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Free tax software online 1. Free tax software online   Investment Income Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: General InformationSSN for joint account. Free tax software online Custodian account for your child. Free tax software online Penalty for failure to supply SSN. Free tax software online Certification. Free tax software online Underreported interest and dividends. Free tax software online How to stop backup withholding due to underreporting. Free tax software online How to stop backup withholding due to an incorrect identification number. Free tax software online Reporting backup withholding. Free tax software online Nonresident aliens. Free tax software online Penalties. Free tax software online Savings account with parent as trustee. Free tax software online Interest IncomeInterest not reported on Form 1099-INT. Free tax software online Nominees. Free tax software online Incorrect amount. Free tax software online Information reporting requirement. Free tax software online Taxable Interest — General Below-Market Loans U. Free tax software online S. Free tax software online Savings Bonds U. Free tax software online S. Free tax software online Treasury Bills, Notes, and Bonds Bonds Sold Between Interest Dates Insurance State or Local Government Obligations Discount on Debt InstrumentsOriginal Issue Discount (OID) Market Discount Bonds Discount on Short-Term Obligations Election To Report All Interest as OID When To Report Interest IncomeConstructive receipt. Free tax software online How To Report Interest IncomeSchedule B (Form 1040A or 1040). Free tax software online Worksheet for savings bonds distributed from a retirement or profit-sharing plan. Free tax software online File Form 1099-INT with the IRS. Free tax software online Dividends and Other DistributionsDividends not reported on Form 1099-DIV. Free tax software online Nominees. Free tax software online Ordinary Dividends Capital Gain Distributions Nondividend Distributions Liquidating Distributions Distributions of Stock and Stock Rights Other Distributions How To Report Dividend IncomeElection. Free tax software online Independent contractor. Free tax software online Investment interest deducted. Free tax software online Exception 1. Free tax software online Exception 2. Free tax software online Undistributed capital gains. Free tax software online File Form 1099-DIV with the IRS. Free tax software online Stripped Preferred Stock REMICs, FASITs, and Other CDOsREMICs Collateralized Debt Obligations (CDOs) FASITs S CorporationsLimit on losses and deductions. Free tax software online Passive activity losses. Free tax software online Form 8582. Free tax software online Investment ClubsInvestments in name of member. Free tax software online Tax Treatment of the Club Topics - This chapter discusses: Interest Income , Discount on Debt Instruments , When To Report Interest Income , How To Report Interest Income , Dividends and Other Distributions , How To Report Dividend Income , Stripped Preferred Stock , Real estate mortgage investment conduits (REMICs), financial asset securitization investment trusts (FASITs), and other collateralized debt obligations (CDOs) , S Corporations , and Investment Clubs . Free tax software online Useful Items - You may want to see: Publication 525 Taxable and Nontaxable Income 537 Installment Sales 590 Individual Retirement Arrangements (IRAs) 925 Passive Activity and At-Risk Rules 1212 Guide to Original Issue Discount (OID) Instruments Form (and Instructions) Schedule B (Form 1040A or 1040) Interest and Ordinary Dividends Schedule D (Form 1040) Capital Gains and Losses 1040 U. Free tax software online S. Free tax software online Individual Income Tax Return 1040A U. Free tax software online S. Free tax software online Individual Income Tax Return 1040EZ Income Tax Return for Single and Joint Filers With No Dependents 1099 General Instructions for Certain Information Returns 2439 Notice to Shareholder of Undistributed Long-Term Capital Gains 3115 Application for Change in Accounting Method 6251 Alternative Minimum Tax — Individuals 8582 Passive Activity Loss Limitations 8615 Tax for Certain Children Who Have Unearned Income 8814 Parents' Election To Report Child's Interest and Dividends 8815 Exclusion of Interest From Series EE and I U. Free tax software online S. Free tax software online Savings Bonds Issued After 1989 8818 Optional Form To Record Redemption of Series EE and I U. Free tax software online S. Free tax software online Savings Bonds Issued After 1989 8824 Like-Kind Exchanges 8949 Sales and Other Dispositions of Capital Assets 8960 Net Investment Income Tax—Individuals, Estates, and Trusts See chapter 5, How To Get Tax Help , for information about getting these publications and forms. Free tax software online General Information A few items of general interest are covered here. Free tax software online Recordkeeping. Free tax software online You should keep a list showing sources and investment income amounts you receive during the year. Free tax software online Also keep the forms you receive showing your investment income (Forms 1099-INT, Interest Income, and 1099-DIV, Dividends and Distributions, for example) as an important part of your records. Free tax software online Net investment income tax (NIIT). Free tax software online   Beginning in 2013, you may be subject to the NIIT. Free tax software online The NIIT is a 3. Free tax software online 8% tax on the lesser of your net investment income or the amount of your modified adjusted gross income (MAGI) that is over a threshold amount based on your filing status. Free tax software online    Filing Status Threshold Amount Married filing jointly $250,000 Married filing separately $125,000 Single $200,000 Head of household (with qualifying person) $200,000 Qualifying Widow(er) with dependent child $250,000    For more information, see Form 8960 and Instructions for Form 8960. Free tax software online Tax on unearned income of certain children. Free tax software online   Part of a child's 2013 unearned income may be taxed at the parent's tax rate. Free tax software online This may happen if all of the following are true. Free tax software online The child had more than $2,000 of unearned income. Free tax software online The child is required to file a tax return. Free tax software online The child was: Under age 18 at the end of 2013, Age 18 at the end of 2013 and did not have earned income that was more than half of the child's support, or A full-time student over age 18 and under age 24 at the end of 2013 and did not have earned income that was more than half of the child's support. Free tax software online At least one of the child's parents was alive at the end of 2013. Free tax software online The child does not file a joint return for 2013. Free tax software online A child born on January 1, 1996, is considered to be age 18 at the end of 2013; a child born on January 1, 1995, is considered to be age 19 at the end of 2013; a child born on January 1, 1990, is considered to be age 24 at the end of 2013. Free tax software online   If all of these statements are true, Form 8615 must be completed and attached to the child's tax return. Free tax software online If any of these statements is not true, Form 8615 is not required and the child's income is taxed at his or her own tax rate. Free tax software online    However, the parent can choose to include the child's interest and dividends on the parent's return if certain requirements are met. Free tax software online Use Form 8814 for this purpose. Free tax software online   For more information about the tax on unearned income of children and the parents' election, see Publication 929, Tax Rules for Children and Dependents. Free tax software online Beneficiary of an estate or trust. Free tax software online   Interest, dividends, and other investment income you receive as a beneficiary of an estate or trust is generally taxable income. Free tax software online You should receive a Schedule K-1 (Form 1041), Beneficiary's Share of Income, Deductions, Credits, etc. Free tax software online , from the fiduciary. Free tax software online Your copy of Schedule K-1 (Form 1041) and its instructions will tell you where to report the income on your Form 1040. Free tax software online Social security number (SSN). Free tax software online   You must give your name and SSN or individual tax identification number (ITIN) to any person required by federal tax law to make a return, statement, or other document that relates to you. Free tax software online This includes payers of interest and dividends. Free tax software online If you do not give your SSN or ITIN to the payer of interest, you may have to pay a penalty. Free tax software online SSN for joint account. Free tax software online   If the funds in a joint account belong to one person, list that person's name first on the account and give that person's SSN to the payer. Free tax software online (For information on who owns the funds in a joint account, see Joint accounts , later. Free tax software online ) If the joint account contains combined funds, give the SSN of the person whose name is listed first on the account. Free tax software online This is because only one name and SSN can be shown on Form 1099. Free tax software online   These rules apply both to joint ownership by a married couple and to joint ownership by other individuals. Free tax software online For example, if you open a joint savings account with your child using funds belonging to the child, list the child's name first on the account and give the child's SSN. Free tax software online Custodian account for your child. Free tax software online   If your child is the actual owner of an account that is recorded in your name as custodian for the child, give the child's SSN to the payer. Free tax software online For example, you must give your child's SSN to the payer of dividends on stock owned by your child, even though the dividends are paid to you as custodian. Free tax software online Penalty for failure to supply SSN. Free tax software online   You will be subject to a penalty if, when required, you fail to: Include your SSN on any return, statement, or other document, Give your SSN to another person who must include it on any return, statement, or other document, or Include the SSN of another person on any return, statement, or other document. Free tax software online The penalty is $50 for each failure up to a maximum penalty of $100,000 for any calendar year. Free tax software online   You will not be subject to this penalty if you can show that your failure to provide the SSN was due to reasonable cause and not to willful neglect. Free tax software online   If you fail to supply an SSN, you may also be subject to backup withholding. Free tax software online Backup withholding. Free tax software online   Your investment income is generally not subject to regular withholding. Free tax software online However, it may be subject to backup withholding to ensure that income tax is collected on the income. Free tax software online Under backup withholding, the bank, broker, or other payer of interest, original issue discount (OID), dividends, cash patronage dividends, or royalties must withhold, as income tax, on the amount you are paid, applying the appropriate withholding rate. Free tax software online   Backup withholding applies if: You do not give the payer your identification number (either a social security number or an employer identification number) in the required manner, The IRS notifies the payer that you gave an incorrect identification number, The IRS notifies the payer that you are subject to backup withholding on interest or dividends because you have underreported interest or dividends on your income tax return, or You are required, but fail, to certify that you are not subject to backup withholding for the reason described in (3). Free tax software online Certification. Free tax software online   For new accounts paying interest or dividends, you must certify under penalties of perjury that your SSN is correct and that you are not subject to backup withholding. Free tax software online Your payer will give you a Form W-9, Request for Taxpayer Identification Number and Certification, or similar form, to make this certification. Free tax software online If you fail to make this certification, backup withholding may begin immediately on your new account or investment. Free tax software online Underreported interest and dividends. Free tax software online   You will be considered to have underreported your interest and dividends if the IRS has determined for a tax year that: You failed to include any part of a reportable interest or dividend payment required to be shown on your return, or You were required to file a return and to include a reportable interest or dividend payment on that return, but you failed to file the return. Free tax software online How to stop backup withholding due to underreporting. Free tax software online   If you have been notified that you underreported interest or dividends, you can request a determination from the IRS to prevent backup withholding from starting or to stop backup withholding once it has begun. Free tax software online You must show that at least one of the following situations applies. Free tax software online No underreporting occurred. Free tax software online You have a bona fide dispute with the IRS about whether underreporting occurred. Free tax software online Backup withholding will cause or is causing an undue hardship, and it is unlikely that you will underreport interest and dividends in the future. Free tax software online You have corrected the underreporting by filing a return if you did not previously file one and by paying all taxes, penalties, and interest due for any underreported interest or dividend payments. Free tax software online   If the IRS determines that backup withholding should stop, it will provide you with a certification and will notify the payers who were sent notices earlier. Free tax software online How to stop backup withholding due to an incorrect identification number. Free tax software online   If you have been notified by a payer that you are subject to backup withholding because you have provided an incorrect SSN or employer identification number, you can stop it by following the instructions the payer gives you. Free tax software online Reporting backup withholding. Free tax software online   If backup withholding is deducted from your interest or dividend income or other reportable payment, the bank or other business must give you an information return for the year (for example, a Form 1099-INT) indicating the amount withheld. Free tax software online The information return will show any backup withholding as “Federal income tax withheld. Free tax software online ” Nonresident aliens. Free tax software online    Generally, payments made to nonresident aliens are not subject to backup withholding. Free tax software online You can use Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, to certify exempt status. Free tax software online However, this does not exempt you from the 30% (or lower treaty) withholding rate that may apply to your investment income. Free tax software online For information on the 30% rate, see Publication 519, U. Free tax software online S. Free tax software online Tax Guide for Aliens. Free tax software online Penalties. Free tax software online   There are civil and criminal penalties for giving false information to avoid backup withholding. Free tax software online The civil penalty is $500. Free tax software online The criminal penalty, upon conviction, is a fine of up to $1,000, or imprisonment of up to 1 year, or both. Free tax software online Where to report investment income. Free tax software online   Table 1-1 gives an overview of the forms and schedules to use to report some common types of investment income. Free tax software online But see the rest of this publication for detailed information about reporting investment income. Free tax software online Joint accounts. Free tax software online   If two or more persons hold property (such as a savings account, bond, or stock) as joint tenants, tenants by the entirety, or tenants in common, each person's share of any interest or dividends from the property is determined by local law. Free tax software online Community property states. Free tax software online   If you are married and receive a distribution that is community income, one-half of the distribution is generally considered to be received by each spouse. Free tax software online If you file separate returns, you must each report one-half of any taxable distribution. Free tax software online See Publication 555, Community Property, for more information on community income. Free tax software online   If the distribution is not considered community property and you and your spouse file separate returns, each of you must report your separate taxable distributions. Free tax software online Example. Free tax software online You and your spouse have a joint money market account. Free tax software online Under state law, half the income from the account belongs to you, and half belongs to your spouse. Free tax software online If you file separate returns, you each report half the income. Free tax software online Income from property given to a child. Free tax software online   Property you give as a parent to your child under the Model Gifts of Securities to Minors Act, the Uniform Gifts to Minors Act, or any similar law becomes the child's property. Free tax software online   Income from the property is taxable to the child, except that any part used to satisfy a legal obligation to support the child is taxable to the parent or guardian having that legal obligation. Free tax software online Savings account with parent as trustee. Free tax software online   Interest income from a savings account opened for a minor child, but placed in the name and subject to the order of the parents as trustees, is taxable to the child if, under the law of the state in which the child resides, both of the following are true. Free tax software online The savings account legally belongs to the child. Free tax software online The parents are not legally permitted to use any of the funds to support the child. Free tax software online Table 1-1. Free tax software online Where To Report Common Types of Investment Income (For detailed information about reporting investment income, see the rest of this publication, especially How To Report Interest Income and How To Report Dividend Income in chapter 1. Free tax software online ) Type of Income If you file Form 1040, report on . Free tax software online . Free tax software online . Free tax software online If you can file Form 1040A, report on . Free tax software online . Free tax software online . Free tax software online If you can file Form 1040EZ, report on . Free tax software online . Free tax software online . Free tax software online Tax-exempt interest (Form 1099-INT, box 8) Line 8b Line 8b Space to the left of line 2 (enter “TEI” and the amount) Taxable interest that totals $1,500 or less Line 8a (You may need to file Schedule B as well. Free tax software online ) Line 8a (You may need to file Schedule B as well. Free tax software online ) Line 2 Taxable interest that totals more than $1,500 Line 8a; also use Schedule B, line 1 Line 8a; also use Schedule B, line 1   Savings bond interest you will exclude because of higher education expenses Schedule B; also use Form 8815 Schedule B; also use Form 8815   Ordinary dividends that total $1,500 or less Line 9a (You may need to file Schedule B as well. Free tax software online ) Line 9a (You may need to file Schedule B as well. Free tax software online )   Ordinary dividends that total more than $1,500 Line 9a; also use Schedule B, line 5 Line 9a; also use Schedule B, line 5   Qualified dividends (if you do not have to file Schedule D) Line 9b; also use the Qualified