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H&r Block Free Taxes

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H&r block free taxes Publication 523 - Main Content Table of Contents Main HomeVacant land. H&r block free taxes Factors used to determine main home. H&r block free taxes 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. H&r block free taxes Property Used Partly for Business or Rental Reporting the SaleSeller-financed mortgage. H&r block free taxes Individual taxpayer identification number (ITIN). H&r block free taxes More information. H&r block free taxes Comprehensive Examples Special SituationsException for sales to related persons. H&r block free taxes Deducting Taxes in the Year of SaleForm 1099-S. H&r block free taxes More information. H&r block free taxes Recapturing (Paying Back) a Federal Mortgage Subsidy Recapture of First-Time Homebuyer CreditExample. H&r block free taxes Worksheets How To Get Tax HelpLow Income Taxpayer Clinics Main Home This section explains the term “main home. H&r block free taxes ” 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. H&r block free taxes 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. H&r block free taxes Land. H&r block free taxes   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. H&r block free taxes Example. H&r block free taxes You buy a piece of land and move your main home to it. H&r block free taxes Then, you sell the land on which your main home was located. H&r block free taxes This sale is not considered a sale of your main home, and you cannot exclude any gain on the sale of the land. H&r block free taxes Vacant land. H&r block free taxes   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. H&r block free taxes 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. H&r block free taxes See Excluding the Gain , later. H&r block free taxes The destruction of your home is treated as a sale of your home. H&r block free taxes 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. H&r block free taxes For information, see Publication 547. H&r block free taxes More than one home. H&r block free taxes   If you have more than one home, you can exclude gain only from the sale of your main home. H&r block free taxes You must include in income the gain from the sale of any other home. H&r block free taxes 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. H&r block free taxes Example 1. H&r block free taxes You own two homes, one in New York and one in Florida. H&r block free taxes 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. H&r block free taxes In the absence of facts and circumstances indicating otherwise, the New York home is your main home. H&r block free taxes You would be eligible to exclude the gain from the sale of the New York home but not of the Florida home in 2013. H&r block free taxes Example 2. H&r block free taxes You own a house, but you live in another house that you rent. H&r block free taxes The rented house is your main home. H&r block free taxes Example 3. H&r block free taxes You own two homes, one in Virginia and one in New Hampshire. H&r block free taxes In 2009 and 2010, you lived in the Virginia home. H&r block free taxes In 2011 and 2012, you lived in the New Hampshire home. H&r block free taxes In 2013, you lived again in the Virginia home. H&r block free taxes Your main home in 2009, 2010, and 2013 is the Virginia home. H&r block free taxes Your main home in 2011 and 2012 is the New Hampshire home. H&r block free taxes You would be eligible to exclude gain from the sale of either home (but not both) in 2013. H&r block free taxes Factors used to determine main home. H&r block free taxes   In addition to the amount of time you live in each home, other factors are relevant in determining which home is your main home. H&r block free taxes Those factors include the following. H&r block free taxes Your place of employment. H&r block free taxes The location of your family members' main home. H&r block free taxes Your mailing address for bills and correspondence. H&r block free taxes The address listed on your: Federal and state tax returns, Driver's license, Car registration, and Voter registration card. H&r block free taxes The location of the banks you use. H&r block free taxes The location of recreational clubs and religious organizations of which you are a member. H&r block free taxes Property used partly as your main home. H&r block free taxes   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. H&r block free taxes For details, see Business Use or Rental of Home , later. H&r block free taxes 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. H&r block free taxes Subtract the adjusted basis from the amount realized to get your gain or loss. H&r block free taxes     Selling price     − Selling expenses       Amount realized     − Adjusted basis       Gain or loss   Gain. H&r block free taxes   Gain is the excess of the amount realized over the adjusted basis of the property. H&r block free taxes Loss. H&r block free taxes   Loss is the excess of the adjusted basis over the amount realized for the property. H&r block free taxes Selling Price The selling price is the total amount you receive for your home. H&r block free taxes 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. H&r block free taxes Personal property. H&r block free taxes   The selling price of your home does not include amounts you received for personal property sold with your home. H&r block free taxes Personal property is property that is not a permanent part of the home. H&r block free taxes Examples are furniture, draperies, rugs, a washer and dryer, and lawn equipment. H&r block free taxes Separately stated amounts you received for these items should not be shown on Form 1099-S (discussed later). H&r block free taxes Any gains from sales of personal property must be included in your income, but not as part of the sale of your home. H&r block free taxes Payment by employer. H&r block free taxes   You may have to sell your home because of a job transfer. H&r block free taxes 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. H&r block free taxes 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. H&r block free taxes Option to buy. H&r block free taxes   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. H&r block free taxes If the option is not exercised, you must report the amount as ordinary income in the year the option expires. H&r block free taxes Report this amount on Form 1040, line 21, or on Form 1040NR, line 21. H&r block free taxes Form 1099-S. H&r block free taxes   If you received Form 1099-S, box 2 (gross proceeds) should show the total amount you received for your home. H&r block free taxes   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. H&r block free taxes Instead, box 4 will be checked to indicate your receipt or expected receipt of these items. H&r block free taxes Amount Realized The amount realized is the selling price minus selling expenses. H&r block free taxes Selling expenses. H&r block free taxes   Selling expenses include: Commissions, Advertising fees, Legal fees, and Loan charges paid by the seller, such as loan placement fees or “points. H&r block free taxes ” Adjusted Basis While you owned your home, you may have made