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Filing your state taxes free 4. Filing your state taxes free   Detailed Examples Table of Contents These examples use actual forms to help you prepare your income tax return. Filing your state taxes free However, the information shown on the filled-in forms is not from any actual person or scenario. Filing your state taxes free Example 1—Mortgage loan modification. Filing your state taxes free    In 2007, Nancy Oak bought a main home for $435,000. Filing your state taxes free Nancy took out a $420,000 mortgage loan to buy the home and made a down payment of $15,000. Filing your state taxes free The loan was secured by the home. Filing your state taxes free The mortgage loan was a recourse debt, meaning that Nancy was personally liable for the debt. Filing your state taxes free In 2008, Nancy took out a second mortgage loan (also a recourse debt) in the amount of $30,000 that was used to substantially improve her kitchen. Filing your state taxes free    In 2011, when the outstanding principal of the first and second mortgage loans was $440,000, Nancy refinanced the two recourse loans into one recourse loan in the amount of $475,000. Filing your state taxes free The FMV of Nancy's home at the time of the refinancing was $500,000. Filing your state taxes free Nancy used the additional $35,000 debt ($475,000 new mortgage loan minus $440,000 outstanding principal of Nancy's first and second mortgage loans immediately before the refinancing) to pay off personal credit cards and to pay college tuition for her son. Filing your state taxes free After the refinancing, Nancy has qualified principal residence indebtedness in the amount of $440,000 because the refinanced debt is qualified principal residence indebtedness only to the extent the amount of debt is not more than the old mortgage principal just before the refinancing. Filing your state taxes free   In 2013, Nancy was unable to make her mortgage loan payments. Filing your state taxes free On August 31, 2013, when the outstanding balance of her refinanced mortgage loan was still $475,000 and the FMV of the property was $425,000, Nancy's bank agreed to a loan modification (a “workout”) that resulted in a $40,000 reduction in the principal balance of her loan. Filing your state taxes free Nancy was neither insolvent nor in bankruptcy at the time of the loan modification. Filing your state taxes free   Nancy received a 2013 Form 1099-C from her bank in January 2014 showing canceled debt of $40,000 in box 2. Filing your state taxes free Identifiable event code "F" appears in box 6. Filing your state taxes free This box shows the reason the creditor has filed Form 1099-C. Filing your state taxes free To determine if she must include the canceled debt in her income, Nancy must determine whether she meets any of the exceptions or exclusions that apply to canceled debts. Filing your state taxes free Nancy determines that the only exception or exclusion that applies to her is the qualified principal residence indebtedness exclusion. Filing your state taxes free   Next, Nancy determines the amount, if any, of the $40,000 of canceled debt that was qualified principal residence indebtedness. Filing your state taxes free Although Nancy has $440,000 of qualified principal residence indebtedness, part of her loan ($35,000) was not qualified principal residence indebtedness because it was used to pay off personal credit cards and college tuition for her son. Filing your state taxes free Applying the ordering rule, the qualified principal residence indebtedness exclusion applies only to the extent the amount canceled is more than the amount of the debt (immediately before the cancellation) that is not qualified principal residence indebtedness. Filing your state taxes free Thus, Nancy can exclude only $5,000 of the canceled debt as qualified principal residence indebtedness ($40,000 amount canceled minus $35,000 nonqualified debt). Filing your state taxes free   Because Nancy does not meet any other exception or exclusion, she checks only the box on line 1e of Form 982 and enters $5,000 on line 2. Filing your state taxes free Nancy must also enter $5,000 on line 10b and reduce the basis of her main home by the $5,000 she excluded from income, bringing the adjusted basis in her home to $460,000 ($435,000 purchase price plus $30,000 substantial improvement minus $5,000). Filing your state taxes free Nancy must also include the $35,000 nonqualified debt portion in income on Form 1040, line 21. Filing your state taxes free You can see Nancy's Form 1099-C and a portion of her Form 1040 below. Filing your state taxes free Nancy's 2013 Form 1099-C, Cancellation of Debt This image is too large to be displayed in the current screen. Filing your state taxes free Please click the link to view the image. Filing your state taxes free Form 1099-C, Cancellation of Debt Nancy's 2013 Form 1040 This image is too large to be displayed in the current screen. Filing your state taxes free Please click the link to view the image. Filing your state taxes free Form 1040, U. Filing your state taxes free S. Filing your state taxes free Individual Income Tax Nancy's Form 982 This image is too large to be displayed in the current screen. Filing your state taxes free Please click the link to view the image. Filing your state taxes free Form 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)              Example 2—Mortgage loan foreclosure. Filing your state taxes free    In 2005, John and Mary Elm bought a main home for $335,000. Filing your state taxes free John and Mary took out a $320,000 mortgage loan to buy the home and made a down payment of $15,000. Filing your state taxes free The loan was secured by the home and is a recourse debt, meaning John and Mary are personally liable for the debt. Filing your state taxes free   John and Mary became unable to make their mortgage loan payments and on March 1, 2013, when the outstanding balance of the mortgage loan was $315,000 and the FMV of the property was $290,000, the bank foreclosed on the property and simultaneously canceled the remaining mortgage debt. Filing your state taxes free Immediately before the foreclosure, John and Mary's only other assets and liabilities were a checking account with a balance of $6,000, retirement savings of $13,000, and credit card debt of $5,500. Filing your state taxes free   John and Mary received a 2013 Form 1099-C showing canceled debt of $25,000 in box 2 ($315,000 outstanding balance minus $290,000 FMV) and an FMV of $290,000 in box 7. Filing your state taxes free Identifiable event code "D" appears in box 6. Filing your state taxes free This box shows the reason the creditor has filed Form 1099-C. Filing your state taxes free In order to determine if John and Mary must include the canceled debt in income, they must first determine whether they meet any of the exceptions or exclusions that apply to canceled debts. Filing your state taxes free In this example, John and Mary meet both the insolvency and qualified principal residence indebtedness exclusions. Filing your state taxes free Their sample Form 1099-C is shown on this page. Filing your state taxes free   John and Mary complete the insolvency worksheet and determine that they were insolvent immediately before the cancellation because at that time their liabilities exceeded the FMV of their assets by $11,500 ($320,500 total liabilities minus $309,000 FMV of total assets). Filing your state taxes free However, because the entire debt canceled is qualified principal residence indebtedness, the insolvency exclusion only applies if John and Mary elect to apply the insolvency exclusion instead of the qualified principal residence exclusion. Filing your state taxes free   John and Mary do not elect to apply the insolvency exclusion instead of the qualified principal residence exclusion because under the insolvency exclusion their exclusion would be limited to the amount by which they were insolvent ($11,500). Filing your state taxes free Instead, John and Mary check box 1e of Form 982 to exclude the canceled debt under the qualified principal residence exclusion. Filing your state taxes free Under the qualified principal residence exclusion, the amount that John and Mary can exclude is not limited because their qualified principal residence indebtedness is not more than $2 million and no portion of the loan was nonqualified debt. Filing your state taxes free As a result, John and Mary enter the full $25,000 of canceled debt on line 2 of Form 982. Filing your state taxes free Because John and Mary no longer own the home due to the foreclosure, John and Mary have no remaining basis in the home at the time of the debt cancellation. Filing your state taxes free Thus, John and Mary leave line 10b of Form 982 blank. Filing your state taxes free   John and Mary must also determine whether they have a gain or loss from the foreclosure. Filing your