Dividends and Capital Gain Tax Worksheet, line 2 Line 9b; also use the Qualified Dividends and Capital Gain Tax Worksheet, line 2   Qualified dividends (if you have to file Schedule D) Line 9b; also use the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet, line 2 You cannot use Form 1040A    You cannot use Form 1040EZ Capital gain distributions (if you do not have to file Schedule D) Line 13; also use the Qualified Dividends and Capital Gain Tax Worksheet, line 3 Line 10; also use the Qualified Dividends and Capital Gain Tax Worksheet, line 3   Capital gain distributions (if you have to file Schedule D) Schedule D, line 13; also use the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet     Section 1250, 1202, or collectibles gain (Form 1099-DIV, box 2b, 2c, or 2d) Form 8949 and Schedule D     Nondividend distributions (Form 1099-DIV, box 3) Generally not reported*     Undistributed capital gains (Form 2439, boxes 1a - 1d) Schedule D     Gain or loss from sales of stocks or bonds Line 13; also use Form 8949, Schedule D, and the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet You cannot use Form 1040A   Gain or loss from exchanges of like-kind investment property Line 13; also use Schedule D, Form 8824, and the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet     *Report any amounts in excess of your basis in your mutual fund shares on Form 8949. Free tax software online Use Part II if you held the shares more than 1 year. Free tax software online Use Part I if you held your mutual fund shares 1 year or less. Free tax software online For details on Form 8949, see Reporting Capital Gains and Losses in chapter 4, and the Instructions for Form 8949. Free tax software online Accuracy-related penalty. Free tax software online   An accuracy-related penalty of 20% can be charged for underpayments of tax due to negligence or disregard of rules or regulations or substantial understatement of tax. Free tax software online For information on the penalty and any interest that applies, see Penalties in chapter 2. Free tax software online Interest Income This section discusses the tax treatment of different types of interest income. Free tax software online In general, any interest that you receive or that is credited to your account and can be withdrawn is taxable income. Free tax software online (It does not have to be entered in your passbook. Free tax software online ) Exceptions to this rule are discussed later. Free tax software online Form 1099-INT. Free tax software online   Interest income is generally reported to you on Form 1099-INT, or a similar statement, by banks, savings and loans, and other payers of interest. Free tax software online This form shows you the interest you received during the year. Free tax software online Keep this form for your records. Free tax software online You do not have to attach it to your tax return. Free tax software online   Report on your tax return the total interest income you receive for the tax year. Free tax software online Interest not reported on Form 1099-INT. Free tax software online   Even if you do not receive Form 1099-INT, you must still report all of your interest income. Free tax software online For example, you may receive distributive shares of interest from partnerships or S corporations. Free tax software online This interest is reported to you on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. Free tax software online , and Schedule K-1 (Form 1120S), Shareholder's Share of Income, Deductions, Credits, etc. Free tax software online Nominees. Free tax software online   Generally, if someone receives interest as a nominee for you, that person must give you a Form 1099-INT showing the interest received on your behalf. Free tax software online   If you receive a Form 1099-INT that includes amounts belonging to another person, see the discussion on Nominee distributions , later, under How To Report Interest Income. Free tax software online Incorrect amount. Free tax software online   If you receive a Form 1099-INT that shows an incorrect amount (or other incorrect information), you should ask the issuer for a corrected form. Free tax software online The new Form 1099-INT you receive will be marked “Corrected. Free tax software online ” Form 1099-OID. Free tax software online   Reportable interest income also may be shown on Form 1099-OID, Original Issue Discount. Free tax software online For more information about amounts shown on this form, see Original Issue Discount (OID) , later in this chapter. Free tax software online Exempt-interest dividends. Free tax software online   Exempt-interest dividends you receive from a mutual fund or other regulated investment company, including those received from a qualified fund of funds in any tax year beginning after December 22, 2010, are not included in your taxable income. Free tax software online (However, see Information reporting requirement , next. Free tax software online ) Exempt-interest dividends should be shown in box 10 of Form 1099-DIV. Free tax software online You do not reduce your basis for distributions that are exempt-interest dividends. Free tax software online Information reporting requirement. Free tax software online   Although exempt-interest dividends are not taxable, you must show them on your tax return if you have to file. Free tax software online This is an information reporting requirement and does not change the exempt-interest dividends into taxable income. Free tax software online See How To Report Interest Income , later. Free tax software online Note. Free tax software online Exempt-interest dividends paid from specified private activity bonds may be subject to the alternative minimum tax. Free tax software online The exempt-interest dividends subject to the alternative minimum tax are shown in box 11 of Form 1099-DIV. Free tax software online See Form 6251 and its instructions for more information about this tax. Free tax software online Private activity bonds are discussed later under State or Local Government Obligations. Free tax software online Interest on VA dividends. Free tax software online   Interest on insurance dividends left on deposit with the Department of Veterans Affairs (VA) is not taxable. Free tax software online This includes interest paid on dividends on converted United States Government Life Insurance policies and on National Service Life Insurance policies. Free tax software online Individual retirement arrangements (IRAs). Free tax software online   Interest on a Roth IRA generally is not taxable. Free tax software online Interest on a traditional IRA is tax deferred. Free tax software online You generally do not include it in your income until you make withdrawals from the IRA. Free tax software online See Publication 590 for more information. Free tax software online Taxable Interest — General Taxable interest includes interest you receive from bank accounts, loans you make to others, and other sources. Free tax software online The following are some sources of taxable interest. Free tax software online Dividends that are actually interest. Free tax software online   Certain distributions commonly called dividends are actually interest. Free tax software online You must report as interest so-called “dividends” on deposits or on share accounts in: Cooperative banks, Credit unions, Domestic building and loan associations, Domestic savings and loan associations, Federal savings and loan associations, and Mutual savings banks. Free tax software online  The “dividends” will be shown as interest income on Form 1099-INT. Free tax software online Money market funds. Free tax software online   Money market funds are offered by nonbank financial institutions such as mutual funds and stock brokerage houses, and pay dividends. Free tax software online Generally, amounts you receive from money market funds should be reported as dividends, not as interest. Free tax software online Certificates of deposit and other deferred interest accounts. Free tax software online   If you open any of these accounts, interest may be paid at fixed intervals of 1 year or less during the term of the account. Free tax software online You generally must include this interest in your income when you actually receive it or are entitled to receive it without paying a substantial penalty. Free tax software online The same is true for accounts that mature in 1 year or less and pay interest in a single payment at maturity. Free tax software online If interest is deferred for more than 1 year, see Original Issue Discount (OID) , later. Free tax software online Interest subject to penalty for early withdrawal. Free tax software online   If you withdraw funds from a deferred interest account before maturity, you may have to pay a penalty. Free tax software online You must report the total amount of interest paid or credited to your account during the year, without subtracting the penalty. Free tax software online See Penalty on early withdrawal of savings under How To Report Interest Income, later, for more information on how to report the interest and deduct the penalty. Free tax software online Money borrowed to invest in certificate of deposit. Free tax software online   The interest you pay on money borrowed from a bank or savings institution to meet the minimum deposit required for a certificate of deposit from the institution and the interest you earn on the certificate are two separate items. Free tax software online You must report the total interest you earn on the certificate in your income. Free tax software online If you itemize deductions, you can deduct the interest you pay as investment interest, up to the amount of your net investment income. Free tax software online See Interest Expenses in chapter 3. Free tax software online Example. Free tax software online You deposited $5,000 with a bank and borrowed $5,000 from the bank to make up the $10,000 minimum deposit required to buy a 6-month certificate of deposit. Free tax software online The certificate earned $575 at maturity in 2013, but you received only $265, which represented the $575 you earned minus $310 interest charged on your $5,000 loan. Free tax software online The bank gives you a Form 1099-INT for 2013 showing the $575 interest you earned. Free tax software online The bank also gives you a statement showing that you paid $310 interest for 2013. Free tax software online You must include the $575 in your income. Free tax software online If you itemize your deductions on Schedule A (Form 1040), Itemized Deductions, you can deduct $310, subject to the net investment income limit. Free tax software online Gift for opening account. Free tax software online   If you receive noncash gifts or services for making deposits or for opening an account in a savings institution, you may have to report the value as interest. Free tax software online   For deposits of less than $5,000, gifts or services valued at more than $10 must be reported as interest. Free tax software online For deposits of $5,000 or more, gifts or services valued at more than $20 must be reported as interest. Free tax software online The value is determined by the cost to the financial institution. Free tax software online Example. Free tax software online You open a savings account at your local bank and deposit $800. Free tax software online The account earns $20 interest. Free tax software online You also receive a $15 calculator. Free tax software online If no other interest is credited to your account during the year, the Form 1099-INT you receive will show $35 interest for the year. Free tax software online You must report $35 interest income on your tax return. Free tax software online Interest on insurance dividends. Free tax software online   Interest on insurance dividends left on deposit with an insurance company that can be withdrawn annually is taxable to you in the year it is credited to your account. Free tax software online However, if you can withdraw it only on the anniversary date of the policy (or other specified date), the interest is taxable in the year that date occurs. Free tax software online Prepaid insurance premiums. Free tax software online   Any increase in the value of prepaid insurance premiums, advance premiums, or premium deposit funds is interest if it is applied to the payment of premiums due on insurance policies or made available for you to withdraw. Free tax software online U. Free tax software online S. Free tax software online obligations. Free tax software online   Interest on U. Free tax software online S. Free tax software online obligations, such as U. Free tax software online S. Free tax software online Treasury bills, notes, and bonds, issued by any agency or instrumentality of the United States is taxable for federal income tax purposes. Free tax software online Interest on tax refunds. Free tax software online   Interest you receive on tax refunds is taxable income. Free tax software online Interest on condemnation award. Free tax software online   If the condemning authority pays you interest to compensate you for a delay in payment of an award, the interest is taxable. Free tax software online Installment sale payments. Free tax software online   If a contract for the sale or exchange of property provides for deferred payments, it also usually provides for interest payable with the deferred payments. Free tax software online That interest is taxable when you receive it. Free tax software online If little or no interest is provided for in a deferred payment contract, part of each payment may be treated as interest. Free tax software online See Unstated Interest and Original Issue Discount (OID) in Publication 537. Free tax software online Interest on annuity contract. Free tax software online   Accumulated interest on an annuity contract you sell before its maturity date is taxable. Free tax software online Usurious interest. Free tax software online   Usurious interest is interest charged at an illegal rate. Free tax software online This is taxable as interest unless state law automatically changes it to a payment on the principal. Free tax software online Interest income on frozen deposits. Free tax software online   Exclude from your gross income interest on frozen deposits. Free tax software online A deposit is frozen if, at the end of the year, you cannot withdraw any part of the deposit because: The financial institution is bankrupt or insolvent, or The state in which the institution is located has placed limits on withdrawals because other financial institutions in the state are bankrupt or insolvent. Free tax software online   The amount of interest you must exclude is the interest that was credited on the frozen deposits minus the sum of: The net amount you withdrew from these deposits during the year, and The amount you could have withdrawn as of the end of the year (not reduced by any penalty for premature withdrawals of a time deposit). Free tax software online If you receive a Form 1099-INT for interest income on deposits that were frozen at the end of 2013, see Frozen deposits under How To Report Interest Income for information about reporting this interest income exclusion on your tax return. Free tax software online   The interest you exclude is treated as credited to your account in the following year. Free tax software online You must include it in income in the year you can withdraw it. Free tax software online Example. Free tax software online $100 of interest was credited on your frozen deposit during the year. Free tax software online You withdrew $80 but could not withdraw any more as of the end of the year. Free tax software online You must include $80 in your income and exclude $20 from your income for the year. Free tax software online You must include the $20 in your income for the year you can withdraw it. Free tax software online Bonds traded flat. Free tax software online    If you buy a bond at a discount when interest has been defaulted or when the interest has accrued but has not been paid, the transaction is described as trading a bond flat. Free tax software online The defaulted or unpaid interest is not income and is not taxable as interest if paid later. Free tax software online When you receive a payment of that interest, it is a return of capital that reduces the remaining cost basis of your bond. Free tax software online Interest that accrues after the date of purchase, however, is taxable interest income for the year received or accrued. Free tax software online See Bonds Sold Between Interest Dates , later in this chapter. Free tax software online Below-Market Loans If you make a below-market gift or demand loan, you must report as interest income any forgone interest (defined later) from that loan. Free tax software online The below-market loan rules and exceptions are described in this section. Free tax software online For more information, see section 7872 of the Internal Revenue Code and its regulations. Free tax software online If you receive a below-market loan, you may be able to deduct the forgone interest as well as any interest you actually paid, but not if it is personal interest. Free tax software online Loans subject to the rules. Free tax software online   The rules for below-market loans apply to: Gift loans, Pay-related loans, Corporation-shareholder loans, Tax avoidance loans, and Certain loans made to qualified continuing care facilities under a continuing care contract. Free tax software online A pay-related loan is any below-market loan between an employer and an employee or between an independent contractor and a person for whom the contractor provides services. Free tax software online A tax avoidance loan is any below-market loan where the avoidance of federal tax is one of the main purposes of the interest arrangement. Free tax software online Forgone interest. Free tax software online   For any period, forgone interest is: The amount of interest that would be payable for that period if interest accrued on the loan at the applicable federal rate and was payable annually on December 31, minus Any interest actually payable on the loan for the period. Free tax software online Applicable federal rate. Free tax software online   Applicable federal rates are published by the IRS each month in the Internal Revenue Bulletin. Free tax software online Some IRS offices have these bulletins available for research. Free tax software online See chapter 5, How To Get Tax Help , for other ways to get this information. Free tax software online Rules for below-market loans. Free tax software online   The rules that apply to a below-market loan depend on whether the loan is a gift loan, demand loan, or term loan. Free tax software online Gift and demand loans. Free tax software online   A gift loan is any below-market loan where the forgone interest is in the nature of a gift. Free tax software online   A demand loan is a loan payable in full at any time upon demand by the lender. Free tax software online A demand loan is a below-market loan if no interest is charged or if interest is charged at a rate below the applicable federal rate. Free tax software online   A demand loan or gift loan that is a below-market loan is generally treated as an arm's-length transaction in which the lender is treated as having made: A loan to the borrower in exchange for a note that requires the payment of interest at the applicable federal rate, and An additional payment to the borrower in an amount equal to the forgone interest. Free tax software online The borrower is generally treated as transferring the additional payment back to the lender as interest. Free tax software online The lender must report that amount as interest income. Free tax software online   The lender's additional payment to the borrower is treated as a gift, dividend, contribution to capital, pay for services, or other payment, depending on the substance of the transaction. Free tax software online The borrower may have to report this payment as taxable income, depending on its classification. Free tax software online These transfers are considered