Table of Contents
This section explains the term “main home.” Usually, the home you live in most of the time is your main home and can be a:
To exclude gain under the rules in this publication, you generally 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.
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The vacant land is adjacent to land containing your home,
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You owned and used the vacant land as part of your main home,
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The 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
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The other requirements for excluding gain from the sale of the vacant land have been satisfied.
The destruction of your home is treated as a sale of your home. Therefore, 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 (3 years if your main home was destroyed as a result of Hurricanes Katrina, Rita, or Wilma.
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Your place of employment.
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The location of your family members' main home.
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Your mailing address for bills and correspondence.
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The address listed on your:
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Federal and state tax returns,
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Driver's license,
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Car registration, and
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Voter registration card.
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The location of the banks you use.
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The location of recreational clubs and religious organizations in which you are a member.
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. Subtract the adjusted basis from the amount realized to get your gain or loss.
Selling price | |||
- | Selling expenses | ||
Amount realized | |||
Amount realized | |||
- | Adjusted basis | ||
Gain or loss |
The selling price is the total amount you receive for your home. It includes money; all notes, mortgages, or other debts assumed by the buyer as part of the sale; and the fair market value of any other property or any services you receive.
While you owned your home, you may have made adjustments (increases or decreases) to the basis. This adjusted basis must be determined before you can figure gain or loss on the sale of your home. For information on how to figure your home's adjusted basis, see Determining Basis, later.
To figure the amount of gain or loss, compare the amount realized to the adjusted basis.
The following rules apply to foreclosures and repossessions, abandonments, trades, transfers to a spouse, and involuntary conversions (such as when your home is destroyed or condemned).
IF you were... | THEN your selling price includes... |
not personally liable for the debt | the full amount of debt canceled by the foreclosure or repossession. |
personally liable for the debt | the amount of canceled debt up to the home's fair market value. You may also have ordinary income, as explained next. |
Example.
You owned and lived in a home with an adjusted basis of $41,000. 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. This is treated as a sale of your old home for $50,000 with a gain of $9,000 ($50,000 - $41,000).
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).
You need to know your basis in your home to determine any gain or loss when you sell it. Your basis in your home is determined by how you got the home. Your basis is its cost if you bought it or built it. If you got it in some other way (inheritance, gift, etc.), its basis is either its fair market value when you got it or the adjusted basis of the person you got it from.
While you owned your home, you may have made adjustments (increases or decreases) to your home's basis. 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.
To figure your adjusted basis, you can use Worksheet 1, shown later. Filled-in examples of that worksheet are included in the Comprehensive Examples, later.
The cost of property is the amount you pay for it in cash, debt obligations, other property, or services.
IF you bought your home... | THEN reduce your home's basis by the seller-paid points... |
after 1990 but before April 4, 1994 | only if you deducted them as home mortgage interest in the year paid. |
after April 3, 1994 | even if you did not deduct them. |
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Abstract fees (abstract of title fees),
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Charges for installing utility services,
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Legal fees (including fees for the title search and preparing the sales contract and deed),
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Recording fees,
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Survey fees,
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Transfer or stamp taxes,
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Owner's title insurance, and
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Any amounts the seller owes that you agree to pay, such as:
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Fire insurance premiums,
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Rent for occupancy of the house before closing,
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Charges for utilities or other services related to occupancy of the house before closing,
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Any fee or cost that you deducted as a moving expense (allowed for certain fees and costs before 1994),
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Charges connected with getting a mortgage loan, such as:
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Fees for refinancing a mortgage.
IF... | AND... | THEN the taxes... |
you pay taxes that the seller owed on the home (the taxes up to the date of sale) | the seller does not reimburse you | are added to the basis of your home. |
the seller reimburses you | do not affect the basis of your home. | |
the seller paid taxes for you (the taxes beginning on the date of sale) | you do not reimburse the seller | are subtracted from the basis of your home. |
you reimburse the seller | do not affect the basis of your home. |
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The cost of the land, plus
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The amount it cost you to complete the house, including:
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The value of your own labor, or
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The value of any other labor you did not pay for.
You must use a basis other than cost, such as fair market value, if you got your home as a gift, from your spouse, as an inheritance, or in a trade. If you got your home in any of these ways, see the following discussion that applies to you. If you want to figure your adjusted basis using Worksheet 1, see the Worksheet 1 Instructions, later, for help.
