought your home, your basis is its cost to you. Free online tax This includes the purchase price and certain settlement or closing costs. Free online tax 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. Free online tax If you build, or contract to build, a new home, your purchase price can include costs of construction, as discussed in Publication 523. Free online tax Settlement fees or closing costs. Free online tax   When you bought your home, you may have paid settlement fees or closing costs in addition to the contract price of the property. Free online tax 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. Free online tax 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). Free online tax    Chapter 13 lists some of the settlement fees and closing costs that you can include in the basis of property, including your home. Free online tax It also lists some settlement costs that cannot be included in basis. Free online tax   Also see Publication 523 for additional items and a discussion of basis other than cost. Free online tax Adjusted Basis Adjusted basis is your cost or other basis increased or decreased by certain amounts. Free online tax To figure your adjusted basis, you can use Worksheet 1 in Publication 523. Free online tax Do not use Worksheet 1 if you acquired an interest in your home from a decedent who died in 2010 and whose executor filed Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent. Free online tax Increases to basis. Free online tax   These include the following. Free online tax Additions and other improvements that have a useful life of more than 1 year. Free online tax Special assessments for local improvements. Free online tax Amounts you spent after a casualty to restore damaged property. Free online tax Improvements. Free online tax   These add to the value of your home, prolong its useful life, or adapt it to new uses. Free online tax You add the cost of additions and other improvements to the basis of your property. Free online tax   For example, putting a recreation room or another bathroom in your unfinished basement, putting up a new fence, putting in new plumbing or wiring, putting on a new roof, or paving your unpaved driveway are improvements. Free online tax An addition to your house, such as a new deck, a sunroom, or a new garage, is also an improvement. Free online tax Repairs. Free online tax   These maintain your home in good condition but do not add to its value or prolong its life. Free online tax You do not add their cost to the basis of your property. Free online tax   Examples of repairs include repainting your house inside or outside, fixing your gutters or floors, repairing leaks or plastering, and replacing broken window panes. Free online tax Decreases to basis. Free online tax   These include the following. Free online tax Discharge of qualified principal residence indebtedness that was excluded from income. Free online tax Some or all of the cancellation of debt income that was excluded due to your bankruptcy or insolvency. Free online tax For details, see Publication 4681. Free online tax Gain you postponed from the sale of a previous home before May 7, 1997. Free online tax Deductible casualty losses. Free online tax Insurance payments you received or expect to receive for casualty losses. Free online tax Payments you received for granting an easement or right-of-way. Free online tax Depreciation allowed or allowable if you used your home for business or rental purposes. Free online tax Energy-related credits allowed for expenditures made on the residence. Free online tax (Reduce the increase in basis otherwise allowable for expenditures on the residence by the amount of credit allowed for those expenditures. Free online tax ) Adoption credit you claimed for improvements added to the basis of your home. Free online tax Nontaxable payments from an adoption assistance program of your employer you used for improvements you added to the basis of your home. Free online tax 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. Free online tax 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. Free online tax District of Columbia first-time homebuyer credit (allowed on the purchase of a principal residence in the District of Columbia beginning on August 5, 1997 and before January 1, 2012). Free online tax General sales taxes (allowed beginning 2004 and ending before 2014) claimed as an itemized deduction on Schedule A (Form 1040) that were imposed on the purchase of personal property, such as a houseboat used as your home or a mobile home. Free online tax Discharges of qualified principal residence indebtedness. Free online tax   You may be able to exclude from gross income a discharge of qualified principal residence indebtedness. Free online tax This exclusion applies to discharges made after 2006 and before 2014. Free online tax If you choose to exclude this income, you must reduce (but not below zero) the basis of the principal residence by the amount excluded from your gross income. Free online tax   File Form 982 with your tax return. Free online tax See the form's instructions for detailed information. Free online tax Recordkeeping. Free online tax You should keep records to prove your home's adjusted basis. Free online tax 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. Free online tax 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. Free online tax Keep records proving the basis of both homes as long as they are needed for tax purposes. Free