to occur annually, generally on December 31. Free tax software online Term loans. Free tax software online   A term loan is any loan that is not a demand loan. Free tax software online A term loan is a below-market loan if the amount of the loan is more than the present value of all payments due under the loan. Free tax software online   A lender who makes a below-market term loan other than a gift loan is treated as transferring an additional lump-sum cash payment to the borrower (as a dividend, contribution to capital, etc. Free tax software online ) on the date the loan is made. Free tax software online The amount of this payment is the amount of the loan minus the present value, at the applicable federal rate, of all payments due under the loan. Free tax software online An equal amount is treated as original issue discount (OID). Free tax software online The lender must report the annual part of the OID as interest income. Free tax software online The borrower may be able to deduct the OID as interest expense. Free tax software online See Original Issue Discount (OID) , later. Free tax software online Exceptions to the below-market loan rules. Free tax software online   Exceptions to the below-market loan rules are discussed here. Free tax software online Exception for loans of $10,000 or less. Free tax software online   The rules for below-market loans do not apply to any day on which the total outstanding amount of loans between the borrower and lender is $10,000 or less. Free tax software online This exception applies only to: Gift loans between individuals if the gift loan is not directly used to buy or carry income-producing assets, and Pay-related loans or corporation-shareholder loans if the avoidance of federal tax is not a principal purpose of the interest arrangement. Free tax software online This exception does not apply to a term loan described in (2) earlier that previously has been subject to the below-market loan rules. Free tax software online Those rules will continue to apply even if the outstanding balance is reduced to $10,000 or less. Free tax software online Exception for loans to continuing care facilities. Free tax software online   Loans to qualified continuing care facilities under continuing care contracts are not subject to the rules for below-market loans for the calendar year if the lender or the lender's spouse is age 62 or older at the end of the year. Free tax software online For the definitions of qualified continuing care facility and continuing care contract, see Internal Revenue Code section 7872(h). Free tax software online Exception for loans without significant tax effect. Free tax software online   Loans are excluded from the below-market loan rules if their interest arrangements do not have a significant effect on the federal tax liability of the borrower or the lender. Free tax software online These loans include: Loans made available by the lender to the general public on the same terms and conditions that are consistent with the lender's customary business practice; Loans subsidized by a federal, state, or municipal government that are made available under a program of general application to the public; Certain employee-relocation loans; Certain loans from a foreign person, unless the interest income would be effectively connected with the conduct of a U. Free tax software online S. Free tax software online trade or business and would not be exempt from U. Free tax software online S. Free tax software online tax under an income tax treaty; Gift loans to a charitable organization, contributions to which are deductible, if the total outstanding amount of loans between the organization and lender is $250,000 or less at all times during the tax year; and Other loans on which the interest arrangement can be shown to have no significant effect on the federal tax liability of the lender or the borrower. Free tax software online For a loan described in (6) above, all the facts and circumstances are used to determine if the interest arrangement has a significant effect on the federal tax liability of the lender or borrower. Free tax software online Some factors to be considered are: Whether items of income and deduction generated by the loan offset each other; The amount of these items; The cost to you of complying with the below-market loan rules, if they were to apply; and Any reasons other than taxes for structuring the transaction as a below-market loan. Free tax software online If you structure a transaction to meet this exception and one of the principal purposes of that structure is the avoidance of federal tax, the loan will be considered a tax-avoidance loan, and this exception will not apply. Free tax software online Limit on forgone interest for gift loans of $100,000 or less. Free tax software online   For gift loans between individuals, if the outstanding loans between the lender and borrower total $100,000 or less, the forgone interest to be included in income by the lender and deducted by the borrower is limited to the amount of the borrower's net investment income for the year. Free tax software online If the borrower's net investment income is $1,000 or less, it is treated as zero. Free tax software online This limit does not apply to a loan if the avoidance of federal tax is one of the main purposes of the interest arrangement. Free tax software online Effective dates. Free tax software online    These rules apply to term loans made after June 6, 1984, and to demand loans outstanding after that date. Free tax software online U. Free tax software online S. Free tax software online Savings Bonds This section provides tax information on U. Free tax software online S. Free tax software online savings bonds. Free tax software online It explains how to report the interest income on these bonds and how to treat transfers of these bonds. Free tax software online U. Free tax software online S. Free tax software online savings bonds currently offered to individuals include Series EE bonds and Series I bonds. Free tax software online For other information on U. Free tax software online S. Free tax software online savings bonds, write to:  For Series HH/H: Bureau of the Fiscal Service Division of Customer Assistance P. Free tax software online O. Free tax software online Box 2186 Parkersburg, WV 26106-2186  For Series EE and I paper savings bonds: Bureau of the Fiscal Service Division of Customer Assistance P. Free tax software online O. Free tax software online Box 7012 Parkersburg, WV 26106-7012  For Series EE and I electronic bonds: Bureau of the Fiscal Service  Division of Customer Assistance P. Free tax software online O. Free tax software online Box 7015 Parkersburg, WV 26106-7015 Or, on the Internet, visit: www. Free tax software online treasurydirect. Free tax software online gov/indiv/indiv. Free tax software online htm. Free tax software online Accrual method taxpayers. Free tax software online   If you use an accrual method of accounting, you must report interest on U. Free tax software online S. Free tax software online savings bonds each year as it accrues. Free tax software online You cannot postpone reporting interest until you receive it or until the bonds mature. Free tax software online Cash method taxpayers. Free tax software online   If you use the cash method of accounting, as most individual taxpayers do, you generally report the interest on U. Free tax software online S. Free tax software online savings bonds when you receive it. Free tax software online But see Reporting options for cash method taxpayers , later. Free tax software online Series HH bonds. Free tax software online   These bonds were issued at face value. Free tax software online Interest is paid twice a year by direct deposit to your bank account. Free tax software online If you are a cash method taxpayer, you must report interest on these bonds as income in the year you receive it. Free tax software online   Series HH bonds were first offered in 1980 and last offered in August 2004. Free tax software online Before 1980, series H bonds were issued. Free tax software online Series H bonds are treated the same as series HH bonds. Free tax software online If you are a cash method taxpayer, you must report the interest when you receive it. Free tax software online   Series H bonds have a maturity period of 30 years. Free tax software online Series HH bonds mature in 20 years. Free tax software online The last series H bonds matured in 2009. Free tax software online The last series HH bonds will mature in 2024. Free tax software online Series EE and series I bonds. Free tax software online   Interest on these bonds is payable when you redeem the bonds. Free tax software online The difference between the purchase price and the redemption value is taxable interest. Free tax software online Series EE bonds. Free tax software online   Series EE bonds were first offered in January 1980 and have a maturity period of 30 years. Free tax software online Before July 1980, series E bonds were issued. Free tax software online The original 10-year maturity period of series E bonds has been extended to 40 years for bonds issued before December 1965 and 30 years for bonds issued after November 1965. Free tax software online Paper series EE and series E bonds are issued at a discount. Free tax software online The face value is payable to you at maturity. Free tax software online Electronic series EE bonds are issued at their face value. Free tax software online The face value plus accrued interest is payable to you at maturity. Free tax software online As of January 1, 2012, paper savings bonds were no longer sold at financial institutions. Free tax software online    Owners of paper series EE bonds can convert them to electronic bonds. Free tax software online These converted bonds do not retain the denomination listed on the paper certificate but are posted at their purchase price (with accrued interest). Free tax software online Series I bonds. Free tax software online   Series I bonds were first offered in 1998. Free tax software online These are inflation-indexed bonds issued at their face amount with a maturity period of 30 years. Free tax software online The face value plus all accrued interest is payable to you at maturity. Free tax software online Reporting options for cash method taxpayers. Free tax software online   If you use the cash method of reporting income, you can report the interest on series EE, series E, and series I bonds in either of the following ways. Free tax software online Method 1. Free tax software online Postpone reporting the interest until the earlier of the year you cash or dispose of the bonds or the year in which they mature. Free tax software online (However, see Savings bonds traded , later. Free tax software online )  Note. Free tax software online Series EE bonds issued in 1983 matured in 2013. Free tax software online If you have used method 1, you generally must report the interest on these bonds on your 2013 return. Free tax software online The last series E bonds were issued in 1980 and matured in 2010. Free tax software online If you used method 1, you generally should have reported the interest on these bonds on your 2010 return. Free tax software online Method 2. Free tax software online Choose to report the increase in redemption value as interest each year. Free tax software online  You must use the same method for all series EE, series E, and series I bonds you own. Free tax software online If you do not choose method 2 by reporting the increase in redemption value as interest each year, you must use method 1. Free tax software online If you plan to cash your bonds in the same year you will pay for higher educational expenses, you may want to use method 1 because you may be able to exclude the interest from your income. Free tax software online To learn how, see Education Savings Bond Program, later. Free tax software online Change from method 1. Free tax software online   If you want to change your method of reporting the interest from method 1 to method 2, you can do so without permission from the IRS. Free tax software online In the year of change, you must report all interest accrued to date and not previously reported for all your bonds. Free tax software online   Once you choose to report the interest each year, you must continue to do so for all series EE, series E, and series I bonds you own and for any you get later, unless you request permission to change, as explained next. Free tax software online Change from method 2. Free tax software online   To change from method 2 to method 1, you must request permission from the IRS. Free tax software online Permission for the change is automatically granted if you send the IRS a statement that meets all the following requirements. Free tax software online You have typed or printed the following number at the top: “131. Free tax software online ” It includes your name and social security number under “131. Free tax software online ” It includes the year of change (both the beginning and ending dates). Free tax software online It identifies the savings bonds for which you are requesting this change. Free tax software online It includes your agreement to: Report all interest on any bonds acquired during or after the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest; and Report all interest on the bonds acquired before the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest, with the exception of the interest reported in prior tax years. Free tax software online   You must attach this statement to your tax return for the year of change, which you must file by the due date (including extensions). Free tax software online   You can have an automatic extension of 6 months from the due date of your return for the year of change (excluding extensions) to file the statement with an amended return. Free tax software online On the statement, type or print “Filed pursuant to section 301. Free tax software online 9100-2. Free tax software online ” To get this extension, you must have filed your original return for the year of the change by the due date (including extensions). Free tax software online    By the date you file the original statement with your return, you must also send a signed copy to the address below. Free tax software online    Internal Revenue Service Attention: CC:IT&A (Automatic Rulings Branch) P. Free tax software online O. Free tax software online Box 7604 Benjamin Franklin Station Washington, DC 20044   If you use a private delivery service, send the signed copy to the address below. Free tax software online Internal Revenue Service Attention: CC:IT&A  (Automatic Rulings Branch) Room 5336 1111 Constitution Avenue, NW Washington, DC 20224    Instead of filing this statement, you can request permission to change from method 2 to method 1 by filing Form 3115. Free tax software online In that case, follow the form instructions for an automatic change. Free tax software online No user fee is required. Free tax software online Co-owners. Free tax software online   If a U. Free tax software online S. Free tax software online savings bond is issued in the names of co-owners, such as you and your child or you and your spouse, interest on the bond is generally taxable to the co-owner who bought the bond. Free tax software online One co-owner's funds used. Free tax software online   If you used your funds to buy the bond, you must pay the tax on the interest. Free tax software online This is true even if you let the other co-owner redeem the bond and keep all the proceeds. Free tax software online Under these circumstances, the co-owner who redeemed the bond will receive a Form 1099-INT at the time of redemption and must provide you with another Form 1099-INT showing the amount of interest from the bond taxable to you. Free tax software online The co-owner who redeemed the bond is a “nominee. Free tax software online ” See Nominee distributions under How To Report Interest Income, later, for more information about how a person who is a nominee reports interest income belonging to another person. Free tax software online Both co-owners' funds used. Free tax software online   If you and the other co-owner each contribute part of the bond's purchase price, the interest is generally taxable to each of you, in proportion to the amount each of you paid. Free tax software online Community property. Free tax software online   If you and your spouse live in a community property state and hold bonds as community property, one-half of the interest is considered received by each of you. Free tax software online If you file separate returns, each of you generally must report one-half of the bond interest. Free tax software online For more information about community property, see Publication 555. Free tax software online Table 1-2. Free tax software online   These rules are also shown in Table 1-2. Free tax software online Child as only owner. Free tax software online   Interest on U. Free tax software online S. Free tax software online savings bonds bought for and registered only in the name of your child is income to your child, even if you paid for the bonds and are named as beneficiary. Free tax software online If the bonds are series EE, series E, or series I bonds, the interest on the bonds is income to your child in the earlier of the year the bonds are cashed or disposed of or the year the bonds mature, unless your child chooses to report the interest income each year. Free tax software online Choice to report interest each year. Free tax software online   The choice to report the accrued interest each year can be made either by your child or by you for your child. Free tax software online This choice is made by filing an income tax return that shows all the interest earned to date, and by stating on the return that your child chooses to report the interest each year. Free tax software online Either you or your child should keep a copy of this return. Free tax software online   Unless your child is otherwise required to file a tax return for any year after making this choice, your child does not have to file a return only to report the annual accrual of U. Free tax software online S. Free tax software online savings bond interest under this choice. Free tax software online However, see Tax on unearned income of certain children , earlier, under General Information. Free tax software online Neither you nor your child can change the way you report the interest unless you request permission from the IRS, as discussed earlier under Change from method 2 . Free tax software online Ownership transferred. Free tax software online   If you bought series E, series EE, or series I bonds entirely with your own funds and had them reissued in your co-owner's name or beneficiary's name alone, you must include in your gross income for the year of reissue all interest that you earned on these bonds and have not previously reported. Free tax software online But, if the bonds were reissued in your name alone, you do not have to report the interest accrued at that time. Free tax software online   This same rule applies when bonds (other than bonds held as community property) are transferred between spouses or incident to divorce. Free tax software online Example. Free tax software online You bought series EE bonds entirely with your own funds. Free tax software online You did not choose to report the accrued interest each year. Free tax software online Later, you transfer the bonds to your former spouse under a divorce agreement. Free tax software online You must include the deferred accrued interest, from the date of the original issue of the bonds to the date of transfer, in your income in the year of transfer. Free tax software online Your former spouse includes in income the interest on the bonds from the date of transfer to the date of redemption. Free tax software online Table 1-2. Free tax software online Who Pays the Tax on U. Free tax software online S. Free tax software online Savings Bond Interest IF . Free tax software online . Free tax software