state taxes free John and Mary complete Table 1-1 (shown below) and find that they have a $45,000 loss from the foreclosure. Filing your state taxes free Because this loss relates to their home, it is a nondeductible loss. Filing your state taxes free   John and Mary's Form 1099-C, Insolvency Worksheet, and Form 982 follow. Filing your state taxes free John and Mary's 2013 Form 1099-C, Cancellation of Debt This image is too large to be displayed in the current screen. Filing your state taxes free Please click the link to view the image. Filing your state taxes free Form 1099-C, Cancellation of Debt Table 1-1. Filing your state taxes free Worksheet for Foreclosures and Repossessions (for John and Mary Elm) Part 1. Filing your state taxes free Complete Part 1 only if you were personally liable for the debt (even if none of the debt was canceled). Filing your state taxes free Otherwise, go to Part 2. Filing your state taxes free 1. Filing your state taxes free Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable immediately after the transfer of property $315,000. Filing your state taxes free 00 2. Filing your state taxes free Enter the fair market value of the transferred property $290,000. Filing your state taxes free 00 3. Filing your state taxes free Ordinary income from the cancellation of debt upon foreclosure or repossession. Filing your state taxes free * Subtract line 2 from line 1. Filing your state taxes free If less than zero, enter zero. Filing your state taxes free Next, go to Part 2 $ 25,000. Filing your state taxes free 00 Part 2. Filing your state taxes free Gain or loss from foreclosure or repossession. Filing your state taxes free   4. Filing your state taxes free Enter the smaller of line 1 or line 2. Filing your state taxes free If you did not complete Part 1 (because you were not personally liable for the debt), enter the amount of outstanding debt immediately before the transfer of property $290,000. Filing your state taxes free 00 5. Filing your state taxes free Enter any proceeds you received from the foreclosure sale   6. Filing your state taxes free Add line 4 and line 5 $290,000. Filing your state taxes free 00 7. Filing your state taxes free Enter the adjusted basis of the transferred property $335,000. Filing your state taxes free 00 8. Filing your state taxes free Gain or loss from foreclosure or repossession. Filing your state taxes free Subtract line 7 from line 6 ($ 45,000. Filing your state taxes free 00) * The income may not be taxable. Filing your state taxes free See chapter 1 for more details. Filing your state taxes free Insolvency Worksheet—John and Mary Elm Date debt was canceled (mm/dd/yy) 03/01/13 Part I. Filing your state taxes free Total liabilities immediately before the cancellation (do not include the same liability in more than one category) Liabilities (debts) Amount Owed Immediately Before the Cancellation 1. Filing your state taxes free Credit card debt $ 5,500 2. Filing your state taxes free Mortgage(s) on real property (including first and second mortgages and home equity loans) (mortgage(s) can be on personal residence, any additional residence, or property held for investment or used in a trade or business) $ 315,000 3. Filing your state taxes free Car and other vehicle loans $ 4. Filing your state taxes free Medical bills owed $ 5. Filing your state taxes free Student loans $ 6. Filing your state taxes free Accrued or past-due mortgage interest $ 7. Filing your state taxes free Accrued or past-due real estate taxes $ 8. Filing your state taxes free Accrued or past-due utilities (water, gas, electric) $ 9. Filing your state taxes free Accrued or past-due child care costs $ 10. Filing your state taxes free Federal or state income taxes remaining due (for prior tax years) $ 11. Filing your state taxes free Judgments $ 12. Filing your state taxes free Business debts (including those owed as a sole proprietor or partner) $ 13. Filing your state taxes free Margin debt on stocks and other debt to purchase or secured by investment assets other than real property $ 14. Filing your state taxes free Other liabilities (debts) not included above $ 15. Filing your state taxes free Total liabilities immediately before the cancellation. Filing your state taxes free Add lines 1 through 14. Filing your state taxes free $ 320,500 Part II. Filing your state taxes free Fair market value (FMV) of assets owned immediately before the cancellation (do not include the FMV of the same asset in more than one category) Assets FMV Immediately Before  the Cancellation 16. Filing your state taxes free Cash and bank account balances $ 6,000 17. Filing your state taxes free Real property, including the value of land (can be main home, any additional home, or property held for investment or used in a trade or business) $ 290,000 18. Filing your state taxes free Cars and other vehicles $ 19. Filing your state taxes free Computers $ 20. Filing your state taxes free Household goods and furnishings (for example, appliances, electronics, furniture, etc. Filing your state taxes free ) $ 21. Filing your state taxes free Tools $ 22. Filing your state taxes free Jewelry $ 23. Filing your state taxes free Clothing $ 24. Filing your state taxes free Books $ 25. Filing your state taxes free Stocks and bonds $ 26. Filing your state taxes free Investments in coins, stamps, paintings, or other collectibles $ 27. Filing your state taxes free Firearms, sports, photographic, and other hobby equipment $ 28. Filing your state taxes free Interest in retirement accounts (IRA accounts, 401(k) accounts, and other retirement accounts) $ 13,000 29. Filing your state taxes free Interest in a pension plan $ 30. Filing your state taxes free Interest in education accounts $ 31. Filing your state taxes free Cash value of life insurance $ 32. Filing your state taxes free Security deposits with landlords, utilities, and others $ 33. Filing your state taxes free Interests in partnerships $ 34. Filing your state taxes free Value of investment in a business $ 35. Filing your state taxes free Other investments (for example, annuity contracts, guaranteed investment contracts, mutual funds, commodity accounts, interests in hedge funds, and options) $ 36. Filing your state taxes free Other assets not included above $ 37. Filing your state taxes free FMV of total assets immediately before the cancellation. Filing your state taxes free Add lines 16 through 36. Filing your state taxes free $ 309,000 Part III. Filing your state taxes free Insolvency 38. Filing your state taxes free Amount of Insolvency. Filing your state taxes free Subtract line 37 from line 15. Filing your state taxes free If zero or less, you are not insolvent. Filing your state taxes free $ 11,500 John and Mary's Form 982 This image is too large to be displayed in the current screen. Filing your state taxes free Please click the link to view the image. Filing your state taxes free Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)          Example 3—Mortgage loan foreclosure with debt exceeding $2 million limit. Filing your state taxes free    In 2011, Kathy and Frank Willow got married and entered into a contract with Hive Construction Corporation to build a house for $3,000,000 to be used as their main home. Filing your state taxes free Kathy and Frank made a $400,000 down payment and took out a $2,600,000 mortgage to finance the remaining cost of the house. Filing your state taxes free Kathy and Frank are personally liable for the mortgage loan, which is secured by the home. Filing your state taxes free   In November 2013, when the outstanding principal balance on the mortgage loan was $2,500,000, the FMV of the property fell to $1,750,000 and Kathy and Frank abandoned the property by permanently moving out. Filing your state taxes free The lender foreclosed on the property and, on December 5, 2013, sold the property to another buyer for $1,750,000. Filing your state taxes free On December 26, 2013, the lender canceled the remaining debt. Filing your state taxes free Kathy and Frank have no tax attributes other than basis of personal-use property. Filing your state taxes free   The lender issued a 2013 Form 1099-C to Kathy and Frank showing canceled debt of $750,000 in box 2 (the remaining balance on the $2,500,000 mortgage debt after application of the foreclosure sale proceeds) and $1,750,000 in box 7 (FMV of the property). Filing your state taxes free Identifiable event code "D" appears in box 6. Filing your state taxes free This box shows the reason the creditor has filed Form 1099-C. Filing your state taxes free Although Kathy and Frank abandoned the property, the lender did not need to also file a Form 1099-A because the lender canceled the debt in connection with the foreclosure in the same calendar year. Filing your state taxes free Kathy and Frank are filing a joint return for 2013. Filing your state taxes free   Because the foreclosure occurred prior to the debt