online tax The records you should keep include: Proof of the home's purchase price and purchase expenses, Receipts and other records for all improvements, additions, and other items that affect the home's adjusted basis, Any worksheets or other computations you used to figure the adjusted basis of the home you sold, the gain or loss on the sale, the exclusion, and the taxable gain, Any Form 982 you filed to report any discharge of qualified principal residence indebtedness, Any Form 2119, Sale of Your Home, you filed to postpone gain from the sale of a previous home before May 7, 1997, and Any worksheets you used to prepare Form 2119, such as the Adjusted Basis of Home Sold Worksheet or the Capital Improvements Worksheet from the Form 2119 instructions, or other source of computations. Free online tax Excluding the Gain You may qualify to exclude from your income all or part of any gain from the sale of your main home. Free online tax 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. Free online tax To qualify, you must meet the ownership and use tests described later. Free online tax 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. Free online tax You can use Worksheet 2 in Publication 523 to figure the amount of your exclusion and your taxable gain, if any. Free online tax If you have any taxable gain from the sale of your home, you may have to increase your withholding or make estimated tax payments. Free online tax See Publication 505, Tax Withholding and Estimated Tax. Free online tax 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. Free online tax You meet the ownership test. Free online tax You meet the use test. Free online tax During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home. Free online tax For details on gain allocated to periods of nonqualified use, see Periods of nonqualified use , later. Free online tax 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 . Free online tax Ownership and Use Tests To claim the exclusion, you must meet the ownership and use tests. Free online tax 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). Free online tax Exception. Free online tax   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. Free online tax However, the maximum amount you may be able to exclude will be reduced. Free online tax See Reduced Maximum Exclusion , later. Free online tax Example 1—home owned and occupied for at least 2 years. Free online tax Mya bought and moved into her main home in September 2011. Free online tax She sold the home at a gain in October 2013. Free online tax 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. Free online tax She meets the ownership and use tests. Free online tax Example 2—ownership test met but use test not met. Free online tax Ayden bought a home, lived in it for 6 months, moved out, and never occupied the home again. Free online tax He later sold the home for a gain. Free online tax He owned the home during the entire 5-year period ending on the date of sale. Free online tax He meets the ownership test but not the use test. Free online tax He cannot exclude any part of his gain on the sale unless he qualified for a reduced maximum exclusion (explained later). Free online tax 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. Free online tax 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. Free online tax Temporary absence. Free online tax   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. Free online tax The following examples assume that the reduced maximum exclusion (discussed later) does not apply to the sales. Free online tax Example 1. Free online tax David Johnson, who is single, bought and moved into his home on February 1, 2011. Free online tax Each year during 2011 and 2012, David left his home for a 2-month summer vacation. Free online tax David sold the house on March 1, 2013. Free online tax Although the total time David used his home is less than 2 years (21 months), he meets the requirement and may exclude gain. Free online tax 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. Free online tax Example 2. Free online tax Professor Paul Beard, who is single, bought and moved into a house on August 18, 2010. Free online tax He lived in it as his main home continuously until January 5, 2012, when he went abroad for a 1-year sabbatical leave. Free online tax On February 6, 2013, 1 month after returning from the leave, Paul sold the house at a gain. Free online tax Because his leave was not a short temporary absence, he cannot include the period of leave to meet the 2-year use test. Free online tax He cannot exclude any part of his gain, because he did not use the residence for the required 2 years. Free online tax Ownership and use tests met at different times. Free online tax   You can meet the ownership and use tests during different 2-year periods. Free online tax However, you must meet both tests during the 5-year period ending on the date of the sale. Free online tax Example. Free online tax Beginning in 2002, Helen Jones lived in a rented apartment. Free online tax The apartment building was later converted to condominiums, and she bought her same apartment on December 3, 2010. Free online tax In 2011, Helen became ill and on April 14 of that year she moved to her daughter's home. Free online tax On July 12, 2013, while still living in her daughter's home, she sold her condominium. Free online tax 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. Free online tax She owned her