online . Free tax software online THEN the interest must be reported by . Free tax software online . Free tax software online . Free tax software online you buy a bond in your name and the name of another person as co-owners, using only your own funds you. Free tax software online you buy a bond in the name of another person, who is the sole owner of the bond the person for whom you bought the bond. Free tax software online you and another person buy a bond as co-owners, each contributing part of the purchase price both you and the other co-owner, in proportion to the amount each paid for the bond. Free tax software online you and your spouse, who live in a community property state, buy a bond that is community property you and your spouse. Free tax software online If you file separate returns, both you and your spouse generally report one-half of the interest. Free tax software online Purchased jointly. Free tax software online   If you and a co-owner each contributed funds to buy series E, series EE, or series I bonds jointly and later have the bonds reissued in the co-owner's name alone, you must include in your gross income for the year of reissue your share of all the interest earned on the bonds that you have not previously reported. Free tax software online The former co-owner does not have to include in gross income at the time of reissue his or her share of the interest earned that was not reported before the transfer. Free tax software online This interest, however, as well as all interest earned after the reissue, is income to the former co-owner. Free tax software online   This income-reporting rule also applies when the bonds are reissued in the name of your former co-owner and a new co-owner. Free tax software online But the new co-owner will report only his or her share of the interest earned after the transfer. Free tax software online   If bonds that you and a co-owner bought jointly are reissued to each of you separately in the same proportion as your contribution to the purchase price, neither you nor your co-owner has to report at that time the interest earned before the bonds were reissued. Free tax software online Example 1. Free tax software online You and your spouse each spent an equal amount to buy a $1,000 series EE savings bond. Free tax software online The bond was issued to you and your spouse as co-owners. Free tax software online You both postpone reporting interest on the bond. Free tax software online You later have the bond reissued as two $500 bonds, one in your name and one in your spouse's name. Free tax software online At that time neither you nor your spouse has to report the interest earned to the date of reissue. Free tax software online Example 2. Free tax software online You bought a $1,000 series EE savings bond entirely with your own funds. Free tax software online The bond was issued to you and your spouse as co-owners. Free tax software online You both postponed reporting interest on the bond. Free tax software online You later have the bond reissued as two $500 bonds, one in your name and one in your spouse's name. Free tax software online You must report half the interest earned to the date of reissue. Free tax software online Transfer to a trust. Free tax software online   If you own series E, series EE, or series I bonds and transfer them to a trust, giving up all rights of ownership, you must include in your income for that year the interest earned to the date of transfer if you have not already reported it. Free tax software online However, if you are considered the owner of the trust and if the increase in value both before and after the transfer continues to be taxable to you, you can continue to defer reporting the interest earned each year. Free tax software online You must include the total interest in your income in the year you cash or dispose of the bonds or the year the bonds finally mature, whichever is earlier. Free tax software online   The same rules apply to previously unreported interest on series EE or series E bonds if the transfer to a trust consisted of series HH or series H bonds you acquired in a trade for the series EE or series E bonds. Free tax software online See Savings bonds traded , later. Free tax software online Decedents. Free tax software online   The manner of reporting interest income on series E, series EE, or series I bonds, after the death of the owner (decedent), depends on the accounting and income-reporting methods previously used by the decedent. Free tax software online Decedent who reported interest each year. Free tax software online   If the bonds transferred because of death were owned by a person who used an accrual method, or who used the cash method and had chosen to report the interest each year, the interest earned in the year of death up to the date of death must be reported on that person's final return. Free tax software online The person who acquires the bonds includes in income only interest earned after the date of death. Free tax software online Decedent who postponed reporting interest. Free tax software online   If the transferred bonds were owned by a decedent who had used the cash method and had not chosen to report the interest each year, and who had bought the bonds entirely with his or her own funds, all interest earned before death must be reported in one of the following ways. Free tax software online The surviving spouse or personal representative (executor, administrator, etc. Free tax software online ) who files the final income tax return of the decedent can choose to include on that return all interest earned on the bonds before the decedent's death. Free tax software online The person who acquires the bonds then includes in income only interest earned after the date of death. Free tax software online If the choice in (1) is not made, the interest earned up to the date of death is income in respect of the decedent and should not be included in the decedent's final return. Free tax software online All interest earned both before and after the decedent's death (except any part reported by the estate on its income tax return) is income to the person who acquires the bonds. Free tax software online If that person uses the cash method and does not choose to report the interest each year, he or she can postpone reporting it until the year the bonds are cashed or disposed of or the year they mature, whichever is earlier. Free tax software online In the year that person reports the interest, he or she can claim a deduction for any federal estate tax paid on the part of the interest included in the decedent's estate. Free tax software online For more information on income in respect of a decedent, see Publication 559, Survivors, Executors, and Administrators. Free tax software online Example 1. Free tax software online Your uncle, a cash method taxpayer, died and left you a $1,000 series EE bond. Free tax software online He had bought the bond for $500 and had not chosen to report the interest each year. Free tax software online At the date of death, interest of $200 had accrued on the bond, and its value of $700 was included in your uncle's estate. Free tax software online Your uncle's executor chose not to include the $200 accrued interest in your uncle's final income tax return. Free tax software online The $200 is income in respect of the decedent. Free tax software online You are a cash method taxpayer and do not choose to report the interest each year as it is earned. Free tax software online If you cash the bond when it reaches maturity value of $1,000, you report $500 interest income—the difference between maturity value of $1,000 and the original cost of $500. Free tax software online For that year, you can deduct (as a miscellaneous itemized deduction not subject to the 2%-of-adjusted-gross-income limit) any federal estate tax paid because the $200 interest was included in your uncle's estate. Free tax software online Example 2. Free tax software online If, in Example 1 , the executor had chosen to include the $200 accrued interest in your uncle's final return, you would report only $300 as interest when you cashed the bond at maturity. Free tax software online $300 is the interest earned after your uncle's death. Free tax software online Example 3. Free tax software online If, in Example 1 , you make or have made the choice to report the increase in redemption value as interest each year, you include in gross income for the year you acquire the bond all of the unreported increase in value of all series E, series EE, and series I bonds you hold, including the $200 on the bond you inherited from your uncle. Free tax software online Example 4. Free tax software online When your aunt died, she owned series HH bonds that she had acquired in a trade for series EE bonds. Free tax software online You were the beneficiary of these bonds. Free tax software online Your aunt used the cash method and did not choose to report the interest on the series EE bonds each year as it accrued. Free tax software online Your aunt's executor chose not to include any interest earned before your aunt's death on her final return. Free tax software online The income in respect of the decedent is the sum of the unreported interest on the series EE bonds and the interest, if any, payable on the series HH bonds but not received as of the date of your aunt's death. Free tax software online You must report any interest received during the year as income on your return. Free tax software online The part of the interest payable but not received before your aunt's death is income in respect of the decedent and may qualify for the estate tax deduction. Free tax software online For information on when to report the interest on the series EE bonds traded, see Savings bonds traded , later. Free tax software online Savings bonds distributed from a retirement or profit-sharing plan. Free tax software online   If you acquire a U. Free tax software online S. Free tax software online savings bond in a taxable distribution from a retirement or profit-sharing plan, your income for the year of distribution includes the bond's redemption value (its cost plus the interest accrued before the distribution). Free tax software online When you redeem the bond (whether in the year of distribution or later), your interest income includes only the interest accrued after the bond was distributed. Free tax software online To figure the interest reported as a taxable distribution and your interest income when you redeem the bond, see Worksheet for savings bonds distributed from a retirement or profit-sharing plan under How To Report Interest Income, later. Free tax software online Savings bonds traded. Free tax software online   If you postponed reporting the interest on your series EE or series E bonds, you did not recognize taxable income when you traded the bonds for series HH or series H bonds, unless you received cash in the trade. Free tax software online (You cannot trade series I bonds for series HH bonds. Free tax software online After August 31, 2004, you cannot trade any other series of bonds for series HH bonds. Free tax software online ) Any cash you received is income up to the amount of the interest earned on the bonds traded. Free tax software online When your series HH or series H bonds mature, or if you dispose of them before maturity, you report as interest the difference between their redemption value and your cost. Free tax software online Your cost is the sum of the amount you paid for the traded series EE or series E bonds plus any amount you had to pay at the time of the trade. Free tax software online Example. Free tax software online You traded series EE bonds (on which you postponed reporting the interest) for $2,500 in series HH bonds and $223 in cash. Free tax software online You reported the $223 as taxable income on your tax return. Free tax software online At the time of the trade, the series EE bonds had accrued interest of $523 and a redemption value of $2,723. Free tax software online You hold the series HH bonds until maturity, when you receive $2,500. Free tax software online You must report $300 as interest income in the year of maturity. Free tax software online This is the difference between their redemption value, $2,500, and your cost, $2,200 (the amount you paid for the series EE bonds). Free tax software online (It is also the difference between the accrued interest of $523 on the series EE bonds and the $223 cash received on the trade. Free tax software online ) Choice to report interest in year of trade. Free tax software online   You could have chosen to treat all of the previously unreported accrued interest on series EE or series E bonds traded for series HH bonds as income in the year of the trade. Free tax software online If you made this choice, it is treated as a change from method 1. Free tax software online See Change from method 1 under Series EE and series I bonds, earlier. Free tax software online Form 1099-INT for U. Free tax software online S. Free tax software online savings bond interest. Free tax software online   When you cash a bond, the bank or other payer that redeems it must give you a Form 1099-INT if the interest part of the payment you receive is $10 or more. Free tax software online Box 3 of your Form 1099-INT should show the interest as the difference between the amount you received and the amount paid for the bond. Free tax software online However, your Form 1099-INT may show more interest than you have to include on your income tax return. Free tax software online For example, this may happen if any of the following are true. Free tax software online You chose to report the increase in the redemption value of the bond each year. Free tax software online The interest shown on your Form 1099-INT will not be reduced by amounts previously included in income. Free tax software online You received the bond from a decedent. Free tax software online The interest shown on your Form 1099-INT will not be reduced by any interest reported by the decedent before death, or on the decedent's final return, or by the estate on the estate's income tax return. Free tax software online Ownership of the bond was transferred. Free tax software online The interest shown on your Form 1099-INT will not be reduced by interest that accrued before the transfer. Free tax software online You were named as a co-owner, and the other co-owner contributed funds to buy the bond. Free tax software online The interest shown on your Form 1099-INT will not be reduced by the amount you received as nominee for the other co-owner. Free tax software online (See Co-owners , earlier in this section, for more information about the reporting requirements. Free tax software online ) You received the bond in a taxable distribution from a retirement or profit-sharing plan. Free tax software online The interest shown on your Form 1099-INT will not be reduced by the interest portion of the amount taxable as a distribution from the plan and not taxable as interest. Free tax software online (This amount is generally shown on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Free tax software online , for the year of distribution. Free tax software online )   For more information on including the correct amount of interest on your return, see U. Free tax software online S. Free tax software online savings bond interest previously reported or Nominee distributions under How To Report Interest Income, later. Free tax software online    Interest on U. Free tax software online S. Free tax software online savings bonds is exempt from state and local taxes. Free tax software online The Form 1099-INT you receive will indicate the amount that is for U. Free tax software online S. Free tax software online savings bonds interest in box 3. Free tax software online Do not include this income on your state or local income tax return. Free tax software online Education Savings Bond Program You may be able to exclude from income all or part of the interest you receive on the redemption of qualified U. Free tax software online S. Free tax software online savings bonds during the year if you pay qualified higher educational expenses during the same year. Free tax software online This exclusion is known as the Education Savings Bond Program. Free tax software online You do not qualify for this exclusion if your filing status is married filing separately. Free tax software online Form 8815. Free tax software online   Use Form 8815 to figure your exclusion. Free tax software online Attach the form to your Form 1040 or Form 1040A. Free tax software online Qualified U. Free tax software online S. Free tax software online savings bonds. Free tax software online   A qualified U. Free tax software online S. Free tax software online savings bond is a series EE bond issued after 1989 or a series I bond. Free tax software online The bond must be issued either in your name (sole owner) or in your and your spouse's names (co-owners). Free tax software online You must be at least 24 years old before the bond's issue date. Free tax software online For example, a bond bought by a parent and issued in the name of his or her child under age 24 does not qualify for the exclusion by the parent or child. Free tax software online    The issue date of a bond may be earlier than the date the bond is purchased because the issue date assigned to a bond is the first day of the month in which it is purchased. Free tax software online Beneficiary. Free tax software online   You can designate any individual (including a child) as a beneficiary of the bond. Free tax software online Verification by IRS. Free tax software online   If you claim the exclusion, the IRS will check it by using bond redemption information from the Department of Treasury. Free tax software online Qualified expenses. Free tax software online   Qualified higher educational expenses are tuition and fees required for you, your spouse, or your dependent (for whom you claim an exemption) to attend an eligible educational institution. Free tax software online   Qualified expenses include any contribution you make to a qualified tuition program or to a Coverdell education savings account. Free tax software online For information about these programs, see Publication 970, Tax Benefits for Education. Free tax software online   Qualified expenses do not include expenses for room and board or for courses involving sports, games, or hobbies that are not part of a degree or certificate granting program. Free tax software online Eligible educational institutions. Free tax software online   These institutions include most public, private, and nonprofit universities, colleges, and vocational schools that are accredited and eligible to participate in student aid programs run by the Department of Education. Free tax software online Reduction for certain benefits. Free tax software online   You must reduce your qualified higher educational expenses by all of the following tax-free benefits. Free tax software online Tax-free part of scholarships and fellowships. Free tax software online Expenses used to figure the tax-free portion of distributions from a Coverdell ESA. Free tax software online Expenses used to figure the tax-free portion of distributions from a qualified tuition program. Free tax software online Any tax-free payments (other than gifts or inheritances) received as educational assistance, such as: Veterans' educational assistance benefits, Qualified tuition reductions, or Employer-provided educational assistance. Free tax software online Any expense used in figuring the American Opportunity and lifetime learning credits. Free tax software online For information about these benefits, see Publication 970. Free tax software online Amount excludable. Free tax software online   If the total proceeds (interest and principal) from the qualified U. Free tax software online S. Free tax software online savings bonds you redeem during the year are not more than your adjusted qualified higher educational expenses for the year, you may be able to exclude all of the interest. Free tax software online If the proceeds are more than the expenses, you may be able to exclude only part of the interest. Free tax software online   To determine the excludable amount, multiply the interest part of the proceeds by a fraction. Free tax software online The numer