cancellation, Kathy and Frank first calculate their gain or loss from the foreclosure using Table 1-1. Filing your state taxes free Because Kathy and Frank remained personally liable for the $750,000 debt remaining after the foreclosure ($2,500,000 outstanding debt immediately before the foreclosure minus $1,750,000 satisfied through the sale of the home), Kathy and Frank enter $1,750,000 on line 1 of Table 1-1 ($2,500,000 outstanding debt immediately before the foreclosure minus the $750,000 for which they remained liable). Filing your state taxes free Completing Table 1-1, Kathy and Frank find that they have no ordinary income from the cancellation of debt upon foreclosure and that they have a $1,250,000 loss. Filing your state taxes free Because this loss relates to their home, it is a nondeductible loss. Filing your state taxes free   Because the lender later canceled the remaining amount of the debt, Kathy and Frank must also determine whether that canceled debt is taxable. Filing your state taxes free Immediately before the cancellation, Kathy and Frank had $15,000 in a savings account, household furnishings with an FMV of $17,000, a car with an FMV of $10,000, and $18,000 in credit card debt. Filing your state taxes free Kathy and Frank also had the $750,000 remaining balance on the mortgage loan at that time. Filing your state taxes free The household furnishings originally cost $30,000. Filing your state taxes free The car had been fully paid off (so there was no related outstanding debt) and was originally purchased for $16,000. Filing your state taxes free Kathy and Frank had no adjustments to the cost basis of the car. Filing your state taxes free Kathy and Frank had no other assets or liabilities at the time of the cancellation. Filing your state taxes free Kathy and Frank complete the insolvency worksheet to calculate that they were insolvent to the extent of $726,000 immediately before the cancellation ($768,000 of total liabilities minus $42,000 FMV of total assets). Filing your state taxes free   At the beginning of 2014, Kathy and Frank had $9,000 in their savings account and $15,000 in credit card debt. Filing your state taxes free Kathy and Frank also owned the same car at that time (still with an FMV of $10,000 and basis of $16,000) and the same household furnishings (still with an FMV of $17,000 and a basis of $30,000). Filing your state taxes free Kathy and Frank had no other assets or liabilities at that time. Filing your state taxes free Kathy and Frank no longer own the home because the lender foreclosed on it in 2013. Filing your state taxes free   Because the canceled debt is qualified principal residence indebtedness, the insolvency exclusion does not apply unless Kathy and Frank elect to apply the insolvency exclusion instead of the qualified principal residence indebtedness exclusion. Filing your state taxes free The maximum amount that Kathy and Frank can treat as qualified principal residence indebtedness is $2,000,000. Filing your state taxes free The remaining $500,000 ($2,500,000 outstanding mortgage loan minus $2,000,000 limit on qualified principal residence indebtedness) is not qualified principal residence indebtedness. Filing your state taxes free Because only a part of the loan is qualified principal residence indebtedness, Kathy and Frank must apply the ordering rule to the canceled debt. Filing your state taxes free Under the ordering rule, the qualified principal residence indebtedness exclusion applies only to the extent that the amount canceled ($750,000) exceeds the amount of the loan (immediately before the cancellation) that is not qualified principal residence indebtedness ($500,000). Filing your state taxes free This means that Kathy and Frank can only exclude $250,000 ($750,000 amount canceled minus $500,000 nonqualified debt) under the qualified principal residence indebtedness exclusion. Filing your state taxes free   Kathy and Frank do not elect to have the insolvency exclusion apply instead of the qualified principal residence exclusion. Filing your state taxes free Nonetheless, they can still apply the insolvency exclusion to the $500,000 nonqualified debt because it is not qualified principal residence indebtedness. Filing your state taxes free Kathy and Frank can exclude the remaining $500,000 canceled debt under the insolvency exclusion because they were insolvent immediately before the cancellation to the extent of $726,000. Filing your state taxes free Thus, Kathy and Frank check the boxes on lines 1b and 1e of Form 982 and enter $750,000 on line 2 ($250,000 excluded under the qualified principal residence indebtedness exclusion plus $500,000 excluded under the insolvency exclusion). Filing your state taxes free   Next, Kathy and Frank reduce their tax attributes using Part II of Form 982. Filing your state taxes free Because Kathy and Frank no longer own the home due to the foreclosure, Kathy and Frank have no remaining basis in the home at the time of the debt cancellation. Filing your state taxes free Thus, Kathy and Frank leave line 10b of Form 982 blank. Filing your state taxes free However, Kathy and Frank are also excluding nonqualified debt under the insolvency exclusion. Filing your state taxes free As a result, Kathy and Frank must reduce the basis of property they own based on the amount of canceled debt they are excluding from income under the insolvency rules. Filing your state taxes free Because Kathy and Frank have no tax attributes other than basis of personal-use property to reduce, Kathy and Frank figure the amount they must include on line 10a of Form 982 by taking the smallest of: The $46,000 bases of their personal-use property held at the beginning of 2014 ($16,000 basis in the car plus $30,000 basis in household furnishings), The $500,000 of the nonbusiness debt (other than qualified principal residence indebtedness) that they are excluding from income on line 2 of Form 982, or The $43,000 excess of the total bases of the property and the amount of money they held immediately after the cancellation over their total liabilities immediately after the cancellation ($15,000 in savings account plus $30,000 basis in household furnishings plus $16,000 adjusted basis in car minus $18,000 credit card debt). Filing your state taxes free Kathy and Frank enter $43,000 on Form 982, line 10a and reduce their bases in the car and the household furnishings in proportion to the total adjusted bases in all their property. Filing your state taxes free Kathy and Frank reduce the basis in the car by $14,956. Filing your state taxes free 52 ($43,000 x $16,000/$46,000). Filing your state taxes free And they reduce the basis in the household furnishings by $28,043. Filing your state taxes free 48 ($43,000 x $30,000/$46,000). Filing your state taxes free   Following are Kathy and Frank's sample forms and worksheets. Filing your state taxes free Frank and Kathy's 2013 Form 1099-C, Cancellation of Debt This image is too large to be displayed in the current screen. Filing your state taxes free Please click the link to view the image. Filing your state taxes free Form 1099-C, Cancellation of Debt Table 1-1. Filing your state taxes free Worksheet for Foreclosures and Repossessions (for Frank and Kathy Willow) Part 1. Filing your state taxes free Complete Part 1 only if you were personally liable for the debt (even if none of the debt was canceled). Filing your state taxes free Otherwise, go to Part 2. Filing your state taxes free 1. Filing your state taxes free Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable immediately after the transfer of property $1,750,000. Filing your state taxes free 00 2. Filing your state taxes free Enter the fair market value of the transferred property $1,750,000. Filing your state taxes free 00 3. Filing your state taxes free Ordinary income from the cancellation of debt upon foreclosure or repossession. Filing your state taxes free * Subtract line 2 from line 1. Filing your state taxes free If less than zero, enter zero. Filing your state taxes free Next, go to Part 2 $0. Filing your state taxes free 00 Part 2. Filing your state taxes free Gain or loss from foreclosure or repossession. Filing your state taxes free   4. Filing your state taxes free Enter the smaller of line 1 or line 2. Filing your state taxes free If you did not complete Part 1 (because you were not personally liable for the debt), enter the amount of outstanding debt immediately before the transfer of property. Filing your state taxes free $1,750,000. Filing your state taxes free 00 5. Filing your state taxes free Enter any proceeds you received from the foreclosure sale   6. Filing your state taxes free Add line 4 and line 5 $1,750,000. Filing your state taxes free 00 7. Filing your state taxes free Enter the adjusted basis of the transferred property $3,000,000. Filing your state taxes free 00 8. Filing your state taxes free Gain or loss from foreclosure or repossession. Filing your