condominium from December 3, 2010, to July 12, 2013 (more than 2 years). Free online tax She lived in the property from July 13, 2008 (the beginning of the 5-year period), to April 14, 2011 (more than 2 years). Free online tax 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. Free online tax Cooperative apartment. Free online tax   If you sold stock as a tenant-stockholder in a cooperative housing corporation, the ownership and use tests are met if, during the 5-year period ending on the date of sale, you: Owned the stock for at least 2 years, and Lived in the house or apartment that the stock entitles you to occupy as your main home for at least 2 years. Free online tax Exceptions to Ownership and Use Tests The following sections contain exceptions to the ownership and use tests for certain taxpayers. Free online tax Exception for individuals with a disability. Free online tax   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. Free online tax 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. Free online tax 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. Free online tax Previous home destroyed or condemned. Free online tax   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. Free online tax This rule applies if any part of the basis of the home you sold depended on the basis of the destroyed or condemned home. Free online tax 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. Free online tax Members of the uniformed services or Foreign Service, employees of the intelligence community, or employees or volunteers of the Peace Corps. Free online tax   You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve on “qualified official extended duty” as a member of the uniformed services or Foreign Service of the United States, or as an employee of the intelligence community. Free online tax You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve outside the United States either as an employee of the Peace Corps on "qualified official extended duty" or as an enrolled volunteer or volunteer leader of the Peace Corps. Free online tax 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. Free online tax   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. Free online tax For more information about the suspension of the 5-year test period, see Members of the uniformed services or Foreign Service, employees of the intelligence community, or employees or volunteers of the Peace Corps in Publication 523. Free online tax 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. Free online tax (But see Special rules for joint returns , next. Free online tax ) Special rules for joint returns. Free online tax   You can exclude up to $500,000 of the gain on the sale of your main home if all of the following are true. Free online tax You are married and file a joint return for the year. Free online tax Either you or your spouse meets the ownership test. Free online tax Both you and your spouse meet the use test. Free online tax 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. Free online tax 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. Free online tax For this purpose, each spouse is treated as owning the property during the period that either spouse owned the property. Free online tax Example 1—one spouse sells a home. Free online tax Emily sells her home in June 2013 for a gain of $300,000. Free online tax She marries Jamie later in the year. Free online tax She meets the ownership and use tests, but Jamie does not. Free online tax Emily can exclude up to $250,000 of gain on a separate or joint return for 2013. Free online tax The $500,000 maximum exclusion for certain joint returns does not apply because Jamie does not meet the use test. Free online tax Example 2—each spouse sells a home. Free online tax 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. Free online tax He meets the ownership and use tests on his home, but Emily does not. Free online tax Emily can exclude $250,000 of gain and Jamie can exclude $200,000 of gain on the respective sales of their individual homes. Free online tax However, Emily cannot use Jamie's unused exclusion to exclude more than $250,000 of gain. Free online tax Therefore, Emily and Jamie must recognize $50,000 of gain on the sale of Emily's home. Free online tax 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. Free online tax Sale of main home by surviving spouse. Free online tax   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. Free online tax   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. Free online tax The sale or exchange took place after 2008. Free online tax The sale or exchange took place no more than 2 years after the date of death of your spouse. Free online tax You have not remarried. Free online tax You and your spouse met the use test at the time of your spouse's death. Free online tax You or your spouse met the ownership test at the time of your spouse's death. Free online tax Neither you nor your spouse excluded gain from the sale of another home during the last 2 years. Free online tax Example. Free online tax   Harry owned and used a house as his main home since 2009. Free online tax Harry and Wilma married on July 1, 2013, and from that date they use Harry's house as their main home. Free online tax Harry died on August 15, 2013, and Wilma inherited the property. Free online tax Wilma sold the property on September 3, 2013, at which time she had not remarried. Free online tax 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. Free