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Free tax software online Publication 523 - Main Content Table of Contents Main HomeVacant land. Free tax software online Factors used to determine main home. Free tax software online Figuring Gain or LossSelling Price Amount Realized Adjusted Basis Amount of Gain or Loss Dispositions Other Than Sales Determining BasisCost As Basis Basis Other Than Cost Adjusted Basis Excluding the GainMaximum Exclusion Ownership and Use Tests Reduced Maximum Exclusion Nonqualified Use Business Use or Rental of HomeUnrecaptured section 1250 gain. Free tax software online Property Used Partly for Business or Rental Reporting the SaleSeller-financed mortgage. Free tax software online Individual taxpayer identification number (ITIN). Free tax software online More information. Free tax software online Comprehensive Examples Special SituationsException for sales to related persons. Free tax software online Deducting Taxes in the Year of SaleForm 1099-S. Free tax software online More information. Free tax software online Recapturing (Paying Back) a Federal Mortgage Subsidy Recapture of First-Time Homebuyer CreditExample. Free tax software online Worksheets How To Get Tax HelpLow Income Taxpayer Clinics Main Home This section explains the term “main home. Free tax software online ” Usually, the home you live in most of the time is your main home and can be a: House, Houseboat, Mobile home, Cooperative apartment, or Condominium. Free tax software online To exclude gain under the rules in this publication, you in most cases must have owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date of sale. Free tax software online Land. Free tax software online   If you sell the land on which your main home is located, but not the house itself, you cannot exclude any gain you have from the sale of the land. Free tax software online Example. Free tax software online You buy a piece of land and move your main home to it. Free tax software online Then, you sell the land on which your main home was located. Free tax software online This sale is not considered a sale of your main home, and you cannot exclude any gain on the sale of the land. Free tax software online Vacant land. Free tax software online   The sale of vacant land is not a sale of your main home unless: The vacant land is adjacent to land containing your home, You owned and used the vacant land as part of your main home, The separate sale of your home satisfies the requirements for exclusion and occurs within 2 years before or 2 years after the date of the sale of the vacant land, and The other requirements for excluding gain from the sale of a main home have been satisfied with respect to the vacant land. Free tax software online If these requirements are met, the sale of the home and the sale of the vacant land are treated as one sale and only one maximum exclusion can be applied to any gain. Free tax software online See Excluding the Gain , later. Free tax software online The destruction of your home is treated as a sale of your home. Free tax software online As a result, you may be able to meet these requirements if you sell vacant land used as a part of your main home within 2 years from the date of the destruction of your main home. Free tax software online For information, see Publication 547. Free tax software online More than one home. Free tax software online   If you have more than one home, you can exclude gain only from the sale of your main home. Free tax software online You must include in income the gain from the sale of any other home. Free tax software online If you have two homes and live in each of them, your main home is ordinarily the one you live in most of the time during the year. Free tax software online Example 1. Free tax software online You own two homes, one in New York and one in Florida. Free tax software online From 2009 through 2013, you live in the New York home for 7 months and in the Florida residence for 5 months of each year. Free tax software online In the absence of facts and circumstances indicating otherwise, the New York home is your main home. Free tax software online You would be eligible to exclude the gain from the sale of the New York home but not of the Florida home in 2013. Free tax software online Example 2. Free tax software online You own a house, but you live in another house that you rent. Free tax software online The rented house is your main home. Free tax software online Example 3. Free tax software online You own two homes, one in Virginia and one in New Hampshire. Free tax software online In 2009 and 2010, you lived in the Virginia home. Free tax software online In 2011 and 2012, you lived in the New Hampshire home. Free tax software online In 2013, you lived again in the Virginia home. Free tax software online Your main home in 2009, 2010, and 2013 is the Virginia home. Free tax software online Your main home in 2011 and 2012 is the New Hampshire home. Free tax software online You would be eligible to exclude gain from the sale of either home (but not both) in 2013. Free tax software online Factors used to determine main home. Free tax software online   In addition to the amount of time you live in each home, other factors are relevant in determining which home is your main home. Free tax software online Those factors include the following. Free tax software online Your place of employment. Free tax software online The location of your family members' main home. Free tax software online Your mailing address for bills and correspondence. Free tax software online The address listed on your: Federal and state tax returns, Driver's license, Car registration, and Voter registration card. Free tax software online The location of the banks you use. Free tax software online The location of recreational clubs and religious organizations of which you are a member. Free tax software online Property used partly as your main home. Free tax software online   If you use only part of the property as your main home, the rules discussed in this publication apply only to the gain or loss on the sale of that part of the property. Free tax software online For details, see Business Use or Rental of Home , later. Free tax software online Figuring Gain or Loss To figure the gain or loss on the sale of your main home, you must know the selling price, the amount realized, and the adjusted basis. Free tax software online Subtract the adjusted basis from the amount realized to get your gain or loss. Free tax software online     Selling price     − Selling expenses       Amount realized     − Adjusted basis       Gain or loss   Gain. Free tax software online   Gain is the excess of the amount realized over the adjusted basis of the property. Free tax software online Loss. Free tax software online   Loss is the excess of the adjusted basis over the amount realized for the property. Free tax software online Selling Price The selling price is the total amount you receive for your home. Free tax software online It includes money and the fair market value of any other property or any other services you receive and all notes, mortgages or other debts assumed by the buyer as part of the sale. Free tax software online Personal property. Free tax software online   The selling price of your home does not include amounts you received for personal property sold with your home. Free tax software online Personal property is property that is not a permanent part of the home. Free tax software online Examples are furniture, draperies, rugs, a washer and dryer, and lawn equipment. Free tax software online Separately stated amounts you received for these items should not be shown on Form 1099-S (discussed later). Free tax software online Any gains from sales of personal property must be included in your income, but not as part of the sale of your home. Free tax software online Payment by employer. Free tax software online   You may have to sell your home because of a job transfer. Free tax software online If your employer pays you for a loss on the sale or for your selling expenses, do not include the payment as part of the selling price. Free tax software online Your employer will include it as wages in box 1 of your Form W-2 and you will include it in your income on Form 1040, line 7, or on Form 1040NR, line 8. Free tax software online Option to buy. Free tax software online   If you grant an option to buy your home and the option is exercised, add the amount you receive for the option to the selling price of your home. Free tax software online If the option is not exercised, you must report the amount as ordinary income in the year the option expires. Free tax software online Report this amount on Form 1040, line 21, or on Form 1040NR, line 21. Free tax software online Form 1099-S. Free tax software online   If you received Form 1099-S, box 2 (gross proceeds) should show the total amount you received for your home. Free tax software online   However, box 2 will not include the fair market value of any services or property other than cash or notes you received or will receive. Free tax software online Instead, box 4 will be checked to indicate your receipt or expected receipt of these items. Free tax software online Amount Realized The amount realized is the selling price minus selling expenses. Free tax software online Selling expenses. Free tax software online   Selling expenses include: Commissions, Advertising fees, Legal fees, and Loan charges paid by the seller, such as loan placement fees or “points. Free tax software online ” Adjusted Basis While you owned your home, you may have made adjustments (increases or decreases) to the basis. Free tax software online This adjusted basis must be determined before you can figure gain or loss on the sale of your home. Free tax software online For information on how to figure your home's adjusted basis, see Determining Basis , later. Free tax software online Amount of Gain or Loss To figure the amount of gain or loss, compare the amount realized to the adjusted basis. Free tax software online Gain on sale. Free tax software online   If the amount realized is more than the adjusted basis, the difference is a gain and, except for any part you can exclude, generally is taxable. Free tax software online Loss on sale. Free tax software online   If the amount realized is less than the adjusted basis, the difference is a loss. Free tax software online Generally, a loss on the sale of your main home cannot be deducted. Free tax software online Jointly owned home. Free tax software online   If you and your spouse sell your jointly owned home and file a joint return, you figure your gain or loss as one taxpayer. Free tax software online Separate returns. Free tax software online   If you file separate returns, each of you must figure your own gain or loss according to your ownership interest in the home. Free tax software online Your ownership interest is generally determined by state law. Free tax software online Joint owners not married. Free tax software online   If you and a joint owner other than your spouse sell your jointly owned home, each of you must figure your own gain or loss according to your ownership interest in the home. Free tax software online Each of you applies the rules discussed in this publication on an individual basis. Free tax software online Dispositions Other Than Sales Some special rules apply to other dispositions of your main home. Free tax software online Foreclosure or repossession. Free tax software online   If your home was foreclosed on or repossessed, you have a disposition. Free tax software online See Publication 4681 to determine if you have ordinary income, gain, or loss. Free tax software online More information. Free tax software online   If part of a home is used for business or rental purposes, see Foreclosures and Repossessions in chapter 1 of Publication 544 for more information. Free tax software online Publication 544 has examples of how to figure gain or loss on a foreclosure or repossession. Free tax software online Abandonment. Free tax software online   If you abandon your home, see Publication 4681 to determine if you have ordinary income, gain, or loss. Free tax software online Trading (exchanging) homes. Free tax software online   If you trade your home for another home, treat the trade as a sale and a purchase. Free tax software online Example. Free tax software online You owned and lived in a home with an adjusted basis of $41,000. Free tax software online A real estate dealer accepted your old home as a trade-in and allowed you $50,000 toward a new home priced at $80,000. Free tax software online This is treated as a sale of your old home for $50,000 with a gain of $9,000 ($50,000 − $41,000). Free tax software online If the dealer had allowed you $27,000 and assumed your unpaid mortgage of $23,000 on your old home, your sales price would still be $50,000 (the $27,000 trade-in allowed plus the $23,000 mortgage assumed). Free tax software online Transfer to spouse. Free tax software online   If you transfer your home to your spouse or you transfer it to your former spouse incident to your divorce, you in most cases have no gain or loss (unless the Exception, discussed next, applies). Free tax software online This is true even if you receive cash or other consideration for the home. Free tax software online As a result, the rules explained in this publication do not apply. Free tax software online   If you owned your home jointly with your spouse and transfer your interest in the home to your spouse, or to your former spouse incident to your divorce, the same rule applies. Free tax software online You have no gain or loss. Free tax software online Exception. Free tax software online   These transfer rules do not apply if your spouse or former spouse is a nonresident alien. Free tax software online In that case, you generally will have a gain or loss. Free tax software online More information. Free tax software online    See Property Settlements in Publication 504, Divorced or Separated Individuals, for more information. Free tax software online Involuntary conversion. Free tax software online   You have a disposition when your home is destroyed or condemned and you receive other property or money in payment, such as insurance or a condemnation award. Free tax software online This is treated as a sale and you may be able to exclude all or part of any gain from the destruction or condemnation of your home, as explained later under Special Situations (see Home destroyed or condemned ). Free tax software online Determining Basis You need to know your basis in your home to figure any gain or loss when you sell it. Free tax software online Your basis in your home is determined by how you got the home. Free tax software online Generally, your basis is its cost if you bought it or built it. Free tax software online If you got it in some other way (inheritance, gift, etc. Free tax software online ), your basis is generally either its fair market value when you received it or the adjusted basis of the previous owner. Free tax software online While you owned your home, you may have made adjustments (increases or decreases) to your home's basis. Free tax software online The result of these adjustments is your home's adjusted basis, which is used to figure gain or loss on the sale of your home. Free tax software online To figure your adjusted basis, you can use Worksheet 1, near the end of this publication. Free tax software online Filled-in examples of that worksheet are included in the Comprehensive Examples , later. Free tax software online Cost As Basis The cost of property is the amount you paid for it in cash, debt obligations, other property, or services. Free tax software online Purchase. Free tax software online   If you bought your home, your basis is its cost to you. Free tax software online This includes the purchase price and certain settlement or closing costs. Free tax software online In most cases, your purchase price includes your down payment and any debt, such as a first or second mortgage or notes you gave the seller in payment for the home. Free tax software online If you build, or contract to build, a new home, your purchase price can include costs of construction, as discussed later. Free tax software online Seller-paid points. Free tax software online   If the person who sold you your home paid points on your loan, you may have to reduce your home's basis by the amount of the points, as shown in the following chart. Free tax software online    IF you bought your home. Free tax software online . Free tax software online . Free tax software online THEN reduce your home's basis by the seller-paid points. Free tax software online . Free tax software online . Free tax software online after 1990 but before April 4, 1994 only if you deducted them as home mortgage interest in the year paid. Free tax software online after April 3, 1994 even if you did not deduct them. Free tax software online Settlement fees or closing costs. Free tax software online   When you bought your home, you may have paid settlement fees or closing costs in addition to the contract price of the property. Free tax software online You can include in your basis some of the settlement fees and closing costs you paid for buying the home, but not the fees and costs for getting a mortgage loan. Free tax software online A fee paid for buying the home is any fee you would have had to pay even if you paid cash for the home (that is, without the need for financing). Free tax software online   Settlement fees do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Free tax software online   Some of the settlement fees or closing costs that you can include in your basis are: Abstract fees (abstract of title fees), Charges for installing utility services, Legal fees (including fees for the title search and preparing the sales contract and deed), Recording fees, Survey fees, Transfer or stamp taxes, Owner's title insurance, and Any amounts the seller owes that you agree to pay, such as: Certain real estate taxes (discussed later), Back interest, Recording or mortgage fees, Charges for improvements or repairs, and Sales commissions. Free tax software online   Some settlement fees and closing costs you cannot include in your basis are: Fire insurance premiums, Rent for occupancy of the house before closing, Charges for utilities or other services related to occupancy of the house before closing, Any fee or cost that you deducted as a moving expense (allowed for certain fees and costs before 1994), Charges connected with getting a mortgage loan, such as: Mortgage insurance premiums (including funding fees connected with loans guaranteed by the Department of Veterans Affairs), Loan assumption fees, Cost of a credit report, Fee for an appraisal required by a lender, and Fees for refinancing a mortgage. Free tax software online Real estate taxes. Free tax software online   Real estate taxes for the year you bought your home may affect your basis, as shown in the following chart. Free tax software online    IF. Free tax software online . Free tax software online . Free tax software online AND. Free tax software online . Free tax software online . Free tax software online THEN the taxes. Free tax software online . Free tax software online . Free tax software online you pay taxes that the seller owed on the home up to the date of sale the seller does not reimburse you are added to the basis of your home. Free tax software online the seller reimburses you do not affect the basis of your home. Free tax software online the seller pays taxes for you (taxes owed beginning on the date of sale) you do not reimburse the seller are subtracted from the basis of your home. Free tax software online you reimburse the seller do not affect the basis of your