state taxes free Subtract line 7 from line 6 ($1,250,000. Filing your state taxes free 00) * The income may not be taxable. Filing your state taxes free See chapter 1 for more details. Filing your state taxes free    Insolvency Worksheet—Frank and Kathy Willow Date debt was canceled (mm/dd/yy) 12/26/13 Part I. Filing your state taxes free Total liabilities immediately before the cancellation (do not include the same liability in more than one category) Liabilities (debts) Amount Owed Immediately Before the Cancellation 1. Filing your state taxes free Credit card debt $ 18,000 2. Filing your state taxes free Mortgage(s) on real property (including first and second mortgages and home equity loans) (mortgage(s) can be on personal residence, any additional residence, or property held for investment or used in a trade or business) $ 750,000 3. Filing your state taxes free Car and other vehicle loans $ 4. Filing your state taxes free Medical bills owed $ 5. Filing your state taxes free Student loans $ 6. Filing your state taxes free Accrued or past-due mortgage interest $ 7. Filing your state taxes free Accrued or past-due real estate taxes $ 8. Filing your state taxes free Accrued or past-due utilities (water, gas, electric) $ 9. Filing your state taxes free Accrued or past-due child care costs $ 10. Filing your state taxes free Federal or state income taxes remaining due (for prior tax years) $ 11. Filing your state taxes free Judgments $ 12. Filing your state taxes free Business debts (including those owed as a sole proprietor or partner) $ 13. Filing your state taxes free Margin debt on stocks and other debt to purchase or secured by investment assets other than real property $ 14. Filing your state taxes free Other liabilities (debts) not included above $ 15. Filing your state taxes free Total liabilities immediately before the cancellation. Filing your state taxes free Add lines 1 through 14. Filing your state taxes free $ 768,000 Part II. Filing your state taxes free Fair market value (FMV) of assets owned immediately before the cancellation (do not include the FMV of the same asset in more than one category) Assets FMV Immediately Before  the Cancellation 16. Filing your state taxes free Cash and bank account balances $ 15,000 17. Filing your state taxes free Real property, including the value of land (can be main home, any additional home, or property held for investment or used in a trade or business) $ 18. Filing your state taxes free Cars and other vehicles $ 10,000 19. Filing your state taxes free Computers $ 20. Filing your state taxes free Household goods and furnishings (for example, appliances, electronics, furniture, etc. Filing your state taxes free ) $ 17,000 21. Filing your state taxes free Tools $ 22. Filing your state taxes free Jewelry $ 23. Filing your state taxes free Clothing $ 24. Filing your state taxes free Books $ 25. Filing your state taxes free Stocks and bonds $ 26. Filing your state taxes free Investments in coins, stamps, paintings, or other collectibles $ 27. Filing your state taxes free Firearms, sports, photographic, and other hobby equipment $ 28. Filing your state taxes free Interest in retirement accounts (IRA accounts, 401(k) accounts, and other retirement accounts) $ 29. Filing your state taxes free Interest in a pension plan $ 30. Filing your state taxes free Interest in education accounts $ 31. Filing your state taxes free Cash value of life insurance $ 32. Filing your state taxes free Security deposits with landlords, utilities, and others $ 33. Filing your state taxes free Interests in partnerships $ 34. Filing your state taxes free Value of investment in a business $ 35. Filing your state taxes free Other investments (for example, annuity contracts, guaranteed investment contracts, mutual funds, commodity accounts, interests in hedge funds, and options) $ 36. Filing your state taxes free Other assets not included above $ 37. Filing your state taxes free FMV of total assets immediately before the cancellation. Filing your state taxes free Add lines 16 through 36. Filing your state taxes free $ 42,000 Part III. Filing your state taxes free Insolvency 38. Filing your state taxes free Amount of Insolvency. Filing your state taxes free Subtract line 37 from line 15. Filing your state taxes free If zero or less, you are not insolvent. Filing your state taxes free $ 726,000    Frank and Kathy's Form 982 This image is too large to be displayed in the current screen. Filing your state taxes free Please click the link to view the image. Filing your state taxes free Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) Prev  Up  Next   Home   More Online Publications
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Filing your state taxes free 15. Filing your state taxes free   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. Filing your state taxes free More information. Filing your state taxes free Special SituationsException for sales to related persons. Filing your state taxes free Recapturing (Paying Back) a Federal Mortgage Subsidy Reminder Home sold with undeducted points. Filing your state taxes free  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. Filing your state taxes free See Mortgage ending early under Points in chapter 23. Filing your state taxes free Introduction This chapter explains the tax rules that apply when you sell your main home. Filing your state taxes free In most cases, your main home is the one in which you live most of the time. Filing your state taxes free 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). Filing your state taxes free See Excluding the Gain , later. Filing your state taxes free Generally, if you can exclude all the gain, you do not need to report the sale on your tax return. Filing your state taxes free If you have gain that cannot be excluded, it is taxable. Filing your state taxes free Report it on Form 8949, Sales and Other Dispositions of Capital Assets, and Schedule D (Form 1040). Filing your state taxes free You may also have to complete Form 4797, Sales of Business Property. Filing your state taxes free See Reporting the Sale , later. Filing your state taxes free If you have a loss on the sale, you generally cannot deduct it on your return. Filing your state taxes free However, you may need to report it. Filing your state taxes free See Reporting the Sale , later. Filing your state taxes free The following are main topics in this chapter. Filing your state taxes free Figuring gain or loss. Filing your state taxes free Basis. Filing your state taxes free Excluding the gain. Filing your state taxes free Ownership and use tests. Filing your state taxes free Reporting the sale. Filing your state taxes free Other topics include the following. Filing your state taxes free Business use or rental of home. Filing your state taxes free Recapturing a federal mortgage subsidy. Filing your state taxes free 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. Filing your state taxes free ” 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. Filing your state taxes free 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. Filing your state taxes free Land. Filing your state taxes free   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. Filing your state taxes free 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. Filing your state taxes free See Vacant land under Main Home in Publication 523 for more information. Filing your state taxes free Example. Filing your state taxes free You buy a piece of land and move your main home to it. Filing your state taxes free Then you sell the land on which your main home was located. Filing your state taxes free This sale is not considered a sale of your main home, and you cannot exclude any gain on the sale of the land. Filing your state taxes free More than one home. Filing your state taxes free   If you have more than one home, you can exclude gain only from the sale of your main home. Filing your state taxes free You must include in income gain from the sale of any other home. Filing your state taxes free 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. Filing your state taxes free Example 1. Filing your state taxes free You own two homes, one in New York and one in Florida. Filing your state taxes free 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. Filing your state taxes free In the absence of facts and circumstances indicating otherwise, the New York home is your main home. Filing your state taxes free You would be eligible to exclude the gain from the sale of the New York home but not of the Florida home in 2013. Filing your state taxes free Example 2. Filing your state taxes free You own a house, but you live in another house that you rent. Filing your state taxes free The rented house is your main home. Filing your state taxes free Example 3. Filing your state taxes free You own two homes, one in Virginia and one in New Hampshire. Filing your state taxes free In 2009 