online tax Home transferred from spouse. Free online tax   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. Free online tax Use of home after divorce. Free online tax   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. Free online tax 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. Free online tax 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. Free online tax In both cases, to qualify for a reduced exclusion, the sale of your main home must be due to one of the following reasons. Free online tax A change in place of employment. Free online tax Health. Free online tax Unforeseen circumstances. Free online tax Unforeseen circumstances. Free online tax   The sale of your main home is because of an unforeseen circumstance if your primary reason for the sale is the occurrence of an event that you could not reasonably have anticipated before buying and occupying your main home. Free online tax   See Publication 523 for more information and to use Worksheet 3 to figure your reduced maximum exclusion. Free online tax 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. Free online tax But you must meet the ownership and use tests. Free online tax Periods of nonqualified use. Free online tax   In most cases, gain from the sale or exchange of your main home will not qualify for the exclusion to the extent that the gains are allocated to periods of nonqualified use. Free online tax Nonqualified use is any period after 2008 during which neither you nor your spouse (or your former spouse) used the property as a main home with the following exceptions. Free online tax Exceptions. Free online tax   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. Free online tax The gain resulting from the sale of the property is allocated between qualified and nonqualified use periods based on the amount of time the property was held for qualified and nonqualified use. Free online tax Gain from the sale or exchange of a main home allocable to periods of qualified use will continue to qualify for the exclusion for the sale of your main home. Free online tax Gain from the sale or exchange of property allocable to nonqualified use will not qualify for the exclusion. Free online tax Calculation. Free online tax   To figure the portion of the gain allocated to the period of nonqualified use, multiply the gain by the following fraction:   Total nonqualified use during the period of ownership after 2008      Total period of ownership     This calculation can be found in Worksheet 2, line 10, in Publication 523. Free online tax Example 1. Free online tax On May 23, 2007, Amy, who is unmarried for all years in this example, bought a house. Free online tax 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. Free online tax The house was rented from June 1, 2009, to March 31, 2011. Free online tax Amy claimed depreciation deductions in 2009 through 2011 totaling $10,000. Free online tax 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. Free online tax 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. Free online tax Five Year Period Used as  Home Used as  Rental 1/31/08 – 5/31/09 16 months       6/1/09 – 3/31/11   22 months 4/1/11 – 1/31/13 22 months         38 months 22 months During the period Amy owned the house (2,080 days), her period of nonqualified use was 668 days. Free online tax Amy divides 668 by 2,080 and obtains a decimal (rounded to at least three decimal places) of 0. Free online tax 321. Free online tax To figure her gain attributable to the period of nonqualified use, she multiplies $190,000 (the gain not attributable to the $10,000 depreciation deduction) by 0. Free online tax 321. Free online tax Because the gain attributable to periods of nonqualified use is $60,990, Amy can exclude $129,010 of her gain. Free online tax Example 2. Free online tax William owned and used a house as his main home from 2007 through 2010. Free online tax On January 1, 2011, he moved to another state. Free online tax He rented his house from that date until April 30, 2013, when he sold it. Free online tax 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. Free online tax He must report the sale on Form 4797 because it was rental property at the time of sale. Free online tax 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. Free online tax Because he met the ownership and use tests, he can exclude gain up to $250,000. Free online tax 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. Free online tax Depreciation after May 6, 1997. Free online tax   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. Free online tax 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. Free online tax See Publication 544 for more information. Free online tax Property used partly for business or rental. Free online tax   If you used property partly as a home and partly for business or to produce rental income, see Publication 523. Free online tax Reporting the Sale Do not report the 2013 sale of your main home on your tax return unless: You have a gain and do not qualify to exclude all of it, You have a gain and choose not to exclude it, or You received Form 1099-S. Free online tax If any of these conditions apply, report the entire gain or loss. Free online tax For details on how to report the gain or loss, see the Instructions for Schedule D (Form 1040) and the Instructions for Form 8949. Free online tax If you used the home for business or to produce rental income, you may have to use Form 4797 to report