home. Free tax software online Construction. Free tax software online   If you contracted to have your house built on land you own, your basis is: The cost of the land, plus The amount it cost you to complete the house, including: The cost of labor and materials, Any amounts paid to a contractor, Any architect's fees, Building permit charges, Utility meter and connection charges, and Legal fees directly connected with building the house. Free tax software online   Your cost includes your down payment and any debt such as a first or second mortgage or notes you gave the seller or builder. Free tax software online It also includes certain settlement or closing costs. Free tax software online You may have to reduce your basis by points the seller paid for you. Free tax software online For more information, see Seller-paid points and Settlement fees or closing costs , earlier. Free tax software online Built by you. Free tax software online   If you built all or part of your house yourself, its basis is the total amount it cost you to complete it. Free tax software online Do not include in the cost of the house: The value of your own labor, or The value of any other labor you did not pay for. Free tax software online Temporary housing. Free tax software online   If a builder gave you temporary housing while your home was being finished, you must reduce your basis by the part of the contract price that was for the temporary housing. Free tax software online To figure the amount of the reduction, multiply the contract price by a fraction. Free tax software online The numerator is the value of the temporary housing, and the denominator is the sum of the value of the temporary housing plus the value of the new home. Free tax software online Cooperative apartment. Free tax software online   If you are a tenant-stockholder in a cooperative housing corporation, your basis in the cooperative apartment used as your home is usually the cost of your stock in the corporation. Free tax software online This may include your share of a mortgage on the apartment building. Free tax software online Condominium. Free tax software online   To determine your basis in a condominium apartment used as your home, use the same rules as for any other home. Free tax software online Basis Other Than Cost You must use a basis other than cost, such as adjusted basis or fair market value, if you received your home as a gift, inheritance, a trade, or from your spouse. Free tax software online These situations are discussed in the following pages. Free tax software online Also, the instructions for Worksheet 1 (near the end of the publication) address each of these issues. Free tax software online Other special rules may apply in certain situations. Free tax software online If you converted the property, or some part of it, to business or rental use, see Property Changed to Business or Rental Use, in Publication 551. Free tax software online Home received as gift. Free tax software online   Use the following chart to find the basis of a home you received as a gift. Free tax software online IF the donor's adjusted basis at the time of the gift was. Free tax software online . Free tax software online . Free tax software online THEN your basis is. Free tax software online . Free tax software online . Free tax software online more than the fair market value of the home at that time the same as the donor's adjusted basis at the time of the gift. Free tax software online   Exception: If using the donor's adjusted basis results in a loss when you sell the home, you must use the fair market value of the home at the time of the gift as your basis. Free tax software online If using the fair market value results in a gain, you have neither gain nor loss. Free tax software online equal to or less than the fair market value at that time, and you received the gift before 1977 the smaller of the: • donor's adjusted basis, plus  any federal gift tax paid on  the gift, or • the home's fair market value  at the time of the gift. Free tax software online equal to or less than the fair market value at that time, and you received the gift after 1976 the same as the donor's adjusted basis, plus the part of any federal gift tax paid that is due to the net increase in value of the home (explained next). Free tax software online Fair market value. Free tax software online   The fair market value of property at the time of the gift is the value of the property as appraised for purposes of the federal gift tax. Free tax software online If the gift was not subject to the federal gift tax, the fair market value is the value as appraised for the purposes of a state gift tax. Free tax software online Part of federal gift tax due to net increase in value. Free tax software online   Figure the part of the federal gift tax paid that is due to the net increase in value of the home by multiplying the total federal gift tax paid by a fraction. Free tax software online The numerator of the fraction is the net increase in the value of the home, and the denominator is the value of the home for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. Free tax software online The net increase in the value of the home is its fair market value minus the donor's adjusted basis immediately before the gift. Free tax software online Home acquired from a decedent who died before or after 2010. Free tax software online   If you inherited your home from a decedent who died before or after 2010, your basis is the fair market value of the property on the date of the decedent's death (or the later alternate valuation date chosen by the personal representative of the estate). Free tax software online If an estate tax return was filed or required to be filed, the value of the property listed on the estate tax return is your basis. Free tax software online If a federal estate tax return did not have to be filed, your basis in the home is the same as its appraised value at the date of death, for purposes of state inheritance or transmission taxes. Free tax software online Surviving spouse. Free tax software online   If you are a surviving spouse and you owned your home jointly, your basis in the home will change. Free tax software online The new basis for the interest your spouse owned will be its fair market value on the date of death (or alternate valuation date). Free tax software online The basis in your interest will remain the same. Free tax software online Your new basis in the home is the total of these two amounts. Free tax software online   If you and your spouse owned the home either as tenants by the entirety or as joint tenants with right of survivorship, you will each be considered to have owned one-half of the home. Free tax software online Example. Free tax software online Your jointly owned home (owned as joint tenants with right of survivorship) had an adjusted basis of $50,000 on the date of your spouse's death, and the fair market value on that date was $100,000. Free tax software online Your new basis in the home is $75,000 ($25,000 for one-half of the adjusted basis plus $50,000 for one-half of the fair market value). Free tax software online Community property. Free tax software online   In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), each spouse is usually considered to own half of the community property. Free tax software online When either spouse dies, the total fair market value of the community property becomes the basis of the entire property, including the part belonging to the surviving spouse. Free tax software online For this to apply, at least half the value of the community property interest must be includible in the decedent's gross estate, whether or not the estate must file a return. Free tax software online   For more information about community property, see Publication 555, Community Property. Free tax software online    If you are selling a home in which you acquired an interest from a decedent who died in 2010, see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, to determine your basis. Free tax software online Home received as trade. Free tax software online   If you acquired your home as a trade for other property, in most cases, the basis of your home is the fair market value (at the time of the trade) of the property you gave up. Free tax software online If you traded one home for another, you have made a sale and purchase. Free tax software online In that case, you may have a gain. Free tax software online See Trading (exchanging) homes under Dispositions Other Than Sales, earlier, for an example of figuring the gain. Free tax software online Home received from spouse. Free tax software online   If you received your home from your spouse or from your former spouse incident to your divorce, your basis in the home depends on the date of the transfer. Free tax software online Transfers after July 18, 1984. Free tax software online   If you received the home after July 18, 1984, there was no gain or loss on the transfer. Free tax software online In most cases, your basis in this home is the same as your spouse's (or former spouse's) adjusted basis just before you received it. Free tax software online This rule applies even if you received the home in exchange for cash, the release of marital rights, the assumption of liabilities, or other considerations. Free tax software online   If you owned a home jointly with your spouse and your spouse transferred his or her interest in the home to you, in most cases, your basis in the half interest received from your spouse is the same as your spouse's adjusted basis just before the transfer. Free tax software online This also applies if your former spouse transferred his or her interest in the home to you incident to your divorce. Free tax software online Your basis in the half interest you already owned does not change. Free tax software online Your new basis in the home is the total of these two amounts. Free tax software online Transfers before July 19, 1984. Free tax software online   If you received your home before July 19, 1984, in exchange for your release of marital rights, in most cases, your basis in the home is generally its fair market value at the time you received it. Free tax software online More information. Free tax software online   For more information on property received from a spouse or former spouse, see Property Settlements in Publication 504. Free tax software online Involuntary conversion. Free tax software online   If your home is destroyed or condemned, you may receive insurance proceeds or a condemnation award. Free tax software online If you acquired a replacement home with these proceeds, the basis is its cost decreased by any gain not recognized on the conversion under the rules explained in: Publication 547, in the case of a home that was destroyed, or Chapter 1 of Publication 544, in the case of a home that was condemned. Free tax software online Example. Free tax software online A fire destroyed your home that you owned and used for only 6 months. Free tax software online The home had an adjusted basis of $80,000 and the insurance company paid you $130,000 for the loss. Free tax software online Your gain is $50,000 ($130,000 − $80,000). Free tax software online You bought a replacement home for $100,000. Free tax software online The part of your gain that is taxable is $30,000 ($130,000 − $100,000), the unspent part of the payment from the insurance company. Free tax software online The rest of the gain ($20,000) is not taxable, so that amount reduces your basis in the new home. Free tax software online The basis of the new home is figured as follows. Free tax software online Cost of replacement home $100,000 Minus: Gain not recognized 20,000 Basis of the replacement home $80,000 More information. Free tax software online   For more information about basis, see Publication 551. Free tax software online Adjusted Basis Adjusted basis is your cost or other basis increased or decreased by certain amounts. Free tax software online To figure your adjusted basis, you can use Worksheet 1, found toward the end of this publication. Free tax software online Filled-in examples of that worksheet are included in Comprehensive Examples , later. Free tax software online Recordkeeping. Free tax software online You should keep records to prove your home's adjusted basis. Free tax software online Ordinarily, you must keep records for 3 years after the due date for filing your return for the tax year in which you sold your home. Free tax software online But if you sold a home before May 7, 1997, and postponed tax on any gain, the basis of that home affects the basis of the new home you bought. Free tax software online Keep records proving the basis of both homes as long as they are needed for tax purposes. Free tax software online The records you should keep include: Proof of the home's purchase price and purchase expenses; Receipts and other records for all improvements, additions, and other items that affect the home's adjusted basis; Any worksheets or other computations you used to figure the adjusted basis of the home you sold, the gain or loss on the sale, the exclusion, and the taxable gain; Any Form 982 you filed to exclude any discharge of qualified principal residence indebtedness; Any Form 2119, Sale of Your Home, you filed to postpone gain from the sale of a previous home before May 7, 1997; and Any worksheets you used to prepare Form 2119, such as the Adjusted Basis of Home Sold Worksheet or the Capital Improvements Worksheet from the Form 2119 instructions, or other source of computations. Free tax software online Increases to Basis These include the following. Free tax software online Additions and other improvements that have a useful life of more than 1 year. Free tax software online Special assessments for local improvements. Free tax software online Amounts you spent after a casualty to restore damaged property. Free tax software online Improvements. Free tax software online   These add to the value of your home, prolong its useful life, or adapt it to new uses. Free tax software online You add the cost of additions and other improvements to the basis of your property. Free tax software online   The following chart lists some other examples of improvements. Free tax software online Examples of Improvements That Increase Basis Additions Bedroom Bathroom Deck Garage Porch Patio Heating & Air Conditioning Heating system Central air conditioning Furnace Duct work Central humidifier Filtration system Lawn & Grounds Landscaping Driveway Walkway Fence  Retaining wall Sprinkler system Swimming pool  Miscellaneous Storm windows, doors New roof Central vacuum Wiring upgrades Satellite dish Security system  Plumbing Septic system Water heater Soft water system Filtration system  Interior Improvements Built-in appliances  Kitchen modernization  Flooring Wall-to-wall carpeting  Insulation Attic Walls Floors Pipes and duct work Improvements no longer part of home. Free tax software online   Your home's adjusted basis does not include the cost of any improvements that are replaced and are no longer part of the home. Free tax software online Example. Free tax software online You put wall-to-wall carpeting in your home 15 years ago. Free tax software online Later, you replaced that carpeting with new wall-to-wall carpeting. Free tax software online The cost of the old carpeting you replaced is no longer part of your home's adjusted basis. Free tax software online Repairs. Free tax software online   These maintain your home in good condition but do not add to its value or prolong its life. Free tax software online You do not add their cost to the basis of your property. Free tax software online Examples. Free tax software online Repainting your house inside or outside, fixing your gutters or floors, repairing leaks or plastering, and replacing broken window panes are examples of repairs. Free tax software online Exception. Free tax software online   The entire job is considered an improvement if items that would otherwise be considered repairs are done as part of an extensive remodeling or restoration of your home. Free tax software online For example, if you have a casualty and your home is damaged, increase your basis by the amount you spend on repairs that restore the property to its pre-casualty condition. Free tax software online Decreases to Basis These include the following. Free tax software online Discharge of qualified principal residence indebtedness that was excluded from income (but not below zero). Free tax software online For details, see Publication 4681. Free tax software online Some or all of the cancellation of debt income that was excluded due to your bankruptcy or insolvency. Free tax software online For details, see Publication 4681. Free tax software online Gain you postponed from the sale of a previous home before May 7, 1997. Free tax software online Deductible casualty losses. Free tax software online Insurance payments you received or expect to receive for casualty losses. Free tax software online Payments you received for granting an easement or right-of-way. Free tax software online Depreciation allowed or allowable if you used your home for business or rental purposes. Free tax software online Energy-related credits allowed for expenditures made on the residence. Free tax software online (Reduce the increase in basis otherwise allowable for expenditures on the residence by the amount of credit allowed for those expenditures. Free tax software online ) Adoption credit you claimed for improvements added to the basis of your home. Free tax software online Nontaxable payments from an adoption assistance program of your employer you used for improvements you added to the basis of your home. Free tax software online Energy conservation subsidy excluded from your gross income because you received it (directly or indirectly) from a public utility after 1992 to buy or install any energy conservation measure. Free tax software online An energy conservation measure is an installation or modification primarily designed either to reduce consumption of electricity or natural gas or to improve the management of energy demand for a home. Free tax software online District of Columbia first-time homebuyer credit allowed on the purchase of a principal residence in the District of Columbia. Free tax software online General sales taxes claimed as an itemized deduction on Schedule A (Form 1040) that were imposed on the purchase of personal property, such as a houseboat used as your home or a mobile home. Free tax software online Discharges of qualified principal residence indebtedness. Free tax software online   You may be able to exclude from gross income a discharge of qualified principal residence indebtedness. Free tax software online This exclusion applies to discharges made after 2006 and before 2014. Free tax software online If you choose to exclude this income, you must reduce (but not below zero) the basis of your principal residence by the amount excluded from gross income. Free tax software online   File Form 982 with your tax return. Free tax software online See the form's instructions for detailed information. Free tax software online    A decrease in basis due to a discharge of qualified principal residence indebtedness that is excluded from income occurs only if you retain ownership of the principal residence after a discharge. Free tax software online In most cases, this would occur in a refinancing or a restructuring of the mortgage. Free tax software online Excluding the Gain You may qualify to exclude from your income all or part of any gain from the sale of your main home. Free tax software online This means that, if you qualify, you will not have to pay tax on the gain up to the limit described under Maximum Exclusion , next. Free tax software online To qualify, you must meet the ownership and use tests described later. Free tax software online You can choose not to take the exclusion by including the gain from the sale in your gross income on your tax return for the year of the sale. Free tax software online This choice