and 2010, you lived in the Virginia home. Filing your state taxes free In 2011 and 2012, you lived in the New Hampshire home. Filing your state taxes free In 2013, you lived again in the Virginia home. Filing your state taxes free Your main home in 2009, 2010, and 2013 is the Virginia home. Filing your state taxes free Your main home in 2011 and 2012 is the New Hampshire home. Filing your state taxes free You would be eligible to exclude gain from the sale of either home (but not both) in 2013. Filing your state taxes free Property used partly as your main home. Filing your state taxes free   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. Filing your state taxes free For details, see Business Use or Rental of Home , later. Filing your state taxes free 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. Filing your state taxes free Subtract the adjusted basis from the amount realized to get your gain or loss. Filing your state taxes free     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. Filing your state taxes free 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. Filing your state taxes free Payment by employer. Filing your state taxes free   You may have to sell your home because of a job transfer. Filing your state taxes free 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. Filing your state taxes free 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. Filing your state taxes free Option to buy. Filing your state taxes free   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. Filing your state taxes free If the option is not exercised, you must report the amount as ordinary income in the year the option expires. Filing your state taxes free Report this amount on Form 1040, line 21. Filing your state taxes free Form 1099-S. Filing your state taxes free   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. Filing your state taxes free   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. Filing your state taxes free Instead, box 4 will be checked to indicate your receipt or expected receipt of these items. Filing your state taxes free Amount Realized The amount realized is the selling price minus selling expenses. Filing your state taxes free Selling expenses. Filing your state taxes free   Selling expenses include: Commissions, Advertising fees, Legal fees, and Loan charges paid by the seller, such as loan placement fees or “points. Filing your state taxes free ” Adjusted Basis While you owned your home, you may have made adjustments (increases or decreases) to the basis. Filing your state taxes free This adjusted basis must be determined before you can figure gain or loss on the sale of your home. Filing your state taxes free For information on how to figure your home's adjusted basis, see Determining Basis , later. Filing your state taxes free Amount of Gain or Loss To figure the amount of gain or loss, compare the amount realized to the adjusted basis. Filing your state taxes free Gain on sale. Filing your state taxes free   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. Filing your state taxes free Loss on sale. Filing your state taxes free   If the amount realized is less than the adjusted basis, the difference is a loss. Filing your state taxes free A loss on the sale of your main home cannot be deducted. Filing your state taxes free Jointly owned home. Filing your state taxes free   If you and your spouse sell your jointly owned home and file a joint return, you figure your gain or loss as one taxpayer. Filing your state taxes free Separate returns. Filing your state taxes free   If you file separate returns, each of you must figure your own gain or loss according to your ownership interest in the home. Filing your state taxes free Your ownership interest is generally determined by state law. Filing your state taxes free Joint owners not married. Filing your state taxes free   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. Filing your state taxes free Each of you applies the rules discussed in this chapter on an individual basis. Filing your state taxes free Dispositions Other Than Sales Some special rules apply to other dispositions of your main home. Filing your state taxes free Foreclosure or repossession. Filing your state taxes free   If your home was foreclosed on or repossessed, you have a disposition. Filing your state taxes free See Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments, to determine if you have ordinary income, gain, or loss. Filing your state taxes free Abandonment. Filing your state taxes free   If you abandon your home, see Publication 4681 to determine if you have ordinary income, gain, or loss. Filing your state taxes free Trading (exchanging) homes. Filing your state taxes free   If you trade your old home for another home, treat the trade as a sale and a purchase. Filing your state taxes free Example. Filing your state taxes free You owned and lived in a home with an adjusted basis of $41,000. Filing your state taxes free 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. Filing your state taxes free This is treated as a sale of your old home for $50,000 with a gain of $9,000 ($50,000 – $41,000). Filing your state taxes free 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). Filing your state taxes free Transfer to spouse. Filing your state taxes free   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. Filing your state taxes free This is true even if you receive cash or other consideration for the home. Filing your state taxes free As a result, the rules in this chapter do not apply. Filing your state taxes free More information. Filing your state taxes free   If you need more information, see Transfer to spouse in Publication 523 and Property Settlements in Publication 504, Divorced or Separated Individuals. Filing your state taxes free Involuntary conversion. Filing your state taxes free   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. Filing your state taxes free 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 . Filing your state taxes free Determining Basis You need to know your basis in your home to figure any gain or loss when you sell it. Filing your state taxes free Your basis in your home is determined by how you got the home. Filing your state taxes free Generally, your basis is its cost if you bought it or built it. Filing your state taxes free If you got it in some other way (inheritance, gift, etc. Filing your state taxes free ), your basis is generally either its fair market value when you received it or the adjusted basis of the previous owner. Filing your state taxes free While you owned your home, you may have made adjustments (increases or decreases) to your home's basis. Filing your state taxes free 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. Filing your state taxes free See Adjusted Basis , later. Filing your state taxes free You can find more information on basis and adjusted basis in chapter 13 of this publication and in Publication 523. Filing your state taxes free Cost As Basis The cost of property is the amount you paid for it in cash, debt obligations, other property, or services. Filing your state taxes free Purchase. Filing your state taxes free   If you bought your home, your basis is its cost to you. Filing your state taxes free This includes the purchase price and certain settlement or closing costs. Filing your state taxes free 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. Filing your state taxes free If you build, or contract to build, a new home, your purchase price can include costs of construction, as discussed in Publication 523. Filing your state taxes free Settlement fees or closing costs. Filing your state taxes free   When you bought your home, you may have paid settlement fees or closing costs in addition to the contract price of the property. Filing your state taxes free 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. Filing your state taxes free 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). Filing your state taxes free    Chapter 13 lists some of the settlement fees and closing costs that you can include in the basis of property, including your home. Filing your state taxes free It also lists some settlement costs that cannot be included in basis. Filing your state taxes free   Also see Publication 523 for additional items and a discussion of basis other than cost. Filing your state taxes free Adjusted Basis Adjusted basis is your cost or other basis increased or decreased by certain amounts. Filing your state taxes free To figure your adjusted basis, you can use Worksheet 1 in Publication 523. Filing your state taxes free 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. Filing your state taxes free Increases to basis. Filing your state taxes free   These include the following. Filing your state taxes free Additions and other improvements that have a useful life of more than 1 year. Filing your state taxes free Special