IF the donor's adjusted basis at the time of the gift was... | THEN your basis is... |
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.
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. If using the fair market value results in a gain, you have neither gain nor loss. |
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. |
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). |
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Publication 547, Casualties, Disasters, and Thefts, in the case of a home that was destroyed, or
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Chapter 1 of Publication 544, in the case of a home that was condemned.
Example.
A fire destroyed your home that you owned and used for only 6 months. The home had an adjusted basis of $80,000 and the insurance company paid you $130,000 for the loss. You realized a gain of $50,000 ($130,000 - $80,000). You bought a replacement home for $100,000. You recognize a gain of $30,000 ($130,000 - $100,000), the unspent part of the payment from the insurance company. Your gain not recognized is $20,000, the difference between the $50,000 realized gain and the $30,000 recognized gain. The basis of the new home is figured as follows:
Cost of replacement home | $100,000 |
Minus: Gain not recognized | 20,000 |
Basis of the replacement home | $80,000 |
Adjusted basis is your basis increased or decreased by certain amounts.
To figure your adjusted basis, you can use Worksheet 1, shown later. Filled-in examples of that worksheet are included in Comprehensive Examples, later.
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Gain you postponed from the sale of a previous home before May 7, 1997,
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Insurance payments you received or expect to receive for casualty losses,
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Payments you received for granting an easement or right-of-way,
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Depreciation allowed or allowable if you used your home for business or rental purposes,
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Residential energy credit (generally allowed from 1977 through 1987) claimed for the cost of energy improvements that you added to the basis of your home,
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Nonbusiness energy property credit (allowed beginning in 2006) claimed for making certain energy saving improvements that you added to the basis of your home,
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Residential energy efficient property credit (allowed beginning in 2006) claimed for making certain energy saving improvements that you added to the basis of your home,
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Adoption credit you claimed for improvements added to the basis of your home,
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Nontaxable payments from an adoption assistance program of your employer that you used for improvements you added to the basis of your home,
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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. An energy conservation measure is an installation or modification that is primarily designed either to reduce consumption of electricity or natural gas or to improve the management of energy demand for a home, and
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District of Columbia first-time homebuyer credit (allowed on the purchase of a principal residence in the District of Columbia beginning on August 5, 1997).
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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.
Examples.
Putting a recreation room or another bathroom in your unfinished basement, putting up a new fence, putting in new plumbing or wiring, putting on a new roof, or paving your unpaved driveway are improvements. An addition to your house, such as a new deck, a sunroom, or a new garage, is also an improvement.
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 |
Recordkeeping. You should keep records to prove your home's adjusted basis. 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. 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. Keep records proving the basis of both homes as long as they are needed for tax purposes.
The records you should keep include:
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Proof of the home's purchase price and purchase expenses,
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Receipts and other records for all improvements, additions, and other items that affect the home's adjusted basis,
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Any worksheets 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,
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Any Form 2119, Sale of Your Home, that you filed to postpone gain from the sale of a previous home before May 7, 1997, and
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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.
You may qualify to exclude from your income all or part of any gain from the sale of your main home. 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. To qualify, you must meet the ownership and use tests described later.
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. 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.
You can use Worksheet 2, shown later, to figure the amount of your exclusion and your taxable gain, if any.
If you have any amount of taxable gain from the sale of your home, you may have to increase your withholding or make estimated tax payments. See Publication 505, Tax Withholding and Estimated Tax.
You can exclude up to $250,000 of the gain on the sale of your main home if all of the following are true.
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You meet the ownership test.
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You meet the use test.
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During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home.
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.
You may be able to exclude up to $500,000 of the gain 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.
To claim the exclusion, you must meet the ownership and use tests. This means that during the 5-year period ending on the date of the sale, you must have:
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Owned the home for at least 2 years (the ownership test), and
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Lived in the home as your main home for at least 2 years (the use test).
Example 1—home owned and occupied for 3 years.
Amanda bought and moved into her main home in September 2004. She sold the home at a gain on September 15, 2007. During the 5-year period ending on the date of sale (September 16, 2002 - September 15, 2007), she owned and lived in the home for 3 years. She meets the ownership and use tests.