can be made (or revoked) at any time before the expiration of a 3-year period beginning on the due date of your return (not including extensions) for the year of the sale. Free tax software online You can use Worksheet 2 (near the end of this publication) to figure the amount of your exclusion and your taxable gain, if any. Free tax software online If you have any taxable gain from the sale of your home, you may have to increase your withholding or make estimated tax payments. Free tax software online See Publication 505, Tax Withholding and Estimated Tax. Free tax software online Maximum Exclusion You can exclude up to $250,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if all of the following are true. Free tax software online You meet the ownership test. Free tax software online You meet the use test. Free tax software online During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home. Free tax software online For details on gain allocated to periods of nonqualified use, see Nonqualified Use , later. Free tax software online If you and another person owned the home jointly but file separate returns, each of you can exclude up to $250,000 of gain from the sale of your interest in the home if each of you meets the three conditions just listed. Free tax software online You may be able to exclude up to $500,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if you are married and file a joint return and meet the requirements listed in the discussion of the special rules for joint returns, later, under Married Persons . Free tax software online Ownership and Use Tests To claim the exclusion, you must meet the ownership and use tests. Free tax software online This means that during the 5-year period ending on the date of the sale, you must have: Owned the home for at least 2 years (the ownership test), and Lived in the home as your main home for at least 2 years (the use test). Free tax software online Exception. Free tax software online   If you owned and lived in the property as your main home for less than 2 years, you can still claim an exclusion in some cases. Free tax software online However, the maximum amount you may be able to exclude will be reduced. Free tax software online See Reduced Maximum Exclusion , later. Free tax software online Example 1—home owned and occupied for at least 2 years. Free tax software online Mya bought and moved into her main home in September 2011. Free tax software online She sold the home at a gain in October 2013. Free tax software online During the 5-year period ending on the date of sale in October 2013, she owned and lived in the home for more than 2 years. Free tax software online She meets the ownership and use tests. Free tax software online Example 2—ownership test met but use test not met. Free tax software online Ayden bought a home, lived in it for 6 months, moved out, and never occupied the home again. Free tax software online He later sold the home for a gain in June 2013. Free tax software online He owned the home during the entire 5-year period ending on the date of sale. Free tax software online He meets the ownership test but not the use test. Free tax software online He cannot exclude any part of his gain on the sale unless he qualified for a reduced maximum exclusion (explained later). Free tax software online Period of Ownership and Use The required 2 years of ownership and use during the 5-year period ending on the date of the sale do not have to be continuous nor do they both have to occur at the same time. Free tax software online You meet the tests if you can show that you owned and lived in the property as your main home for either 24 full months or 730 days (365 × 2) during the 5-year period ending on the date of sale. Free tax software online Example. Free tax software online Naomi bought and moved into a house in July 2009. Free tax software online She lived there for 13 months and then moved in with a friend. Free tax software online She later moved back into her house and lived there for 12 months until she sold it in August 2013. Free tax software online Naomi meets the ownership and use tests because, during the 5-year period ending on the date of sale, she owned the house for more than 2 years and lived in it for a total of 25 (13 + 12) months. Free tax software online Temporary absence. Free tax software online   Short temporary absences for vacations or other seasonal absences, even if you rent out the property during the absences, are counted as periods of use. Free tax software online The following examples assume that the reduced maximum exclusion (discussed later) does not apply to the sales. Free tax software online Example 1. Free tax software online David Johnson, who is single, bought and moved into his home on February 1, 2011. Free tax software online Each year during 2011 and 2012, David left his home for a 2-month summer vacation. Free tax software online David sold the house on March 1, 2013. Free tax software online Although the total time David lived in his home is less than 2 years (21 months), he meets the use requirement and may exclude gain. Free tax software online The 2-month vacations are short temporary absences and are counted as periods of use in determining whether David used the home for the required 2 years. Free tax software online Example 2. Free tax software online Professor Paul Beard, who is single, bought and moved into a house in December 2010, went abroad for a 1-year sabbatical leave in January 2012, returned to the house in January 2013, and sold it at a gain in February 2013. Free tax software online Because his leave was not a short temporary absence, he cannot include the period of leave to meet the 2-year use test. Free tax software online He cannot exclude any part of his gain because he did not use the residence for the required 2 years. Free tax software online Ownership and use tests met at different times. Free tax software online   You can meet the ownership and use tests during different 2-year periods. Free tax software online However, you must meet both tests during the 5-year period ending on the date of the sale. Free tax software online Example. Free tax software online Beginning in 2002, Helen Jones lived in a rented apartment. Free tax software online The apartment building was later converted to condominiums, and she bought her same apartment on December 3, 2010. Free tax software online In 2011, Helen became ill and on April 14 of that year she moved to her daughter's home. Free tax software online On July 12, 2013, while still living in her daughter's home, she sold her condominium. Free tax software online Helen can exclude gain on the sale of her condominium because she met the ownership and use tests during the 5-year period from July 13, 2008, to July 12, 2013, the date she sold the condominium. Free tax software online She owned her condominium from December 3, 2010, to July 12, 2013 (more than 2 years). Free tax software online She lived in the property from July 13, 2008 (the beginning of the 5-year period), to April 14, 2011 (more than 2 years). Free tax software online The time Helen lived in her daughter's home during the 5-year period can be counted toward her period of ownership, and the time she lived in her rented apartment during the 5-year period can be counted toward her period of use. Free tax software online Cooperative apartment. Free tax software online   If you sold stock as a tenant-shareholder in a cooperative housing corporation, the ownership and use tests are met if, during the 5-year period ending on the date of sale, you: Owned the stock for at least 2 years, and Lived in the house or apartment that the stock entitled you to occupy as your main home for at least 2 years. Free tax software online Exceptions to Ownership and Use Tests The following sections contain exceptions to the ownership and use tests for certain taxpayers. Free tax software online Exception for individuals with a disability. Free tax software online   There is an exception to the use test if: You become physically or mentally unable to care for yourself, and You owned and lived in your home as your main home for a total of at least 1 year during the 5-year period before the sale of your home. Free tax software online Under this exception, you are considered to live in your home during any time within the 5-year period that you own the home and live in a facility (including a nursing home) licensed by a state or political subdivision to care for persons in your condition. Free tax software online   If you meet this exception to the use test, you still have to meet the 2-out-of-5-year ownership test to claim the exclusion. Free tax software online Previous home destroyed or condemned. Free tax software online   For the ownership and use tests, you add the time you owned and lived in a previous home that was destroyed or condemned to the time you owned and lived in the replacement home on whose sale you wish to exclude gain. Free tax software online This rule applies if any part of the basis of the home you sold depended on the basis of the destroyed or condemned home (see Involuntary Conversions in Publication 551). Free tax software online Otherwise, you must have owned and lived in the same home for 2 of the 5 years before the sale to qualify for the exclusion. Free tax software online Members of the uniformed services or Foreign Service, employees of the intelligence community, or employees or volunteers of the Peace Corps. Free tax software online   You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve on qualified official extended duty (defined later) as a member of the uniformed services or Foreign Service of the United States, or as an employee of the intelligence community. Free tax software online You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve outside the United States either as an employee of the Peace Corps on qualified official extended duty (defined later) or as an enrolled volunteer or volunteer leader of the Peace Corps. Free tax software online This means that you may be able to meet the 2-year use test even if, because of your service, you did not actually live in your home for at least the required 2 years during the 5-year period ending on the date of sale. Free tax software online   If this helps you qualify to exclude gain, you can choose to have the 5-year test period suspended by filing a return for the year of sale that does not include the gain. Free tax software online Example. Free tax software online John bought and moved into a home in 2005. Free tax software online He lived in it as his main home for 2½ years. Free tax software online For the next 6 years, he did not live in it because he was on qualified official extended duty with the Army. Free tax software online He then sold the home at a gain in 2013. Free tax software online To meet the use test, John chooses to suspend the 5-year test period for the 6 years he was on qualified official extended duty. Free tax software online This means he can disregard those 6 years. Free tax software online Therefore, John's 5-year test period consists of the 5 years before he went on qualified official extended duty. Free tax software online He meets the ownership and use tests because he owned and lived in the home for 2½ years during this test period. Free tax software online Period of suspension. Free tax software online   The period of suspension cannot last more than 10 years. Free tax software online Together, the 10-year suspension period and the 5-year test period can be as long as, but no more than, 15 years. Free tax software online You cannot suspend the 5-year period for more than one property at a time. Free tax software online You can revoke your choice to suspend the 5-year period at any time. Free tax software online Example. Free tax software online Mary bought a home on April 1, 1997. Free tax software online She used it as her main home until August 31, 2000. Free tax software online On September 1, 2000, she went on qualified official extended duty with the Navy. Free tax software online She did not live in the house again before selling it on July 31, 2013. Free tax software online Mary chooses to use the entire 10-year suspension period. Free tax software online Therefore, the suspension period would extend back from July 31, 2013, to August 1, 2003, and the 5-year test period would extend back to August 1, 1998. Free tax software online During that period, Mary owned the house all 5 years and lived in it as her main home from August 1, 1998, until August 31, 2000, a period of more than 24 months. Free tax software online She meets the ownership and use tests because she owned and lived in the home for at least 2 years during this test period. Free tax software online Uniformed services. Free tax software online   The uniformed services are: The Armed Forces (the Army, Navy, Air Force, Marine Corps, and Coast Guard), The commissioned corps of the National Oceanic and Atmospheric Administration, and The commissioned corps of the Public Health Service. Free tax software online Foreign Service member. Free tax software online   For purposes of the choice to suspend the 5-year test period for ownership and use, you are a member of the Foreign Service if you are any of the following. Free tax software online A Chief of mission. Free tax software online An Ambassador at large. Free tax software online A member of the Senior Foreign Service. Free tax software online A Foreign Service officer. Free tax software online Part of the Foreign Service personnel. Free tax software online Employee of the intelligence community. Free tax software online   For purposes of the choice to suspend the 5-year test period for ownership and use, you are an employee of the intelligence community if you are an employee of any of the following. Free tax software online The Office of the Director of National Intelligence. Free tax software online The Central Intelligence Agency. Free tax software online The National Security Agency. Free tax software online The Defense Intelligence Agency. Free tax software online The National Geospatial-Intelligence Agency. Free tax software online The National Reconnaissance Office and any other office within the Department of Defense for the collection of specialized national intelligence through reconnaissance programs. Free tax software online Any of the intelligence elements of the Army, the Navy, the Air Force, the Marine Corps, the Federal Bureau of Investigation, the Department of Treasury, the Department of Energy, and the Coast Guard. Free tax software online The Bureau of Intelligence and Research of the Department of State. Free tax software online Any of the elements of the Department of Homeland Security concerned with the analyses of foreign intelligence information. Free tax software online Qualified official extended duty. Free tax software online   You are on qualified official extended duty if you are on extended duty while: Serving at a duty station at least 50 miles from your main home, or Living in Government quarters under Government orders. Free tax software online   You are on extended duty when you are called or ordered to active duty for a period of more than 90 days or for an indefinite period. Free tax software online Married Persons If you and your spouse file a joint return for the year of sale and one spouse meets the ownership and use tests, you can exclude up to $250,000 of the gain. Free tax software online (But see Special rules for joint returns, next. Free tax software online ) Special rules for joint returns. Free tax software online   You can exclude up to $500,000 of the gain on the sale of your main home if all of the following are true. Free tax software online You are married and file a joint return for the year. Free tax software online Either you or your spouse meets the ownership test. Free tax software online Both you and your spouse meet the use test. Free tax software online During the 2-year period ending on the date of the sale, neither you nor your spouse excluded gain from the sale of another home. Free tax software online If either spouse does not satisfy all these requirements, the maximum exclusion that can be claimed by the couple is the total of the maximum exclusions that each spouse would qualify for if not married and the amounts were figured separately. Free tax software online For this purpose, each spouse is treated as owning the property during the period that either spouse owned the property. Free tax software online Example 1—one spouse sells a home. Free tax software online Emily sells her home in June 2013 for a gain of $300,000. Free tax software online She marries Jamie later in the year. Free tax software online She meets the ownership and use tests, but Jamie does not. Free tax software online Emily can exclude up to $250,000 of gain on a separate or joint return for 2013. Free tax software online The $500,000 maximum exclusion for certain joint returns does not apply because Jamie does not meet the use test. Free tax software online Example 2—each spouse sells a home. Free tax software online The facts are the same as in Example 1 except that Jamie also sells a home in 2013 for a gain of $200,000 before he marries Emily. Free tax software online He meets the ownership and use tests on his home, but Emily does not. Free tax software online Emily can exclude $250,000 of gain and Jamie can exclude $200,000 of gain on the respective sales of their individual homes. Free tax software online However, Emily cannot use Jamie's unused exclusion to exclude more than $250,000 of gain. Free tax software online Therefore, Emily and Jamie must recognize $50,000 of gain on the sale of Emily's home. Free tax software online The $500,000 maximum exclusion for certain joint returns does not apply because Emily and Jamie do not both meet the use test for the same home. Free tax software online Sale of main home by surviving spouse. Free tax software online   If your spouse died and you did not remarry before the date of sale, you are considered to have owned and lived in the property as your main home during any period of time when your spouse owned and lived in it as a main home. Free tax software online   If you meet all of the following requirements, you may qualify to exclude up to $500,000 of any gain from the sale or exchange of your main home. Free tax software online The sale or exchange took place after 2008. Free tax software online The sale or exchange took place no more than 2 years after the date of death of your spouse. Free tax software online You have not remarried. Free tax software online You and your spouse met the use test at the time of your spouse's death. Free tax software online You or your spouse met the ownership test at the time of your spouse's death. Free tax software online Neither you nor your spouse excluded gain from the sale of another home during the last 2 years before the date of death. Free tax software online The ownership and use tests were described earlier. Free tax software online Example. Free tax software online Harry owned and used a house as his main home since 2009. Free tax software online Harry and Wilma married on July 1, 2013, and from that date they used Harry's house as their main home. Free tax software online Harry died on August 15, 2013, and Wilma inherited the property. Free tax software online Wilma sold the property on September 1, 2013, at which time she had not remarried. Free tax software online Although Wilma owned and used the house for less than 2 years, Wilma is considered to have satisfied the ownership and use tests because her period of ownership and use includes the period that Harry owned and used the property before death. Free tax software online Home transferred from spouse. Free tax software online   If your home was transferred to you by your spouse (or former spouse if the transfer was incident to divorce), you are considered to have owned it during any period of time when your spouse owned it. Free tax software online Use of home after divorce. Free tax software online   You