assessments for local improvements. Filing your state taxes free Amounts you spent after a casualty to restore damaged property. Filing your state taxes free Improvements. Filing your state taxes free   These add to the value of your home, prolong its useful life, or adapt it to new uses. Filing your state taxes free You add the cost of additions and other improvements to the basis of your property. Filing your state taxes free   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. Filing your state taxes free An addition to your house, such as a new deck, a sunroom, or a new garage, is also an improvement. Filing your state taxes free Repairs. Filing your state taxes free   These maintain your home in good condition but do not add to its value or prolong its life. Filing your state taxes free You do not add their cost to the basis of your property. Filing your state taxes free   Examples of repairs include repainting your house inside or outside, fixing your gutters or floors, repairing leaks or plastering, and replacing broken window panes. Filing your state taxes free Decreases to basis. Filing your state taxes free   These include the following. Filing your state taxes free Discharge of qualified principal residence indebtedness that was excluded from income. Filing your state taxes free Some or all of the cancellation of debt income that was excluded due to your bankruptcy or insolvency. Filing your state taxes free For details, see Publication 4681. Filing your state taxes free Gain you postponed from the sale of a previous home before May 7, 1997. Filing your state taxes free Deductible casualty losses. Filing your state taxes free Insurance payments you received or expect to receive for casualty losses. Filing your state taxes free Payments you received for granting an easement or right-of-way. Filing your state taxes free Depreciation allowed or allowable if you used your home for business or rental purposes. Filing your state taxes free Energy-related credits allowed for expenditures made on the residence. Filing your state taxes free (Reduce the increase in basis otherwise allowable for expenditures on the residence by the amount of credit allowed for those expenditures. Filing your state taxes free ) Adoption credit you claimed for improvements added to the basis of your home. Filing your state taxes free Nontaxable payments from an adoption assistance program of your employer you used for improvements you added to the basis of your home. Filing your state taxes free 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. Filing your state taxes free 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. Filing your state taxes free 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). Filing your state taxes free 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. Filing your state taxes free Discharges of qualified principal residence indebtedness. Filing your state taxes free   You may be able to exclude from gross income a discharge of qualified principal residence indebtedness. Filing your state taxes free This exclusion applies to discharges made after 2006 and before 2014. Filing your state taxes free 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. Filing your state taxes free   File Form 982 with your tax return. Filing your state taxes free See the form's instructions for detailed information. Filing your state taxes free Recordkeeping. Filing your state taxes free You should keep records to prove your home's adjusted basis. Filing your state taxes free 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. Filing your state taxes free 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. Filing your state taxes free Keep records proving the basis of both homes as long as they are needed for tax purposes. Filing your state taxes free 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. Filing your state taxes free Excluding the Gain You may qualify to exclude from your income all or part of any gain from the sale of your main home. Filing your state taxes free 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. Filing your state taxes free To qualify, you must meet the ownership and use tests described later. Filing your state taxes free 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. Filing your state taxes free You can use Worksheet 2 in Publication 523 to figure the amount of your exclusion and your taxable gain, if any. Filing your state taxes free If you have any taxable gain from the sale of your home, you may have to increase your withholding or make estimated tax payments. Filing your state taxes free See Publication 505, Tax Withholding and Estimated Tax. Filing your state taxes free 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. Filing your state taxes free You meet the ownership test. Filing your state taxes free You meet the use test. Filing your state taxes free During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home. Filing your state taxes free For details on gain allocated to periods of nonqualified use, see Periods of nonqualified use , later. Filing your state taxes free 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 . Filing your state taxes free Ownership and Use Tests To claim the exclusion, you must meet the ownership and use tests. Filing your state taxes free 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). Filing your state taxes free Exception. Filing your state taxes free   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. Filing your state taxes free However, the maximum amount you may be able to exclude will be reduced. Filing your state taxes free See Reduced Maximum Exclusion , later. Filing your state taxes free Example 1—home owned and occupied for at least 2 years. Filing your state taxes free Mya bought and moved into her main home in September 2011. Filing your state taxes free She sold the home at a gain in October 2013. Filing your state taxes free 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. Filing your state taxes free She meets the ownership and use tests. Filing your state taxes free Example 2—ownership test met but use test not met. Filing your state taxes free Ayden bought a home, lived in it for 6 months, moved out, and never occupied the home again. Filing your state taxes free He later sold the home for a gain. Filing your state taxes free He owned the home during the entire 5-year period ending on the date of sale. Filing your state taxes free He meets the ownership test but not the use test. Filing your state taxes free He cannot exclude any part of his gain on the sale unless he qualified for a reduced maximum exclusion (explained later). Filing your state taxes free 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. Filing your state taxes free 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. Filing your state taxes free Temporary absence. Filing your state taxes free   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. Filing your state taxes free The following examples assume that the reduced maximum exclusion (discussed later) does not apply to the sales. Filing your state taxes free Example 1. Filing your state taxes free David Johnson, who is single, bought and moved into his home on February 1, 2011. Filing your state taxes free Each year during 2011 and 2012, David left his home for a 2-month summer vacation. Filing your state taxes free David sold the house on March 1, 2013. Filing your state taxes free Although the total time David used his home is less than 2 years (21 months), he meets the requirement and may exclude gain. Filing your state taxes free 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. Filing your state taxes free Example 2. Filing your state taxes free Professor Paul Beard, who is single, bought and moved into a house on August 18, 2010. Filing your state taxes free He lived in it as his main home continuously until January 5, 2012, when he went abroad for a 1-year sabbatical leave. Filing your state taxes free On February 6, 2013, 1 month after returning from the leave, Paul sold the house at a gain. Filing your state taxes free Because his leave was not a short temporary absence, he cannot include the period of leave to meet the 2-year use test. Filing your state taxes free He cannot exclude any part of his gain, because he did not use the residence for the required 2 years. Filing your state taxes free Ownership and use tests met at different times. Filing your state taxes free   You can meet the ownership and use tests during different 2-year periods. Filing your state taxes free However, you must meet both tests during the 5-year period ending on the date of the sale. Filing your state taxes free Example. Filing your state taxes free Beginning in 2002, Helen Jones lived in a rented apartment. Filing your state taxes free The apartment building was later converted to condominiums, and she bought her same apartment on December 3, 2010. Filing your