Example 2—ownership test met but use test not met.
Dan bought a home in 2001. After living in it for 6 months, he moved out. He never lived in the home again and sold it at a gain on June 28, 2007. He owned the home during the entire 5-year period ending on the date of sale (June 29, 2002 - June 28, 2007). However, he did not live in it for the required 2 years. He meets the ownership test but not the use test. He cannot exclude any part of his gain on the sale, unless he qualified for a reduced maximum exclusion (explained later).
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.
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.
Worksheet 1 Instructions.
If you use Worksheet 1 to figure the adjusted basis of your home, follow these instructions.
IF... | THEN... | |
you inherited your home | 1 | skip lines 1-4 of the worksheet. |
2 | find your basis using the rules under Home received as inheritance. Enter this amount on line 5 of the worksheet. | |
3 | fill out the rest of the worksheet. | |
you received your home as a gift | 1 | read Home received as gift and enter on lines 1 and 3 of the worksheet either the donor's adjusted basis or the home's fair market value at the time of the gift, whichever is appropriate. |
2 | if you can add any federal gift tax to your basis, enter that amount on line 5 of the worksheet. | |
3 | fill out the rest of the worksheet. | |
you received your home as a trade for other property | 1 | enter on line 1 of the worksheet the fair market value of the other property. (But if you received your home as a trade for your previous home before May 7, 1997, and had a gain on the trade that you postponed using Form 2119, enter on line 1 of the worksheet the adjusted basis of the new home from that Form 2119.) |
2 | fill out the rest of the worksheet. | |
you built your home | 1 | add the purchase price of the land and the cost of building the home. See Construction. Enter that total on line 1 of the worksheet. (However, if you filed a Form 2119 to postpone gain on the sale of a previous home before May 7, 1997, enter on line 1 of the worksheet the adjusted basis of the new home from that Form 2119.) |
2 | fill out the rest of the worksheet. | |
you received your home from your spouse after July 18, 1984 | 1 | skip lines 1-4 of the worksheet. |
2 | enter on line 5 of the worksheet your spouse's adjusted basis in the home just before you received it. | |
3 | fill out the rest of the worksheet, making adjustments to basis only for events after the transfer. | |
you owned a home jointly with your spouse, who transferred his or her interest in the home to you after July 18, 1984 | ||
fill out one worksheet, including adjustments to basis for events both before and after the transfer. | ||
you received your home from your spouse before July 19, 1984 | 1 | skip lines 1-4 of the worksheet. |
2 | enter on line 5 of the worksheet the home's fair market value at the time you received it. | |
3 | fill out the rest of the worksheet, making adjustments to basis only for events after the transfer. | |
you owned a home jointly with your spouse, who transferred his or her interest in the home to you before July 19, 1984 | 1 | fill out a worksheet, lines 1-13, making adjustments to basis only for events before the transfer. |
2 | multiply the amount on line 13 of that worksheet by one-half (0.5) to get the adjusted basis of your half-interest at the time of the transfer. | |
3 | multiply the fair market value of the home at the time of the transfer by one-half (0.5). Generally, this is the basis of the half-interest that your spouse owned. | |
4 | add the amounts from steps 2 and 3 and enter the total on line 5 of a second worksheet. | |
5 | complete the rest of the second worksheet, making adjustments to basis only for events after the transfer. |
Worksheet 1 Instructions.(Continued)
IF... | THEN... | |
you owned your home jointly with your spouse who died | 1 | fill out a worksheet, lines 1-13, making adjustments to basis only for events before your spouse's death. |
2 | multiply the amount on line 13 of that worksheet by one-half (0.5) to get the adjusted basis of your half-interest on the date of death. | |
3 | use the rules under Surviving spouse to find the basis for the half-interest owned by your spouse. | |
4 | add the amounts from steps 2 and 3 and enter the total on line 5 of a second worksheet. | |
5 | complete the rest of the second worksheet, making adjustments to basis only for events after your spouse's death. | |
