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Tax on Real Estate SalesStevens ITP Home Page |
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Sale of Principal Residence: You may exclude from income up to $250,000 of gain realized on a sale or exchange of a residence, if you owned and occupied it as a principal residence for an aggregate of at least two years out of five years before the sale or exchange. If you are married filing jointly, you may be able to exclude up to $500,000 of gain. Any loss on the sale of your principal residence is not allowed.
Frequency of exclusion. The exclusion is not a once-in-a-lifetime benefit. If you meet the ownership and use tests for a principal residence, you may claim the exclusion when you sell it although you previously claimed the exclusion for another residence, provided that the sales are more than two years apart. If you claim the exclusion on a sale and within two years of the first sale you sell another principal residence, an exclusion may not be claimed on the second sale even if you meet the ownership and use tests for that residence. There is an exception if the second sale was due to a change in employment, health reasons, or unforeseen circumstances. In that case, a prorated exclusion is allowed. See the Reduced Exclusion Worksheet not included on this page.
Principal residence. A principal residence is not restricted to one-family houses but includes a mobile home, trailer, houseboat, and condominium apartment used as a principal residence.
Business or rental use. You may have used part of your property as your home and part for business or to produce income. If you sell the entire property and part of it was used for business or rental purposes for the entire five-year periods ending on the date of sale, consider the transaction as the sale of two properties. You exclude gain only on the part used as your home, assuming you meet the two-out-of-five-year ownership and use tests for that part.
Depreciation after May 6, 1997. You may not exclude that part of your gain that is equal to any depreciation allowed or allowable for the business or rental use of your home after May 6, 1997. If you were entitled to take depreciation deductions because you used your home for business purposes or as rental property, you may not exlude the part of your gain equal to any deprecation allowed or allowable as a deduction for peroids after May 6, 1997. If you can show by adequate records that the depreciation deduction allowed was less that the amount allowable, the gain up to allowed deprecation deduction is the amount ineligible for the exclusion.
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Example: John purchased this home below for $145,000, made $20,000 in improvements and sold it for $189,000.
John realized a $24,000 gain ($189,000 - Basis of $165,000). He meets the use and ownership tests to exclude the
gain on the entire home, including a part of the home he used for business from July through December 2009. For those months
of business use, he claimed $2,000 depreciation. He may exclude $22,000 (24,000 - 2,000). He has a taxable gain of $2,000
equal to the depreciation deduction.
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Reporting Home Sale Gain. If the entire gain on the sale of your principal residence is excludable from income under the rules discussed above, you do not have to report the sale at all on your return. If part of the gain is taxable, or you decide not to claim the exclusion for eligible gain, report the sale on Schedule D of Form 1040. Report the entire gain on Schedule D and on a separate line enter the excludable portion as a loss. Label the excludable amount as "Section 121 exclusion."
Form 1099-S. The settlement agent responsible for closing the sale of your principal residence must report the sale to the IRS on Form 1099-S if the sales price exceeded $250,000 or $500,000 if you are married. If the price was $250,000/$500,000 or less and you provide a written, signed certification that the full amount of your gain qualifies for the exclusion, the settlement agent may rely on the certificaion and not file the Form 1099-S or may choose to file the form anyway. IRS Revenue Prodedure 98-20 has a sample certification form.
Vacation Home. No loss Allowed on second home or vacation home. If you sell at a loss a second home or vaction home (not your principal residence) that was used entirely for personal purposes, you report the loss transaction on Schedule D, write "Personal Loss." If in the year of sale part of the home was rented out or used for business, allocate the sale between the personal part and the rental or business part; report the personal part on Schedule D and the rental or business part on Form 4797.
Residence Converted to Rental Property. If you convert the house from personal use to rental use you may claim a loss on a sale if the value has declined below the basis fixed for the residence as rental property.
To figure basis for loss purposes, you first need to know the lower of (1) your adjusted basis for the house at the time of conversion or (2) the fair market value at the time of conversion. Add to the lower amount the cost of capital improvements made after the conversion, and subtract depreciation and casualty loss deductions claimed after the conversion. To deduct a loss, you have to be able to show that this basis exceeds the sales price. For example, if you paid $200,000 for your home and convert it to rental property when the value has declined to $150,000, your conversion date basis for the rental property is $150,000. If the property continues to decline in value, and you sell for $125,000 after having deducted $10,000 for depreciation, you may claim a loss of $15,000 ($140,000 - $125,000). Your loss deduction will not reflect the $50,000 loss occurring before the conversion.
Gain on Rented Residence. You have a gain on the sale of rental property if you sell for more than your adjusted basis at the time of conversion, plus subsequent capital improvements, and minus depreciation and casualty loss deductions. The sale is subject to the rules in "Sales of Business Property" for depreciable property. (Not covered on this page.)