state taxes free In 2011, Helen became ill and on April 14 of that year she moved to her daughter's home. Filing your state taxes free On July 12, 2013, while still living in her daughter's home, she sold her condominium. Filing your state taxes free 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. Filing your state taxes free She owned her condominium from December 3, 2010, to July 12, 2013 (more than 2 years). Filing your state taxes free She lived in the property from July 13, 2008 (the beginning of the 5-year period), to April 14, 2011 (more than 2 years). Filing your state taxes free 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. Filing your state taxes free Cooperative apartment. Filing your state taxes free   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. Filing your state taxes free Exceptions to Ownership and Use Tests The following sections contain exceptions to the ownership and use tests for certain taxpayers. Filing your state taxes free Exception for individuals with a disability. Filing your state taxes free   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. Filing your state taxes free 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. Filing your state taxes free 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. Filing your state taxes free Previous home destroyed or condemned. Filing your state taxes free   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. Filing your state taxes free This rule applies if any part of the basis of the home you sold depended on the basis of the destroyed or condemned home. Filing your state taxes free 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. Filing your state taxes free Members of the uniformed services or Foreign Service, employees of the intelligence community, or employees or volunteers of the Peace Corps. Filing your state taxes free   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. Filing your state taxes free 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. Filing your state taxes free 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. Filing your state taxes free   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. Filing your state taxes free 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. Filing your state taxes free 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. Filing your state taxes free (But see Special rules for joint returns , next. Filing your state taxes free ) Special rules for joint returns. Filing your state taxes free   You can exclude up to $500,000 of the gain on the sale of your main home if all of the following are true. Filing your state taxes free You are married and file a joint return for the year. Filing your state taxes free Either you or your spouse meets the ownership test. Filing your state taxes free Both you and your spouse meet the use test. Filing your state taxes free 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. Filing your state taxes free 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. Filing your state taxes free For this purpose, each spouse is treated as owning the property during the period that either spouse owned the property. Filing your state taxes free Example 1—one spouse sells a home. Filing your state taxes free Emily sells her home in June 2013 for a gain of $300,000. Filing your state taxes free She marries Jamie later in the year. Filing your state taxes free She meets the ownership and use tests, but Jamie does not. Filing your state taxes free Emily can exclude up to $250,000 of gain on a separate or joint return for 2013. Filing your state taxes free The $500,000 maximum exclusion for certain joint returns does not apply because Jamie does not meet the use test. Filing your state taxes free Example 2—each spouse sells a home. Filing your state taxes free 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. Filing your state taxes free He meets the ownership and use tests on his home, but Emily does not. Filing your state taxes free Emily can exclude $250,000 of gain and Jamie can exclude $200,000 of gain on the respective sales of their individual homes. Filing your state taxes free However, Emily cannot use Jamie's unused exclusion to exclude more than $250,000 of gain. Filing your state taxes free Therefore, Emily and Jamie must recognize $50,000 of gain on the sale of Emily's home. Filing your state taxes free 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. Filing your state taxes free Sale of main home by surviving spouse. Filing your state taxes free   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. Filing your state taxes free   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. Filing your state taxes free The sale or exchange took place after 2008. Filing your state taxes free The sale or exchange took place no more than 2 years after the date of death of your spouse. Filing your state taxes free You have not remarried. Filing your state taxes free You and your spouse met the use test at the time of your spouse's death. Filing your state taxes free You or your spouse met the ownership test at the time of your spouse's death. Filing your state taxes free Neither you nor your spouse excluded gain from the sale of another home during the last 2 years. Filing your state taxes free Example. Filing your state taxes free   Harry owned and used a house as his main home since 2009. Filing your state taxes free Harry and Wilma married on July 1, 2013, and from that date they use Harry's house as their main home. Filing your state taxes free Harry died on August 15, 2013, and Wilma inherited the property. Filing your state taxes free Wilma sold the property on September 3, 2013, at which time she had not remarried. Filing your state taxes free 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. Filing your state taxes free Home transferred from spouse. Filing your state taxes free   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. Filing your state taxes free Use of home after divorce. Filing your state taxes free   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. Filing your state taxes free 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. Filing your state taxes free 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. Filing your state taxes free In both cases, to qualify for a reduced exclusion, the sale of your main home must be due to one of the following reasons. Filing your state taxes free A change in place of employment. Filing your state taxes free Health. Filing your state taxes free Unforeseen circumstances. Filing your state taxes free Unforeseen circumstances. Filing your state taxes free   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. Filing your state taxes free   See Publication 523 for more information and to use Worksheet 3 to figure your reduced maximum exclusion. Filing your state taxes free 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. Filing your state taxes free But you must meet the ownership and use tests. Filing your state taxes free Periods of nonqualified use. Filing your state taxes free   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. Filing your state taxes free 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. Filing your state taxes free Exceptions. Filing your state taxes free   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. Filing your state taxes free 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. Filing your state taxes free 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. Filing your state taxes free Gain from the sale or exchange of property allocable to nonqualified use will not qualify for the exclusion. Filing your state taxes free Calculation. Filing your state taxes free   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. Filing your state taxes free Example 1. Filing your state taxes free On May 23, 2007, Amy, who is unmarried for all years in this example, bought a house. Filing your state taxes free 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. Filing your state taxes free The house was rented from June 1, 2009, to March 31, 2011. Filing your state taxes free Amy claimed depreciation deductions in 2009 through 2011 totaling $10,000. Filing your state taxes free 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. Filing your state taxes free 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. Filing your state taxes free 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. Filing your state taxes free Amy divides 668 by 2,080 and obtains a decimal (rounded to at least three decimal places) of 0. Filing your state taxes free 321. Filing your state taxes free 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. Filing your state taxes free 321. Filing your state taxes free Because the gain attributable to periods of nonqualified use is $60,990, Amy can exclude $129,010 of her gain. Filing your state taxes free Example 2. Filing your state taxes free William owned