adjustments (increases or decreases) to the basis. H&r block free taxes This adjusted basis must be determined before you can figure gain or loss on the sale of your home. H&r block free taxes For information on how to figure your home's adjusted basis, see Determining Basis , later. H&r block free taxes Amount of Gain or Loss To figure the amount of gain or loss, compare the amount realized to the adjusted basis. H&r block free taxes Gain on sale. H&r block free taxes   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. H&r block free taxes Loss on sale. H&r block free taxes   If the amount realized is less than the adjusted basis, the difference is a loss. H&r block free taxes Generally, a loss on the sale of your main home cannot be deducted. H&r block free taxes Jointly owned home. H&r block free taxes   If you and your spouse sell your jointly owned home and file a joint return, you figure your gain or loss as one taxpayer. H&r block free taxes Separate returns. H&r block free taxes   If you file separate returns, each of you must figure your own gain or loss according to your ownership interest in the home. H&r block free taxes Your ownership interest is generally determined by state law. H&r block free taxes Joint owners not married. H&r block free taxes   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. H&r block free taxes Each of you applies the rules discussed in this publication on an individual basis. H&r block free taxes Dispositions Other Than Sales Some special rules apply to other dispositions of your main home. H&r block free taxes Foreclosure or repossession. H&r block free taxes   If your home was foreclosed on or repossessed, you have a disposition. H&r block free taxes See Publication 4681 to determine if you have ordinary income, gain, or loss. H&r block free taxes More information. H&r block free taxes   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. H&r block free taxes Publication 544 has examples of how to figure gain or loss on a foreclosure or repossession. H&r block free taxes Abandonment. H&r block free taxes   If you abandon your home, see Publication 4681 to determine if you have ordinary income, gain, or loss. H&r block free taxes Trading (exchanging) homes. H&r block free taxes   If you trade your home for another home, treat the trade as a sale and a purchase. H&r block free taxes Example. H&r block free taxes You owned and lived in a home with an adjusted basis of $41,000. H&r block free taxes 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. H&r block free taxes This is treated as a sale of your old home for $50,000 with a gain of $9,000 ($50,000 − $41,000). H&r block free taxes 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). H&r block free taxes Transfer to spouse. H&r block free taxes   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). H&r block free taxes This is true even if you receive cash or other consideration for the home. H&r block free taxes As a result, the rules explained in this publication do not apply. H&r block free taxes   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. H&r block free taxes You have no gain or loss. H&r block free taxes Exception. H&r block free taxes   These transfer rules do not apply if your spouse or former spouse is a nonresident alien. H&r block free taxes In that case, you generally will have a gain or loss. H&r block free taxes More information. H&r block free taxes    See Property Settlements in Publication 504, Divorced or Separated Individuals, for more information. H&r block free taxes Involuntary conversion. H&r block free taxes   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. H&r block free taxes 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 ). H&r block free taxes Determining Basis You need to know your basis in your home to figure any gain or loss when you sell it. H&r block free taxes Your basis in your home is determined by how you got the home. H&r block free taxes Generally, your basis is its cost if you bought it or built it. H&r block free taxes If you got it in some other way (inheritance, gift, etc. H&r block free taxes ), your basis is generally either its fair market value when you received it or the adjusted basis of the previous owner. H&r block free taxes While you owned your home, you may have made adjustments (increases or decreases) to your home's basis. H&r block free taxes 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. H&r block free taxes To figure your adjusted basis, you can use Worksheet 1, near the end of this publication. H&r block free taxes Filled-in examples of that worksheet are included in the Comprehensive Examples , later. H&r block free taxes Cost As Basis The cost of property is the amount you paid for it in cash, debt obligations, other property, or services. H&r block free taxes Purchase. H&r block free taxes   If you bought your home, your basis is its cost to you. H&r block free taxes This includes the purchase price and certain settlement or closing costs. H&r block free taxes 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. H&r block free taxes If you build, or contract to build, a new home, your purchase price can include costs of construction, as discussed later. H&r block free taxes Seller-paid points. H&r block free taxes   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. H&r block free taxes    IF you bought your home. H&r block free taxes . H&r block free taxes . H&r block free taxes THEN reduce your home's basis by the seller-paid points. H&r block free taxes . H&r block free taxes . H&r block free taxes after 1990 but before April 4, 1994 only if you deducted them as home mortgage interest in the year paid. H&r block free taxes after April 3, 1994 even if you did not deduct them. H&r block free taxes Settlement fees or closing costs. H&r block free taxes   When you bought your home, you may have paid settlement fees or closing costs in addition to the contract price of the property. H&r block free taxes 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. H&r block free taxes 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). H&r block free taxes   Settlement fees do not include amounts placed in escrow for the future payment of items such as taxes and insurance. H&r block free taxes   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. H&r block free taxes   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. H&r block free taxes Real estate taxes. H&r block free taxes   Real estate taxes for the year you bought your home may affect your basis, as shown in the following chart. H&r block free taxes    IF. H&r block free taxes . H&r block free taxes . H&r block free taxes AND. H&r block free taxes . H&r block free taxes . H&r block free taxes THEN the taxes. H&r block free taxes . H&r block free taxes . H&r block free taxes 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. H&r block free taxes the seller reimburses you do not affect the basis of your home. H&r block free taxes 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. H&r block free taxes you reimburse the seller do not affect the basis of your home. H&r block free taxes Construction. H&r block free taxes   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. H&r block free taxes   Your