the sale of the business or rental part (or the sale of the entire property if used entirely for business or rental). Free online tax See Business Use or Rental of Home in Publication 523 and the Instructions for Form 4797. Free online tax Installment sale. Free online tax    Some sales are made under arrangements that provide for part or all of the selling price to be paid in a later year. Free online tax These sales are called “installment sales. Free online tax ” If you finance the buyer's purchase of your home yourself instead of having the buyer get a loan or mortgage from a bank, you probably have an installment sale. Free online tax You may be able to report the part of the gain you cannot exclude on the installment basis. Free online tax    Use Form 6252, Installment Sale Income, to report the sale. Free online tax Enter your exclusion on line 15 of Form 6252. Free online tax Seller-financed mortgage. Free online tax   If you sell your home and hold a note, mortgage, or other financial agreement, the payments you receive in most cases consist of both interest and principal. Free online tax You must separately report as interest income the interest you receive as part of each payment. Free online tax If the buyer of your home uses the property as a main or second home, you must also report the name, address, and social security number (SSN) of the buyer on line 1 of Schedule B (Form 1040A or 1040). Free online tax The buyer must give you his or her SSN, and you must give the buyer your SSN. Free online tax Failure to meet these requirements may result in a $50 penalty for each failure. Free online tax If either you or the buyer does not have and is not eligible to get an SSN, see Social Security Number in chapter 1. Free online tax More information. Free online tax   For more information on installment sales, see Publication 537, Installment Sales. Free online tax Special Situations The situations that follow may affect your exclusion. Free online tax Sale of home acquired in a like-kind exchange. Free online tax   You cannot claim the exclusion if: You acquired your home in a like-kind exchange (also known as a section 1031 exchange), or your basis in your home is determined by reference to the basis of the home in the hands of the person who acquired the property in a like-kind exchange (for example, you received the home from that person as a gift), and You sold the home during the 5-year period beginning with the date your home was acquired in the like-kind exchange. Free online tax Gain from a like-kind exchange is not taxable at the time of the exchange. Free online tax This means that gain will not be taxed until you sell or otherwise dispose of the property you receive. Free online tax To defer gain from a like-kind exchange, you must have exchanged business or investment property for business or investment property of a like kind. Free online tax For more information about like-kind exchanges, see Publication 544, Sales and Other Dispositions of Assets. Free online tax Home relinquished in a like-kind exchange. Free online tax   If you use your main home partly for business or rental purposes and then exchange the home for another property, see Publication 523. Free online tax Expatriates. Free online tax   You cannot claim the exclusion if the expatriation tax applies to you. Free online tax The expatriation tax applies to certain U. Free online tax S. Free online tax citizens who have renounced their citizenship (and to certain long-term residents who have ended their residency). Free online tax For more information about the expatriation tax, see Expatriation Tax in chapter 4 of Publication 519, U. Free online tax S. Free online tax Tax Guide for Aliens. Free online tax Home destroyed or condemned. Free online tax   If your home was destroyed or condemned, any gain (for example, because of insurance proceeds you received) qualifies for the exclusion. Free online tax   Any part of the gain that cannot be excluded (because it is more than the maximum exclusion) can be postponed under the rules explained in: Publication 547, in the case of a home that was destroyed, or Publication 544, chapter 1, in the case of a home that was condemned. Free online tax Sale of remainder interest. Free online tax   Subject to the other rules in this chapter, you can choose to exclude gain from the sale of a remainder interest in your home. Free online tax If you make this choice, you cannot choose to exclude gain from your sale of any other interest in the home that you sell separately. Free online tax Exception for sales to related persons. Free online tax   You cannot exclude gain from the sale of a remainder interest in your home to a related person. Free online tax Related persons include your brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc. Free online tax ), and lineal descendants (children, grandchildren, etc. Free online tax ). Free online tax Related persons also include certain corporations, partnerships, trusts, and exempt organizations. Free online tax Recapturing (Paying Back) a Federal Mortgage Subsidy If you financed your home under a federally subsidized program (loans from tax-exempt qualified mortgage bonds or loans with mortgage credit certificates), you may have to recapture all or part of the benefit you received from that program when you sell or otherwise dispose of your home. Free online tax You recapture the benefit by increasing your federal income tax for the year of the sale. Free online