Sale of residence - Real estate tax tips

You may qualify to exclude from your income all or part of any gain from the sale of your main home. Your main home is the one in which you live most of the time.

Ownership and use tests

To claim the exclusion, you must meet the ownership and use tests. This means that during the 5-year period ending on the date of the sale, you must have:

• Owned the home for at least two years (the ownership test)
• Lived in the home as your main home for at least two years (the use test)

Gain

If you have a gain from the sale of your main home, you may be able to exclude up to $250,000 of the gain from your income ($500,000 on a joint return in most cases).

Loss

You cannot deduct a loss from the sale of your main home.

Worksheets

Worksheets are included in Publication 523, Selling Your Home, to help you figure the:

• Adjusted basis of the home you sold
• Gain (or loss) on the sale
• Gain that you can exclude

Reporting the sale

Report the sale or exchange of your main home on Form 8949, Sale and Other Dispositions of Capital Assets, if:

• 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 a Form 1099-S.

More than one home

If you have more than one home, you can exclude gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time.

Example One:

You own and live in a house in the city. You also own a beach house, which you use during the summer months. The house in the city is your main home; the beach house is not.

Example Two:

You own a house, but you live in another house that you rent. The rented house is your main home.

Business use or rental of home

For more information about your gain or loss calculations from the sale of a home that you have used for business or to produce rental income, see Publication 523.

Example:

On February 1, 1998, Amy bought a house. She moved in on that date and lived in it until May 31, 1999, when she moved out of the house and put it up for rent. The house was rented from June 1, 1999, to March 31, 2001. Amy moved back into the house on April 1, 2001, and lived there until she sold it on January 31, 2003. During the 5-year period ending on the date of the sale (February 1, 1998 - January 31, 2003), Amy owned and lived in the house for more than 2 years as shown in the table below.

Amy can exclude gain up to $250,000. However, she cannot exclude the part of the gain equal to the depreciation she claimed for renting the house.