cost includes your down payment and any debt such as a first or second mortgage or notes you gave the seller or builder. H&r block free taxes It also includes certain settlement or closing costs. H&r block free taxes You may have to reduce your basis by points the seller paid for you. H&r block free taxes For more information, see Seller-paid points and Settlement fees or closing costs , earlier. H&r block free taxes Built by you. H&r block free taxes   If you built all or part of your house yourself, its basis is the total amount it cost you to complete it. H&r block free taxes 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. H&r block free taxes Temporary housing. H&r block free taxes   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. H&r block free taxes To figure the amount of the reduction, multiply the contract price by a fraction. H&r block free taxes 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. H&r block free taxes Cooperative apartment. H&r block free taxes   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. H&r block free taxes This may include your share of a mortgage on the apartment building. H&r block free taxes Condominium. H&r block free taxes   To determine your basis in a condominium apartment used as your home, use the same rules as for any other home. H&r block free taxes 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. H&r block free taxes These situations are discussed in the following pages. H&r block free taxes Also, the instructions for Worksheet 1 (near the end of the publication) address each of these issues. H&r block free taxes Other special rules may apply in certain situations. H&r block free taxes 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. H&r block free taxes Home received as gift. H&r block free taxes   Use the following chart to find the basis of a home you received as a gift. H&r block free taxes IF the donor's adjusted basis at the time of the gift was. H&r block free taxes . H&r block free taxes . H&r block free taxes THEN your basis is. H&r block free taxes . H&r block free taxes . H&r block free taxes 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. H&r block free taxes   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. H&r block free taxes If using the fair market value results in a gain, you have neither gain nor loss. H&r block free taxes 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. H&r block free taxes 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). H&r block free taxes Fair market value. H&r block free taxes   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. H&r block free taxes 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. H&r block free taxes Part of federal gift tax due to net increase in value. H&r block free taxes   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. H&r block free taxes 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. H&r block free taxes The net increase in the value of the home is its fair market value minus the donor's adjusted basis immediately before the gift. H&r block free taxes Home acquired from a decedent who died before or after 2010. H&r block free taxes   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). H&r block free taxes 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. H&r block free taxes 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. H&r block free taxes Surviving spouse. H&r block free taxes   If you are a surviving spouse and you owned your home jointly, your basis in the home will change. H&r block free taxes The new basis for the interest your spouse owned will be its fair market value on the date of death (or alternate valuation date). H&r block free taxes The basis in your interest will remain the same. H&r block free taxes Your new basis in the home is the total of these two amounts. H&r block free taxes   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. H&r block free taxes Example. H&r block free taxes 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. H&r block free taxes 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). H&r block free taxes Community property. H&r block free taxes   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. H&r block free taxes 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. H&r block free taxes 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. H&r block free taxes   For more information about community property, see Publication 555, Community Property. H&r block free taxes    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. H&r block free taxes Home received as trade. H&r block free taxes   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. H&r block free taxes If you traded one home for another, you have made a sale and purchase. H&r block free taxes In that case, you may have a gain. H&r block free taxes See Trading (exchanging) homes under Dispositions Other Than Sales, earlier, for an example of figuring the gain. H&r block free taxes Home received from spouse. H&r block free taxes   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. H&r block free taxes Transfers after July 18, 1984. H&r block free taxes   If you received the home after July 18, 1984, there was no gain or loss on the transfer. H&r block free taxes 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. H&r block free taxes 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. H&r block free taxes   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. H&r block free taxes This also applies if your former spouse transferred his or her interest in the home to you incident to your divorce. H&r block free taxes Your basis in the half interest you already owned does not change. H&r block free taxes Your new basis in the home is the total of these two amounts. H&r block free taxes Transfers before July 19, 1984. H&r block free taxes   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. H&r block free taxes More information. H&r block free taxes   For more information on property received from a spouse or former spouse, see Property Settlements in Publication 504. H&r block free taxes Involuntary conversion. H&r block free taxes   If your home is destroyed or condemned, you may receive insurance proceeds or a condemnation award. H&r block free taxes 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. H&r block free taxes Example. H&r block free taxes A fire destroyed your home that you owned and used for only 6 months. H&r block free taxes The home had an adjusted basis of $80,000 and the insurance company paid you $130,000 for the loss. H&r block free taxes Your gain is $50,000 ($130,000 − $80,000). H&r block free taxes You bought a replacement home for $100,000. H&r block free taxes 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. H&r block free taxes The rest of the gain ($20,000) is not taxable, so that amount reduces your basis in the new home. H&r block free taxes The basis of the new home is figured as follows. H&r block free taxes Cost of replacement home $100,000 Minus: Gain not recognized 20,000 Basis of the replacement home $80,000 More information. H&r block free taxes   For more information about basis, see Publication 551. H&r block free taxes Adjusted Basis Adjusted basis is your cost or other basis increased