tax You may have to pay this recapture tax even if you can exclude your gain from income under the rules discussed earlier; that exclusion does not affect the recapture tax. Free online tax Loans subject to recapture rules. Free online tax   The recapture applies to loans that: Came from the proceeds of qualified mortgage bonds, or Were based on mortgage credit certificates. Free online tax The recapture also applies to assumptions of these loans. Free online tax When recapture applies. Free online tax   Recapture of the federal mortgage subsidy applies only if you meet both of the following conditions. Free online tax You sell or otherwise dispose of your home at a gain within the first 9 years after the date you close your mortgage loan. Free online tax Your income for the year of disposition is more than that year's adjusted qualifying income for your family size for that year (related to the income requirements a person must meet to qualify for the federally subsidized program). Free online tax When recapture does not apply. Free online tax   Recapture does not apply in any of the following situations. Free online tax Your mortgage loan was a qualified home improvement loan (QHIL) of not more than $15,000 used for alterations, repairs, and improvements that protect or improve the basic livability or energy efficiency of your home. Free online tax Your mortgage loan was a QHIL of not more than $150,000 in the case of a QHIL used to repair damage from Hurricane Katrina to homes in the hurricane disaster area; a QHIL funded by a qualified mortgage bond that is a qualified Gulf Opportunity Zone Bond; or a QHIL for an owner-occupied home in the Gulf Opportunity Zone (GO Zone), Rita GO Zone, or Wilma GO Zone. Free online tax For more information, see Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma. Free online tax Also see Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas. Free online tax The home is disposed of as a result of your death. Free online tax You dispose of the home more than 9 years after the date you closed your mortgage loan. Free online tax You transfer the home to your spouse, or to your former spouse incident to a divorce, where no gain is included in your income. Free online tax You dispose of the home at a loss. Free online tax Your home is destroyed by a casualty, and you replace it on its original site within 2 years after the end of the tax year when the destruction happened. Free online tax The replacement period is extended for main homes destroyed in a federally declared disaster area, a Midwestern disaster area, the Kansas disaster area, and the Hurricane Katrina disaster area. Free online tax For more information, see Replacement Period in Publication 547. Free online tax You refinance your mortgage loan (unless you later meet the conditions listed previously under When recapture applies ). Free online tax Notice of amounts. Free online tax   At or near the time of settlement of your mortgage loan, you should receive a notice that provides the federally subsidized amount and other information you will need to figure your recapture tax. Free online tax How to figure and report the recapture. Free online tax    The recapture tax is figured on Form 8828. Free online tax If you sell your home and your mortgage is subject to recapture rules, you must file Form 8828 even if you do not owe a recapture tax. Free online tax Attach Form 8828 to your Form 1040. Free online tax For more information, see Form 8828 and its instructions. Free online tax Prev  Up  Next   Home   More Online Publications
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Free online tax 9. Free online tax   Education Exception to Additional Tax on Early IRA Distributions Table of Contents Introduction Who Is Eligible Figuring the Amount Not Subject to the 10% Tax Reporting Early Distributions Introduction Generally, if you take a distribution from your IRA before you reach age 59½, you must pay a 10% additional tax on the early distribution. Free online tax This applies to any IRA you own, whether it is a traditional IRA (including a SEP-IRA), a Roth IRA, or a SIMPLE IRA. Free online tax The additional tax on an early distribution from a SIMPLE IRA may be as high as 25%. Free online tax See Publication 560, Retirement Plans for Small Business, for information on SEP-IRAs, and Publication 590, for information about all other IRAs. Free online tax However, you can take distributions from your IRAs for qualified higher education expenses without having to pay the 10% additional tax. Free online tax You may owe income tax on at least part of the amount distributed, but you may not have to pay the 10% additional tax. Free online tax Generally, if the taxable part of the distribution is less than or equal to the adjusted qualified education expenses (AQEE), none of the distribution is subject to the additional tax. Free online tax If the taxable part of the distribution is more than the AQEE, only the excess is subject to the additional tax. Free online tax Who Is Eligible You can take a distribution from your IRA before you reach age 59½ and not have to pay the 10% additional tax if, for the year of the distribution, you pay qualified education expenses for: yourself, your spouse, or your or your spouse's child, foster child, adopted child, or descendant of any of them. Free online tax Qualified education expenses. Free online tax   For purposes of the 10% additional tax, these expenses are tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution. Free