and used a house as his main home from 2007 through 2010. Filing your state taxes free On January 1, 2011, he moved to another state. Filing your state taxes free He rented his house from that date until April 30, 2013, when he sold it. Filing your state taxes free 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. Filing your state taxes free He must report the sale on Form 4797 because it was rental property at the time of sale. Filing your state taxes free 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. Filing your state taxes free Because he met the ownership and use tests, he can exclude gain up to $250,000. Filing your state taxes free 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. Filing your state taxes free Depreciation after May 6, 1997. Filing your state taxes free   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. Filing your state taxes free 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. Filing your state taxes free See Publication 544 for more information. Filing your state taxes free Property used partly for business or rental. Filing your state taxes free   If you used property partly as a home and partly for business or to produce rental income, see Publication 523. Filing your state taxes free 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. Filing your state taxes free If any of these conditions apply, report the entire gain or loss. Filing your state taxes free For details on how to report the gain or loss, see the Instructions for Schedule D (Form 1040) and the Instructions for Form 8949. Filing your state taxes free 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). Filing your state taxes free See Business Use or Rental of Home in Publication 523 and the Instructions for Form 4797. Filing your state taxes free Installment sale. Filing your state taxes free    Some sales are made under arrangements that provide for part or all of the selling price to be paid in a later year. Filing your state taxes free These sales are called “installment sales. Filing your state taxes free ” 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. Filing your state taxes free You may be able to report the part of the gain you cannot exclude on the installment basis. Filing your state taxes free    Use Form 6252, Installment Sale Income, to report the sale. Filing your state taxes free Enter your exclusion on line 15 of Form 6252. Filing your state taxes free Seller-financed mortgage. Filing your state taxes free   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. Filing your state taxes free You must separately report as interest income the interest you receive as part of each payment. Filing your state taxes free 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). Filing your state taxes free The buyer must give you his or her SSN, and you must give the buyer your SSN. Filing your state taxes free Failure to meet these requirements may result in a $50 penalty for each failure. Filing your state taxes free If either you or the buyer does not have and is not eligible to get an SSN, see Social Security Number in chapter 1. Filing your state taxes free More information. Filing your state taxes free   For more information on installment sales, see Publication 537, Installment Sales. Filing your state taxes free Special Situations The situations that follow may affect your exclusion. Filing your state taxes free Sale of home acquired in a like-kind exchange. Filing your state taxes free   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. Filing your state taxes free Gain from a like-kind exchange is not taxable at the time of the exchange. Filing your state taxes free This means that gain will not be taxed until you sell or otherwise dispose of the property you receive. Filing your state taxes free 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. Filing your state taxes free For more information about like-kind exchanges, see Publication 544, Sales and Other Dispositions of Assets. Filing your state taxes free Home relinquished in a like-kind exchange. Filing your state taxes free   If you use your main home partly for business or rental purposes and then exchange the home for another property, see Publication 523. Filing your state taxes free Expatriates. Filing your state taxes free   You cannot claim the exclusion if the expatriation tax applies to you. Filing your state taxes free The expatriation tax applies to certain U. Filing your state taxes free S. Filing your state taxes free citizens who have renounced their citizenship (and to certain long-term residents who have ended their residency). Filing your state taxes free For more information about the expatriation tax, see Expatriation Tax in chapter 4 of Publication 519, U. Filing your state taxes free S. Filing your state taxes free Tax Guide for Aliens. Filing your state taxes free Home destroyed or condemned. Filing your state taxes free   If your home was destroyed or condemned, any gain (for example, because of insurance proceeds you received) qualifies for the exclusion. Filing your state taxes free   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. Filing your state taxes free Sale of remainder interest. Filing your state taxes free   Subject to the other rules in this chapter, you can choose to exclude gain from the sale of a remainder interest in your home. Filing your state taxes free 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. Filing your state taxes free Exception for sales to related persons. Filing your state taxes free   You cannot exclude gain from the sale of a remainder interest in your home to a related person. Filing your state taxes free Related persons include your brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc. Filing your state taxes free ), and lineal descendants (children, grandchildren, etc. Filing your state taxes free ). Filing your state taxes free Related persons also include certain corporations, partnerships, trusts, and exempt organizations. Filing your state taxes free 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. Filing your state taxes free You recapture the benefit by increasing your federal income tax for the year of the sale. Filing your state taxes free 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. Filing your state taxes free Loans subject to recapture rules. Filing your state taxes free   The recapture applies to loans that: Came from the proceeds of qualified mortgage bonds, or Were based on mortgage credit certificates. Filing your state taxes free The recapture also applies to assumptions of these loans. Filing your state taxes free When recapture applies. Filing your state taxes free   Recapture of the federal mortgage subsidy applies only if you meet both of the following conditions. Filing your state taxes free You sell or otherwise dispose of your home at a gain within the first 9 years after the date you close your mortgage loan. Filing your state taxes free 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). Filing your state taxes free When recapture does not apply. Filing your state taxes free   Recapture does not apply in any of the following situations. Filing your state taxes free 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. Filing your state taxes free 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. Filing your state taxes free For more information, see Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma. Filing your state taxes free Also see Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas. Filing your state taxes free The home is disposed of as a result of your death. Filing your state taxes free You dispose of the home more than 9 years after the date you closed your mortgage loan. Filing your state taxes free You transfer the home to your spouse, or to your former spouse incident to a divorce, where no gain is included in your income. Filing your state taxes free You dispose of the home at a loss. Filing your state taxes free 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. Filing your state taxes free 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. Filing your state taxes free For more information, see Replacement Period in Publication 547. Filing your state taxes free You refinance your mortgage loan (unless you later meet the conditions listed previously under When recapture applies ). Filing your state taxes free Notice of amounts. Filing your state taxes free   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. Filing your state taxes free How to figure and report the recapture. Filing your state taxes free    The recapture tax is figured on Form 8828. Filing your state taxes free 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. Filing your state taxes free Attach Form 8828 to your Form 1040. Filing your state taxes free For more information, see Form 8828 and its instructions. Filing your state taxes free Prev  Up  Next   Home   More Online Publications