or decreased by certain amounts. H&r block free taxes To figure your adjusted basis, you can use Worksheet 1, found toward the end of this publication. H&r block free taxes Filled-in examples of that worksheet are included in Comprehensive Examples , later. H&r block free taxes Recordkeeping. H&r block free taxes You should keep records to prove your home's adjusted basis. H&r block free taxes 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. H&r block free taxes 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. H&r block free taxes Keep records proving the basis of both homes as long as they are needed for tax purposes. H&r block free taxes 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. H&r block free taxes Increases to Basis These include the following. H&r block free taxes Additions and other improvements that have a useful life of more than 1 year. H&r block free taxes Special assessments for local improvements. H&r block free taxes Amounts you spent after a casualty to restore damaged property. H&r block free taxes Improvements. H&r block free taxes   These add to the value of your home, prolong its useful life, or adapt it to new uses. H&r block free taxes You add the cost of additions and other improvements to the basis of your property. H&r block free taxes   The following chart lists some other examples of improvements. H&r block free taxes 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. H&r block free taxes   Your home's adjusted basis does not include the cost of any improvements that are replaced and are no longer part of the home. H&r block free taxes Example. H&r block free taxes You put wall-to-wall carpeting in your home 15 years ago. H&r block free taxes Later, you replaced that carpeting with new wall-to-wall carpeting. H&r block free taxes The cost of the old carpeting you replaced is no longer part of your home's adjusted basis. H&r block free taxes Repairs. H&r block free taxes   These maintain your home in good condition but do not add to its value or prolong its life. H&r block free taxes You do not add their cost to the basis of your property. H&r block free taxes Examples. H&r block free taxes Repainting your house inside or outside, fixing your gutters or floors, repairing leaks or plastering, and replacing broken window panes are examples of repairs. H&r block free taxes Exception. H&r block free taxes   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. H&r block free taxes 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. H&r block free taxes Decreases to Basis These include the following. H&r block free taxes Discharge of qualified principal residence indebtedness that was excluded from income (but not below zero). H&r block free taxes For details, see Publication 4681. H&r block free taxes Some or all of the cancellation of debt income that was excluded due to your bankruptcy or insolvency. H&r block free taxes For details, see Publication 4681. H&r block free taxes Gain you postponed from the sale of a previous home before May 7, 1997. H&r block free taxes Deductible casualty losses. H&r block free taxes Insurance payments you received or expect to receive for casualty losses. H&r block free taxes Payments you received for granting an easement or right-of-way. H&r block free taxes Depreciation allowed or allowable if you used your home for business or rental purposes. H&r block free taxes Energy-related credits allowed for expenditures made on the residence. H&r block free taxes (Reduce the increase in basis otherwise allowable for expenditures on the residence by the amount of credit allowed for those expenditures. H&r block free taxes ) Adoption credit you claimed for improvements added to the basis of your home. H&r block free taxes Nontaxable payments from an adoption assistance program of your employer you used for improvements you added to the basis of your home. H&r block free taxes 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. H&r block free taxes 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. H&r block free taxes District of Columbia first-time homebuyer credit allowed on the purchase of a principal residence in the District of Columbia. H&r block free taxes 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. H&r block free taxes Discharges of qualified principal residence indebtedness. H&r block free taxes   You may be able to exclude from gross income a discharge of qualified principal residence indebtedness. H&r block free taxes This exclusion applies to discharges made after 2006 and before 2014. H&r block free taxes 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. H&r block free taxes   File Form 982 with your tax return. H&r block free taxes See the form's instructions for detailed information. H&r block free taxes    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. H&r block free taxes In most cases, this would occur in a refinancing or a restructuring of the mortgage. H&r block free taxes Excluding the Gain You may qualify to exclude from your income all or part of any gain from the sale of your main home. H&r block free taxes 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. H&r block free taxes To qualify, you must meet the ownership and use tests described later. H&r block free taxes 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. H&r block free taxes 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. H&r block free taxes You can use Worksheet 2 (near the end of this publication) to figure the amount of your exclusion and your taxable gain, if any. H&r block free taxes If you have any taxable gain from the sale of your home, you may have to increase your withholding or make estimated tax payments. H&r block free taxes See Publication 505, Tax Withholding and Estimated Tax. H&r block free taxes 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. H&r block free taxes You meet the ownership test. H&r block free taxes You meet the use test. H&r block free taxes During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home. H&r block free taxes For details on gain allocated to periods of nonqualified use, see Nonqualified Use , later. H&r block free taxes 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. H&r block free taxes 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 . H&r block free taxes Ownership and Use Tests To claim the exclusion, you must meet the ownership and use tests. H&r block free taxes 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). H&r block free taxes Exception. H&r block free taxes   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. H&r block free taxes However, the maximum amount you may be able to exclude will be reduced. H&r block free taxes See Reduced Maximum Exclusion , later. H&r block free taxes Example 1—home owned and occupied for at least 2 years. H&r block free taxes Mya bought and moved into her main home in September 2011. H&r block free taxes She sold the home at a gain in October 2013. H&r block free taxes 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. H&r block free taxes She meets the ownership and use tests. H&r block free taxes Example 2—ownership test met but use test not met. H&r block free taxes Ayden bought a home, lived in it for 6 months, moved out, and never occupied the