online tax They also include expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance. Free online tax   In addition, if the student is at least a half-time student, room and board are qualified education expenses. Free online tax   The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts. Free online tax The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student. Free online tax The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution. Free online tax You will need to contact the eligible educational institution for qualified room and board costs. Free online tax Eligible educational institution. Free online tax   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Free online tax S. Free online tax Department of Education. Free online tax It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Free online tax The educational institution should be able to tell you if it is an eligible educational institution. Free online tax   Certain educational institutions located outside the United States also participate in the U. Free online tax S. Free online tax Department of Education's Federal Student Aid (FSA) programs. Free online tax Half-time student. Free online tax   A student is enrolled “at least half-time” if he or she is enrolled for at least half the full-time academic work load for the course of study the student is pursuing as determined under the standards of the school where the student is enrolled. Free online tax Figuring the Amount Not Subject to the 10% Tax To determine the amount of your distribution that is not subject to the 10% additional tax, first figure your adjusted qualified education expenses. Free online tax You do this by reducing your total qualified education expenses by any tax-free educational assistance, which includes: Expenses used to figure the tax-free portion of distributions from a Coverdell education savings account (ESA) (see Distributions in chapter 7, Coverdell Education Savings Account), The tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Free online tax Do not reduce the qualified education expenses by amounts paid with funds the student receives as: Payment for services, such as wages, A loan, A gift, An inheritance given to either the student or the individual making the withdrawal, or A withdrawal from personal savings (including savings from a qualified tuition program (QTP)). Free online tax If your IRA distribution is equal to or less than your adjusted qualified education expenses, you are not subject to the 10% additional tax. Free online tax Example 1. Free online tax In 2013, Erin (age 32) took a year off from teaching to attend graduate school full-time. Free online tax She paid $5,800 of qualified education expenses from the following sources. Free online tax   Employer-provided educational assistance  (tax free) $5,000     Early distribution from IRA (includes $500 taxable earnings) 3,200           Before Erin can determine if she must pay the 10% additional tax on her IRA distribution, she must reduce her total qualified education expenses. Free online tax   Total qualified education expenses $5,800     Minus: Tax-free educational assistance −5,000     Equals: Adjusted qualified  education expenses (AQEE) $ 800   Because Erin's AQEE ($800) are more than the taxable portion of her IRA distribution ($500), she does not have to pay the 10% additional tax on any part of this distribution. Free online tax However, she must include the $500 taxable earnings in her gross income subject to income tax. Free online tax Example 2. Free online tax Assume the same facts as in Example 1 , except that Erin deducted some of the contributions to her IRA, so the taxable part of her early distribution is higher by $1,000. Free online tax This must be included in her income subject to income tax. Free online tax The taxable part of Erin's IRA distribution ($1,000) is larger than her $800 AQEE. Free online tax Therefore, she must pay the 10% additional tax on $200, the taxable part of her distribution ($1,000) that is more than her qualified education expenses ($800). Free online tax She does not have to pay the 10% additional tax on the remaining $800 of her taxable distribution. Free online tax Reporting Early Distributions By January 31, 2014, the payer of your IRA distribution should send you Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Free online tax The information on this form will help you determine how much of your distribution is taxable for income tax purposes and how much is subject to the 10% additional tax. Free online tax If you received an early distribution from your IRA, you must report the taxable earnings on Form 1040, line 15b (Form 1040NR, line 16b). Free online tax Then, if you qualify for an exception for qualified higher education expenses, you must file Form 5329 to show how much, if any, of your early distribution is subject to the 10% additional tax. Free online tax See the Instructions for Form 5329, Part I, for help in completing the form and entering the results on Form 1040 or 1040NR. Free online tax There are many other situations in which Form 5329 is required. Free online tax If, during 2013, you had other distributions from IRAs or qualified retirement plans, or have made excess contributions to certain tax-favored accounts, see the instructions for line 58 (Form 1040) or line 56 (Form 1040NR) to determine if you must file Form 5329. Free online tax Prev  Up  Next   Home   More Online Publications