are considered to have used property as your main home during any period when: You owned it, and Your spouse or former spouse is allowed to live in it under a divorce or separation instrument and uses it as his or her main home. Free tax software online Reduced Maximum Exclusion If you fail to meet the requirements to qualify for the $250,000 or $500,000 exclusion, you may still qualify for a reduced exclusion. Free tax software online This applies to those who: Fail to meet the ownership and use tests, or Have used the exclusion within 2 years of selling their current home. Free tax software online In both cases, to qualify for a reduced exclusion, the sale of your main home must be due to one of the following reasons. Free tax software online A change in place of employment. Free tax software online Health. Free tax software online Unforeseen circumstances. Free tax software online Qualified individual. Free tax software online   For purposes of the reduced maximum exclusion, a qualified individual is any of the following. Free tax software online You. Free tax software online Your spouse. Free tax software online A co-owner of the home. Free tax software online A person whose main home is the same as yours. Free tax software online Primary reason for sale. Free tax software online   One of the three reasons above will be considered to be the primary reason you sold your home if either (1) or (2) is true. Free tax software online You qualify under a “safe harbor. Free tax software online ” This is a specific set of facts and circumstances that, if applicable, qualifies you to claim a reduced maximum exclusion. Free tax software online Safe harbors corresponding to the reasons listed above are described later. Free tax software online A safe harbor does not apply, but you can establish, based on facts and circumstances, that the primary reason for the sale is a change in place of employment, health, or unforeseen circumstances. Free tax software online  Factors that may be relevant in determining your primary reason for sale include whether: Your sale and the circumstances causing it were close in time, The circumstances causing your sale occurred during the time you owned and used the property as your main home, The circumstances causing your sale were not reasonably foreseeable when you began using the property as your main home, Your financial ability to maintain the property became materially impaired, The suitability of the property as your main home materially changed, and During the time you owned the property, you used it as your home. Free tax software online Change in Place of Employment You may qualify for a reduced exclusion if the primary reason for the sale of your main home is a change in the location of employment of a qualified individual. Free tax software online Employment. Free tax software online   For this purpose, employment includes the start of work with a new employer or continuation of work with the same employer. Free tax software online It also includes the start or continuation of self-employment. Free tax software online Distance safe harbor. Free tax software online   A change in place of employment is considered to be the reason you sold your home if: The change occurred during the period you owned and used the property as your main home, and The new place of employment is at least 50 miles farther from the home you sold than was the former place of employment (or, if there was no former place of employment, the distance between your new place of employment and the home sold is at least 50 miles). Free tax software online Example. Free tax software online Justin was unemployed and living in a townhouse in Florida he had owned and used as his main home since 2012. Free tax software online He got a job in North Carolina and sold his townhouse in 2013. Free tax software online Because the distance between Justin's new place of employment and the home he sold is at least 50 miles, the sale satisfies the conditions of the distance safe harbor. Free tax software online Justin's sale of his home is considered to be because of a change in place of employment, and he is entitled to claim a reduced maximum exclusion of gain from the sale. Free tax software online Health The sale of your main home is because of health if your primary reason for the sale is: To obtain, provide, or facilitate the diagnosis, cure, mitigation, or treatment of disease, illness, or injury of a qualified individual, or To obtain or provide medical or personal care for a qualified individual suffering from a disease, illness, or injury. Free tax software online The sale of your home is not because of health if the sale merely benefits a qualified individual's general health or well-being. Free tax software online For purposes of this reason, a qualified individual includes, in addition to the individuals listed earlier under Qualified individual , any of the following family members of these individuals. Free tax software online Parent, grandparent, stepmother, stepfather. Free tax software online Child, grandchild, stepchild, adopted child, eligible foster child. Free tax software online Brother, sister, stepbrother, stepsister, half-brother, half-sister. Free tax software online Mother-in-law, father-in-law, brother-in-law, sister-in-law, son-in-law, or daughter-in-law. Free tax software online Uncle, aunt, nephew, niece, or cousin. Free tax software online Example. Free tax software online In 2012, Chase and Lauren, spouses, bought a house that they used as their main home. Free tax software online Lauren's father has a chronic disease and is unable to care for himself. Free tax software online In 2013, Chase and Lauren sold their home in order to move into Lauren's father's house to provide care for him. Free tax software online Because the primary reason for the sale of their home was to provide care for Lauren's father, Chase and Lauren are entitled to a reduced maximum exclusion. Free tax software online Doctor's recommendation safe harbor. Free tax software online   Health is considered to be the reason you sold your home if, for one or more of the reasons listed at the beginning of this discussion, a doctor recommends a change of residence. Free tax software online Unforeseen Circumstances The sale of your main home is because of an unforeseen circumstance if your primary reason for the sale is the occurrence of an event that you could not reasonably have anticipated before buying and occupying that home. Free tax software online You are not considered to have an unforeseen circumstance if the primary reason you sold your home was that you preferred to get a different home or because your finances improved. Free tax software online Specific event safe harbors. Free tax software online   Unforeseen circumstances are considered to be the reason for selling your home if any of the following events occurred while you owned and used the property as your main home. Free tax software online An involuntary conversion of your home, such as when your home is destroyed or condemned. Free tax software online Natural or man-made disasters or acts of war or terrorism resulting in a casualty to your home, whether or not your loss is deductible. Free tax software online In the case of qualified individuals (listed earlier under Qualified individual ): Death, Unemployment (if the individual is eligible for unemployment compensation), A change in employment or self-employment status that results in the individual's inability to pay reasonable basic living expenses (listed under Reasonable basic living expenses , later) for his or her household, Divorce or legal separation under a decree of divorce or separate maintenance, or Multiple births resulting from the same pregnancy. Free tax software online An event the IRS determined to be an unforeseen circumstance in published guidance of general applicability. Free tax software online For example, the IRS determined the September 11, 2001, terrorist attacks to be an unforeseen circumstance. Free tax software online Reasonable basic living expenses. Free tax software online   Reasonable basic living expenses for your household include the following. Free tax software online Amounts spent for food. Free tax software online Amounts spent for clothing. Free tax software online Housing and related expenses. Free tax software online Medical expenses. Free tax software online Transportation expenses. Free tax software online Tax payments. Free tax software online Court-ordered payments. Free tax software online Expenses reasonably necessary to produce income. Free tax software online   Any of these amounts spent to maintain an affluent or luxurious standard of living are not reasonable basic living expenses. Free tax software online Nonqualified Use Gain from the sale or exchange of the main home is not excludable from income if it is allocable to periods of nonqualified use. Free tax software online Nonqualified use means any period after 2008 where neither you nor your spouse (or your former spouse) used the property as a main home, with certain exceptions (see next). Free tax software online Exceptions. Free tax software online   A period of nonqualified use does not include: Any portion of the 5-year period ending on the date of the sale or exchange after the last date you (or your spouse) use the property as a main home; Any period (not to exceed an aggregate period of 10 years) during which you (or your spouse) are serving on qualified official extended duty: As a member of the uniformed services; As a member of the Foreign Service of the United States; or As an employee of the intelligence community; and Any other period of temporary absence (not to exceed an aggregate period of 2 years) due to change of employment, health conditions, or such other unforeseen circumstances as may be specified by the IRS. Free tax software online Calculation. Free tax software online   To figure the portion of the gain allocated to the period of nonqualified use, multiply the gain (net of any depreciation allowed or allowable on the property for periods after May 6, 1997) by the following fraction:   Total nonqualified use during the period of ownership after 2008     Total period of ownership     This calculation can be found in Worksheet 2, line 10, later in this publication. Free tax software online   For examples of this calculation, see Business Use or Rental of Home , next. Free tax software online Business Use or Rental of Home You may be able to exclude gain from the sale of a home you have used for business or to produce rental income if you meet the ownership and use tests. Free tax software online Example 1. Free tax software online On May 23, 2007, Amy, who is unmarried for all years in this example, bought a house. Free tax software online She moved in on that date and lived in it until May 31, 2009, when she moved out of the house and put it up for rent. Free tax software online The house was rented from June 1, 2009, to March 31, 2011. Free tax software online Amy claimed depreciation deductions in 2009 through 2011 totaling $10,000. Free tax software online Amy moved back into the house on April 1, 2011, and lived there until she sold it on January 31, 2013, for a gain of $200,000. Free tax software online During the 5-year period ending on the date of the sale (January 31, 2008–January 31, 2013), Amy owned and lived in the house for more than 2 years as shown in the following table. Free tax software online Five-Year Period Used as Home Used as Rental 1/31/08 – 5/31/09 16 months   6/01/09 – 3/31/11   22 months 4/01/11 – 1/31/13 22 months     38 months 22 months       During the period Amy owned the house (2,080 days), her period of nonqualified use was 668 days. Free tax software online Because the gain attributable to periods of nonqualified use is $60,990, Amy can exclude $129,010 of her gain, as shown on Worksheet 2. Free tax software online Example 2. Free tax software online William owned and used a house as his main home from 2007 through 2010. Free tax software online On January 1, 2011, he moved to another state. Free tax software online He rented his house from that date until April 30, 2013, when he sold it. Free tax software online During the 5-year period ending on the date of sale (May 1, 2008-April 30, 2013), William owned and lived in the house for more than 2 years. Free tax software online Because it was rental property at the time of the sale, he must report the sale on Form 4797. Free tax software online Because the period of nonqualified use does not include any part of the 5-year period after the last date William lived in the house, he has no period of nonqualified use. Free tax software online Because he met the ownership and use tests, he can exclude gain up to $250,000. Free tax software online However, he cannot exclude the part of the gain equal to the depreciation he claimed or could have claimed for renting the house, as explained next. Free tax software online Depreciation after May 6, 1997. Free tax software online   If you were entitled to take depreciation deductions because you used your home for business purposes or as rental property, you cannot exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997. Free tax software online If you can show by adequate records or other evidence that the depreciation allowed was less than the amount allowable, then you may limit the amount of gain recognized to the depreciation allowed. Free tax software online Unrecaptured section 1250 gain. Free tax software online   This is the part of any long-term capital gain from the sale of your home that is due to depreciation and cannot be excluded. Free tax software online To figure the amount of unrecaptured section 1250 gain to be reported on Schedule D (Form 1040), you must also take into account certain gains or losses from the sale of property other than your home. Free tax software online Use the Unrecaptured Section 1250 Gain Worksheet in the Schedule D instructions for this purpose. Free tax software online Worksheet 2. Free tax software online Taxable Gain on Sale of Home—Completed Example 1 for Amy Part 1. Free tax software online Gain or (Loss) on Sale       1. Free tax software online   Selling price of home 1. Free tax software online     2. Free tax software online   Selling expenses (including commissions, advertising and legal fees, and seller-paid loan charges) 2. Free tax software online     3. Free tax software online   Subtract line 2 from line 1. Free tax software online This is the amount realized 3. Free tax software online     4. Free tax software online   Adjusted basis of home sold (from Worksheet 1, line 13) 4. Free tax software online     5. Free tax software online   Gain or (loss) on the sale. Free tax software online Subtract line 4 from line 3. Free tax software online If this is a loss, stop here 5. Free tax software online 200,000   Part 2. Free tax software online Exclusion and Taxable Gain       6. Free tax software online   Enter any depreciation allowed or allowable on the property for periods after May 6, 1997. Free tax software online If none, enter -0- 6. Free tax software online 10,000   7. Free tax software online   Subtract line 6 from line 5. Free tax software online If the result is less than zero, enter -0- 7. Free tax software online 190,000   8. Free tax software online   Aggregate number of days of nonqualified use after 2008. Free tax software online If none, enter -0-. Free tax software online  If line 8 is equal to zero, skip to line 12 and enter the amount from line 7 on line 12 8. Free tax software online 668   9. Free tax software online   Number of days taxpayer owned the property 9. Free tax software online 2,080   10. Free tax software online   Divide the amount on line 8 by the amount on line 9. Free tax software online Enter the result as a decimal (rounded to at least 3 places). Free tax software online But do not enter an amount greater than 1. Free tax software online 00 10. Free tax software online 0. Free tax software online 321   11. Free tax software online   Gain allocated to nonqualified use. Free tax software online (Line 7 multiplied by line 10) 11. Free tax software online 60,990   12. Free tax software online   Gain eligible for exclusion. Free tax software online Subtract line 11 from line 7 12. Free tax software online 129,010   13. Free tax software online   If you qualify to exclude gain on the sale, enter your maximum exclusion (see Maximum Exclusion ). Free tax software online  If you qualify for a reduced maximum exclusion, enter the amount from Worksheet 3, line 7. Free tax software online If you do  not qualify to exclude gain, enter -0- 13. Free tax software online 250,000   14. Free tax software online   Exclusion. Free tax software online Enter the smaller of line 12 or line 13 14. Free tax software online 129,010   15. Free tax software online   Taxable gain. Free tax software online Subtract line 14 from line 5. Free tax software online Report your taxable gain as described under Reporting the Sale . Free tax software online If the amount on line 6 is more than zero, complete line 16 15. Free tax software online 70,990   16. Free tax software online   Enter the smaller of line 6 or line 15. Free tax software online Enter this amount on line 12 of the Unrecaptured Section 1250 Gain  Worksheet in the instructions for Schedule D (Form 1040) 16. Free tax software online 10,000 Property Used Partly for Business or Rental If you use property partly as a home and partly for business or to produce rental income, the treatment of any gain on the sale depends partly on whether the business or rental part of the property is part of your home or separate from it. Free tax software online Part of Home Used for Business or Rental If the part of your property used for business or to produce rental income is within your home, such as a room used as a home office for a business, you do not need to allocate gain on the sale of the property between the business part of the property and the part used as a home. Free tax software online In addition, you do not need to report the sale of the business or rental part on Form 4797. Free tax software online This is true whether or not you were entitled to claim any depreciation. Free tax software online However, you cannot exclude the part of any gain equal to any depreciation allowed or allowable after May 6, 1997. Free tax software online See Depreciation after May 6, 1997, earlier. Free tax software online Example 1. Free tax software online Ray sold his main home in 2013 at a $30,000 gain. Free tax software online He has no gains or losses from the sale of property other than the gain from the sale of his home. Free tax software online He meets the ownership and use tests to exclude the gain from his income. Free tax software online However, he used part of the home as a business office in 2012 and claimed $500 depreciation. Free tax software online Because the business office was part of his home (not separate from it), he does not have to allocate the gain on the sale between the business part of the property and the part used as a home. Free tax software online In addition, he does not have to report any part of the gain on Form 4797. Free tax software online Because Ray was entitled to take a depreciation deduction, he must recognize $500 of the gain as unrecaptured section 1250 gain. Free tax software online He reports his gain, exclusion, and the taxable gain of $500 on Form 8949 and Schedule D (Form 1040). Free tax software online Example 2. Free tax software online The facts are the same as in Example 1 except that Ray was not entitled to claim depreciation for the business use of his home. Free tax software online Since Ray did not claim any depreciation, he can exclude the entire $30,000 gain. Free tax software online Separate Part of Property Used for Business or Rental You may have used part of your property as your home and a separate part of it for business or to produce rental income. Free tax software online Examples are: A working farm on which your house was located, A duplex in w