home again. H&r block free taxes He later sold the home for a gain in June 2013. H&r block free taxes He owned the home during the entire 5-year period ending on the date of sale. H&r block free taxes He meets the ownership test but not the use test. H&r block free taxes He cannot exclude any part of his gain on the sale unless he qualified for a reduced maximum exclusion (explained later). H&r block free taxes 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. H&r block free taxes 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. H&r block free taxes Example. H&r block free taxes Naomi bought and moved into a house in July 2009. H&r block free taxes She lived there for 13 months and then moved in with a friend. H&r block free taxes She later moved back into her house and lived there for 12 months until she sold it in August 2013. H&r block free taxes 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. H&r block free taxes Temporary absence. H&r block free taxes   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. H&r block free taxes The following examples assume that the reduced maximum exclusion (discussed later) does not apply to the sales. H&r block free taxes Example 1. H&r block free taxes David Johnson, who is single, bought and moved into his home on February 1, 2011. H&r block free taxes Each year during 2011 and 2012, David left his home for a 2-month summer vacation. H&r block free taxes David sold the house on March 1, 2013. H&r block free taxes 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. H&r block free taxes 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. H&r block free taxes Example 2. H&r block free taxes 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. H&r block free taxes Because his leave was not a short temporary absence, he cannot include the period of leave to meet the 2-year use test. H&r block free taxes He cannot exclude any part of his gain because he did not use the residence for the required 2 years. H&r block free taxes Ownership and use tests met at different times. H&r block free taxes   You can meet the ownership and use tests during different 2-year periods. H&r block free taxes However, you must meet both tests during the 5-year period ending on the date of the sale. H&r block free taxes Example. H&r block free taxes Beginning in 2002, Helen Jones lived in a rented apartment. H&r block free taxes The apartment building was later converted to condominiums, and she bought her same apartment on December 3, 2010. H&r block free taxes In 2011, Helen became ill and on April 14 of that year she moved to her daughter's home. H&r block free taxes On July 12, 2013, while still living in her daughter's home, she sold her condominium. H&r block free taxes 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. H&r block free taxes She owned her condominium from December 3, 2010, to July 12, 2013 (more than 2 years). H&r block free taxes She lived in the property from July 13, 2008 (the beginning of the 5-year period), to April 14, 2011 (more than 2 years). H&r block free taxes 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. H&r block free taxes Cooperative apartment. H&r block free taxes   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. H&r block free taxes Exceptions to Ownership and Use Tests The following sections contain exceptions to the ownership and use tests for certain taxpayers. H&r block free taxes Exception for individuals with a disability. H&r block free taxes   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. H&r block free taxes 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. H&r block free taxes   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. H&r block free taxes Previous home destroyed or condemned. H&r block free taxes   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. H&r block free taxes 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). H&r block free taxes 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. H&r block free taxes Members of the uniformed services or Foreign Service, employees of the intelligence community, or employees or volunteers of the Peace Corps. H&r block free taxes   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. H&r block free taxes 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. H&r block free taxes 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. H&r block free taxes   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. H&r block free taxes Example. H&r block free taxes John bought and moved into a home in 2005. H&r block free taxes He lived in it as his main home for 2½ years. H&r block free taxes For the next 6 years, he did not live in it because he was on qualified official extended duty with the Army. H&r block free taxes He then sold the home at a gain in 2013. H&r block free taxes 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. H&r block free taxes This means he can disregard those 6 years. H&r block free taxes Therefore, John's 5-year test period consists of the 5 years before he went on qualified official extended duty. H&r block free taxes He meets the ownership and use tests because he owned and lived in the home for 2½ years during this test period. H&r block free taxes Period of suspension. H&r block free taxes   The period of suspension cannot last more than 10 years. H&r block free taxes Together, the 10-year suspension period and the 5-year test period can be as long as, but no more than, 15 years. H&r block free taxes You cannot suspend the 5-year period for more than one property at a time. H&r block free taxes You can revoke your choice to suspend the 5-year period at any time. H&r block free taxes Example. H&r block free taxes Mary bought a home on April 1, 1997. H&r block free taxes She used it as her main home until August 31, 2000. H&r block free taxes On September 1, 2000, she went on qualified official extended duty with the Navy. H&r block free taxes She did not live in the house again before selling it on July 31, 2013. H&r block free taxes Mary chooses to use the entire 10-year suspension period. H&r block free taxes 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. H&r block free taxes 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. H&r block free taxes She meets the ownership and use tests because she owned and lived in the home for at least 2 years during this test period. H&r block free taxes Uniformed services. H&r block free taxes   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. H&r block free taxes Foreign Service member. H&r block free taxes   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. H&r block free taxes A Chief of mission. H&r block free taxes An Ambassador at large. H&r block free taxes A member of the Senior Foreign Service. H&r block free taxes A Foreign Service officer. H&r block free taxes Part of the Foreign Service personnel. H&r block free taxes Employee of the intelligence community. H&r block free taxes   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. H&r block free taxes The Office of the Director of National Intelligence. H&r block free taxes The Central Intelligence Agency. H&r block free taxes The National Security Agency. H&r block free taxes The Defense Intelligence Agency. H&r block free taxes The National Geospatial-Intelligence Agency. H&r block free taxes The National Reconnaissance Office and any other office within the Department of Defense for the collection of specialized national intelligence through reconnaissance programs. H&r block free taxes 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. H&r block free taxes The Bureau of Intelligence and Research of the Department of State. H&r block free taxes Any of the elements of the Department of Homeland Security concerned with the analyses of foreign intelligence information. H&r block free taxes Qualified official extended duty. H&r block free taxes   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. H&r block free taxes   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. H&r block free taxes 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. H&r block free taxes (But see Special rules for joint returns, next. H&r block free taxes ) Special rules for joint returns. H&r block free taxes   You can exclude up to $500,000 of the gain on the sale of your main home if all of the following are true. H&r block free taxes You are married and file a joint return for the year. H&r block free taxes Either you or your spouse meets the ownership test. H&r block free taxes Both you and your spouse meet the use test. H&r block free taxes 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. H&r block free taxes 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. H&r block free taxes For this purpose, each spouse is treated as owning the property during the period that either spouse owned the property. H&r block free taxes Example 1—one spouse sells a home. H&r block free taxes Emily sells her home in June 2013 for a gain of $300,000. H&r block free taxes She marries Jamie later in the year. H&r block free taxes She meets the ownership and use tests, but Jamie does not. H&r block free taxes Emily can exclude up to $250,000 of gain on a separate or joint return for 2013. H&r block free taxes The $500,000 maximum exclusion for certain joint returns does not apply because Jamie does not meet the use test. H&r block free taxes Example 2—each spouse sells a home. H&r block free taxes 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. H&r block free taxes He meets the ownership and use tests on his home, but Emily does not. H&r block free taxes Emily can exclude $250,000 of gain and Jamie can exclude $200,000 of gain on the respective sales of their individual homes. H&r block free taxes However, Emily cannot use Jamie's unused exclusion to exclude more than $250,000 of gain. H&r block free taxes Therefore, Emily and Jamie must recognize $50,000 of gain on the sale of Emily's home. H&r block free taxes 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. H&r block free taxes Sale of main home by surviving spouse. H&r block free taxes   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. H&r block free taxes   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. H&r block free taxes The sale or exchange took place after 2008. H&r block free taxes The sale or exchange took place no more than 2 years after the date of death of your spouse. H&r block free taxes You have not remarried. H&r block free taxes You and your spouse met the use test at the time of your spouse's death. H&r block free taxes You or your spouse met the ownership test at the time of your spouse's death. H&r block free taxes Neither you nor your spouse excluded gain from the sale of another home during the last 2 years before the date of death. H&r block free taxes The ownership and use tests were described earlier. H&r block free taxes Example. H&r block free taxes Harry owned and used a house as his main home since 2009. H&r block free taxes Harry and Wilma married on July 1, 2013, and from that date they used Harry's house as their main home. H&r block free taxes Harry died on August 15, 2013, and Wilma inherited the property. H&r block free taxes Wilma sold the property on September 1, 2013, at which time she had not remarried. H&r block free taxes 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. H&r block free taxes Home transferred from spouse. H&r block free taxes   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. H&r block free taxes Use of home after divorce. H&r block free taxes   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. H&r block free taxes 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. H&r block free taxes 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. H&r block free taxes In both cases, to qualify for a reduced exclusion, the sale of your main home must be due to one of the following reasons. H&r block free taxes A change in place of employment. H&r block free taxes Health. H&r block free taxes Unforeseen circumstances. H&r block free taxes Qualified individual. H&r block free taxes   For purposes of the reduced maximum exclusion, a qualified individual is any of the following. H&r block free taxes You. H&r block free taxes Your spouse. H&r block free taxes A co-owner of the home. H&r block free taxes A person whose main home is the same as yours. H&r block free taxes Primary reason for sale. H&r block free taxes   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. H&r block free taxes You qualify under a “safe harbor. H&r block free taxes ” This is a specific set of facts and circumstances that, if applicable, qualifies you to claim a reduced maximum exclusion. H&r block free taxes Safe harbors corresponding to the reasons listed above are described later. H&r block free taxes 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. H&r block free taxes  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. H&r block free taxes 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. H&r block free taxes Employment. H&r block free taxes   For this purpose, employment includes the start of work with a new employer or continuation of work with the same employer. H&r block free taxes It also includes the start or continuation of self-employment. H&r block free taxes Distance safe harbor. H&r block free taxes   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). H&r block free taxes Example. H&r block free taxes Justin was unemployed and living in a townhouse in Florida he had owned and used as his main home since 2012. H&r block free taxes He got a job in North Carolina and sold his townhouse in 2013. H&r block free taxes 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. H&r block free taxes 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. H&r block free taxes 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. H&r block free taxes The sale of your home is not because of health if the sale merely benefits a qualified individual's general health or well-being. H&r block free taxes 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. H&r block free taxes Parent, grandparent, stepmother, stepfather. H&r block free taxes Child, grandchild, stepchild, adopted child, eligible foster child. H&r block free taxes Brother, sister, stepbrother, stepsister, half-brother, half-sister. H&r block free taxes Mother-in-law, father-in-law, brother-in-law, sister-in-law, son-in-law, or daughter-in-law. H&r block free taxes Uncle, aunt, nephew, niece, or cousin. H&r block free taxes Example. H&r block free taxes In 2012, Chase and Lauren, spouses, bought a house that they used as their main home. H&r block free taxes Lauren's father has a chronic disease and is unable to care for himself. H&r block free taxes In 2013, Chase and Lauren sold their home in order to move into Lauren's father's house to provide care for him. H&r block free taxes 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. H&r block free taxes Doctor's recommendation safe harbor. H&r block free taxes   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. H&r block free taxes 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. H&r block free taxes 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. H&r block free taxes Specific event safe harbors. H&r block free taxes   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. H&r block free taxes An involuntary conversion of your home, such as when your home is destroyed or condemned. H&r block free taxes 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. H&r block free taxes 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. H&r block free taxes An event the IRS determined to be an unforeseen circumstance in published guidance of general applicability. H&r block free taxes For example, the IRS determined the September 11, 2001, terrorist attacks to be an unforeseen circumstance. H&r block free taxes Reasonable basic living expenses. H&r block free taxes   Reasonable basic living expenses for your household include the following. H&r block free taxes Amounts spent for food. H&r block free taxes Amounts spent for clothing. H&r block free taxes Housing and related expenses. H&r block free taxes Medical expenses. H&r block free taxes Transportation expenses. H&r block free taxes Tax payments. H&r block free taxes Court-ordered payments. H&r block free taxes Expenses reasonably necessary to produce income. H&r block free taxes   Any of these amounts spent to maintain an affluent or luxurious standard of living are not reasonable basic living expenses. H&r block free taxes 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. H&r block free taxes 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). H&r block free taxes Exceptions. H&r block free taxes   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. H&r block free taxes Calculation. H&r block free taxes   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. H&r block free taxes   For examples of this calculation, see Business Use or Rental of Home , next. H&r block free taxes 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. H&r block free taxes Example 1. H&r block free taxes On May 23, 2007, Amy, who is unmarried for all years in this example, bought a house. H&r block free taxes 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. H&r block free taxes The house was rented from June 1, 2009, to March 31, 2011. H&r block free taxes Amy claimed depreciation deductions in 2009 through 2011 totaling $10,000. H&r block free taxes 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. H&r block free taxes 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. H&r block free taxes 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. H&r block free taxes 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. H&r block free taxes Example 2. H&r block free taxes William owned and used a house as his main home from 2007 through 2010. H&r block free taxes On January 1, 2011, he moved to another state. H&r block free taxes He rented his house from that date until April 30, 2013, when he sold it. H&r block free taxes 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. H&r block free taxes Because it was rental property at the time of the sale, he must report the sale on Form 4797. H&r block free taxes 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. H&r block free taxes Because he met the ownership and use tests, he can exclude gain up to $250,000. H&r block free taxes 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. H&r block free taxes Depreciation after May 6, 1997. H&r block free taxes   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. H&r block free taxes 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. H&r block free taxes Unrecaptured section 1250 gain. H&r block free taxes   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. H&r block free taxes 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. H&r block free taxes Use the Unrecaptured Section 1250 Gain Worksheet in the Schedule D instructions for this purpose. H&r block free taxes Worksheet 2. H&r block free taxes Taxable Gain on Sale of Home—Completed Example 1 for Amy Part 1. H&r block free taxes Gain or (Loss) on Sale       1. H&r block free taxes   Selling price of home 1. H&r block free taxes     2. H&r block free taxes   Selling expenses (including commissions, advertising and legal fees, and seller-paid loan charges) 2. H&r block free taxes     3. H&r block free taxes   Subtract line 2 from line 1. H&r block free taxes This is the amount realized 3. H&r block free taxes     4. H&r block free taxes   Adjusted basis of home sold (from Worksheet 1, line 13) 4. H&r block free taxes     5. H&r block free taxes   Gain or (loss) on the sale. H&r block free taxes Subtract line 4 from line 3. H&r block free taxes If this is a loss, stop here 5. H&r block free taxes 200,000   Part 2. H&r block free taxes Exclusion and Taxable Gain       6. H&r block free taxes   Enter any depreciation allowed or allowable on the property for periods after May 6, 1997. H&r block free taxes If none, enter -0- 6. H&r block free taxes 10,000   7. H&r block free taxes   Subtract line 6 from line 5. H&r block free taxes If the result is less than zero, enter -0- 7. H&r block free taxes 190,000   8. H&r block free taxes   Aggregate number of days of nonqualified use after 2008. H&r block free taxes If none, enter -0-. H&r block free taxes  If line 8 is equal to zero, skip to line 12 and enter the amount from line 7 on line 12 8. H&r block free taxes 668   9. H&r block free taxes   Number of days taxpayer owned the property 9. H&r block free taxes 2,080   10. H&r block free taxes   Divide the amount on line 8 by the amount on line 9. H&r block free taxes Enter the result as a decimal (rounded to at least 3 places). H&r block free taxes But do not enter an amount greater than 1. H&r block free taxes 00 10. H&r block free taxes 0. H&r block free taxes 321   11. H&r block free taxes   Gain allocated to nonqualified use. H&r block free taxes (Line 7 multiplied by line 10) 11. H&r block free taxes 60,990   12. H&r block free taxes   Gain eligible for exclusion. H&r block free taxes Subtract line 11 from line 7 12. H&r block free taxes 129,010   13. H&r block free taxes   If you qualify to exclude gain on the sale, enter your maximum exclusion (see Maximum Exclusion ). H&r block free taxes  If you qualify for a reduced maximum exclusion, enter the amount from Worksheet 3, line 7. H&r block free taxes If you do  not qualify to exclude gain, enter -0- 13. H&r block free taxes 250,000   14. H&r block free taxes   Exclusion. H&r block free taxes Enter the smaller of line 12 or line 13 14. H&r block free taxes 129,010   15. H&r block free taxes   Taxable gain. H&r block free taxes Subtract line 14 from line 5. H&r block free taxes Report your taxable gain as described under Reporting the Sale . H&r block free taxes If the amount on line 6 is more than zero, complete line 16 15. H&r block free taxes 70,990   16. H&r block free taxes   Enter the smaller of line 6 or line 15. H&r block free taxes Enter this amount on line 12 of the Unrecaptured Section 1250 Gain  Worksheet in the instructions for Schedule D (Form 1040) 16. H&r block free taxes 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. H&r block free taxes 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. H&r block free taxes In addition, you do not need to report the sale of the business or rental part on Form 4797. H&r block free taxes This is true whether or not you were entitled to claim any depreciation. H&r block free taxes However, you cannot exclude the part of any gain equal to any depreciation allowed or allowable after May 6, 1997. H&r block free taxes See Depreciation after May 6, 1997, earlier. H&r block free taxes Example 1. H&r block free taxes Ray sold his main home in 2013 at a $30,000 gain. H&r block free taxes He has no gains or losses from the sale of property other than the gain from the sale of his home. H&r block free taxes He meets the ownership and use tests to exclude the gain from his income. H&r block free taxes However, he used part of the home as a business office in 2012 and claimed $500 depreciation. H&r block free taxes 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. H&r block free taxes In addition, he does not have to report any part of the gain on Form 4797. H&r block free taxes Because Ray was entitled to take a depreciation deduction, he must recognize $500 of the gain as unrecaptured section 1250 gain. H&r block free taxes He reports his gain, exclusion, and the taxable gain of $500 on Form 8949 and Schedule D (Form 1040). H&r block free taxes Example 2. H&r block free taxes 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. H&r block free taxes Since Ray did not claim any depreciation, he can exclude the entire $30,000 gain. H&r block free taxes 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. H&r block free taxes Examples are: A working farm on which your house was located, A duplex in w
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The H&r Block Free Taxes

H&r block free taxes 3. H&r block free taxes   Gifts Table of Contents If you give gifts in the course of your trade or business, you can deduct all or part of the cost. H&r block free taxes This chapter explains the limits and rules for deducting the costs of gifts. H&r block free taxes $25 limit. H&r block free taxes   You can deduct no more than $25 for business gifts you give directly or indirectly to each person during your tax year. H&r block free taxes A gift to a company that is intended for the eventual personal use or benefit of a particular person or a limited class of people will be considered an indirect gift to that particular person or to the individuals within that class of people who receive the gift. H&r block free taxes   If you give a gift to a member of a customer's family, the gift is generally considered to be an indirect gift to the customer. H&r block free taxes This rule does not apply if you have a bona fide, independent business connection with that family member and the gift is not intended for the customer's eventual use. H&r block free taxes   If you and your spouse both give gifts, both of you are treated as one taxpayer. H&r block free taxes It does not matter whether you have separate businesses, are separately employed, or whether each of you has an independent connection with the recipient. H&r block free taxes If a partnership gives gifts, the partnership and the partners are treated as one taxpayer. H&r block free taxes Example. H&r block free taxes Bob Jones sells products to Local Company. H&r block free taxes He and his wife, Jan, gave Local Company three gourmet gift baskets to thank them for their business. H&r block free taxes They paid $80 for each gift basket, or $240 total. H&r block free taxes Three of Local Company's executives took the gift baskets home for their families' use. H&r block free taxes Bob and Jan have no independent business relationship with any of the executives' other family members. H&r block free taxes They can deduct a total of $75 ($25 limit × 3) for the gift baskets. H&r block free taxes Incidental costs. H&r block free taxes   Incidental costs, such as engraving on jewelry, or packaging, insuring, and mailing, are generally not included in determining the cost of a gift for purposes of the $25 limit. H&r block free taxes   A cost is incidental only if it does not add substantial value to the gift. H&r block free taxes For example, the cost of gift wrapping is an incidental cost. H&r block free taxes However, the purchase of an ornamental basket for packaging fruit is not an incidental cost if the value of the basket is substantial compared to the value of the fruit. H&r block free taxes Exceptions. H&r block free taxes   The following items are not considered gifts for purposes of the $25 limit. H&r block free taxes An item that costs $4 or less and: Has your name clearly and permanently imprinted on the gift, and Is one of a number of identical items you widely distribute. H&r block free taxes Examples include pens, desk sets, and plastic bags and cases. H&r block free taxes Signs, display racks, or other promotional material to be used on the business premises of the recipient. H&r block free taxes    Figure B. H&r block free taxes When Are Transportation Expenses Deductible? Most employees and self-employed persons can use this chart. H&r block free taxes (Do not use this chart if your home is your principal place of business. H&r block free taxes See Office in the home . H&r block free taxes ) Please click here for the text description of the image. H&r block free taxes Figure B. H&r block free taxes When Are Local Transportation Expenses Deductible?TAs for Figure B are: Reg 1. H&r block free taxes 162-1(a); RR 55–109; RR 94–47 Gift or entertainment. H&r block free taxes   Any item that might be considered either a gift or entertainment generally will be considered entertainment. H&r block free taxes However, if you give a customer packaged food or beverages you intend the customer to use at a later date, treat it as a gift. H&r block free taxes    If you give a customer tickets to a theater performance or sporting event and you do not go with the customer to the performance or event, you have a choice. H&r block free taxes You can treat the cost of the tickets as either a gift expense or an entertainment expense, whichever is to your advantage. H&r block free taxes   You can change your treatment of the tickets at a later date by filing an amended return. H&r block free taxes Generally, an amended return must be filed within 3 years from the date the original return was filed or within 2 years from the time the tax was paid, whichever is later. H&r block free taxes    If you go with the customer to the event, you must treat the cost of the tickets as an entertainment expense. H&r block free taxes You cannot choose, in this case, to treat the cost of the tickets as a gift expense. H&r block free taxes Prev  Up  Next   Home   More Online Publications