you owned your home jointly with your spouse who died, and your permanent home is in a community property state | 1 | skip lines 1-4 of the worksheet. |
2 | enter the amount of your basis on line 5 of the worksheet. Generally, this is the total fair market value of the home at the time of death. (See Community property.) | |
3 | fill out the rest of the worksheet, making adjustments to basis only for events after your spouse's death. | |
your home was ever damaged as a result of a casualty | 1 | on line 8 of the worksheet, enter any amounts you spent to restore the home to its condition before the casualty. |
2 |
on line 11 enter:
any insurance reimbursements you received (or expect to receive) for the loss, and any deductible casualty losses not covered by insurance. |
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none of these items apply | fill out the entire worksheet. |
Worksheet 1. Adjusted Basis of Home Sold |
Caution:See the Worksheet 1 Instructions before you use this worksheet. | |||||||
1. | Enter the purchase price of the home sold. (If you filed Form 2119 when you originally acquired that home to postpone gain on the sale of a previous home before May 7, 1997, enter the adjusted basis of the new home from that Form 2119.) | 1. | |||||
2. | Seller-paid points for home bought after 1990. (See Seller-paid points.) Do not include any seller-paid points you already subtracted to arrive at the amount entered on line 1 | 2. | |||||
3. | Subtract line 2 from line 1 | 3. | |||||
4. | Settlement fees or closing costs. (See Settlement fees or closing costs.) If line 1 includes the adjusted basis of the new home from Form 2119, go to line 6. | ||||||
a. | Abstract and recording fees | 4a. | |||||
b. | Legal fees (including fees for title search and preparing documents) | 4b. | |||||
c. | Survey fees | 4c. | |||||
d. | Title insurance | 4d. | |||||
e. | Transfer or stamp taxes | 4e. | |||||
f. | Amounts that the seller owed that you agreed to pay (back taxes or interest, recording or mortgage fees, and sales commissions) |
4f. |
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g. | Other | 4g. | |||||
5. | Add lines 4a through 4g | 5. | |||||
6. | Cost of additions and improvements. Do not include any additions and improvements included on line 1 | 6. | |||||
7. | Special tax assessments paid for local improvements, such as streets and sidewalks | 7. | |||||
8. | Other increases to basis | 8. | |||||
9. | Add lines 3, 5, 6, 7, and 8 | 9. | |||||
10. | Depreciation allowed or allowable, related to the business use or rental of the home | 10. | |||||
11. | Other decreases to basis (See Decreases to basis.) | 11. | |||||
12. | Add lines 10 and 11 | 12. | |||||
13. | Adjusted basis of home sold. Subtract line 12 from line 9. Enter here and on Worksheet 2, line 4 | 13. |
Worksheet 2. Gain or (Loss), Exclusion, and Taxable Gain on Sale of Home
Part 1 - Gain or (Loss) on Sale | |||||
1. | Selling price of home | 1. | |||
2. | Selling expenses (including commissions, advertising and legal fees, and seller-paid loan charges) | 2. | |||
3. | Subtract line 2 from line 1. This is the amount realized | 3. | |||
4. | Adjusted basis of home sold (from Worksheet 1, line 13) | 4. | |||
5. | Subtract line 4 from line 3. This is the gain or (loss) on the sale. If this is a loss, stop here | 5. | |||
Part 2 - Exclusion and Taxable Gain | |||||
6. | Enter any depreciation allowed or allowable on the property for periods after May 6, 1997. If none, enter -0-. | 6. | |||
7. | Subtract line 6 from line 5. (If the result is less than zero, enter -0-.) | 7. | |||
8. | If you qualify to exclude gain on the sale, enter your maximum exclusion. (See Maximum Exclusion.) If you qualify for a reduced maximum exclusion, enter the amount from Worksheet 3, line 7. If you do not qualify to exclude gain, enter -0- | 8. | |||
9. | Enter the smaller of line 7 or line 8. This is your exclusion | 9. | |||
10. | Subtract line 9 from line 5. This is your taxable gain. Report it as described under Reporting the Sale. If the amount on this line is zero, do not report the sale or exclusion on your tax return. If the amount on line 6 is more than zero, complete line 11 | 10. | |||
11. | Enter the smaller of line 6 or line 10. Enter this amount on line 12 of the Unrecaptured Section 1250 Gain Worksheet in the instructions for Schedule D (Form 1040) | 11. |
Example.
Susan bought and moved into a house in July 2003. She lived there for 13 months and then moved in with a friend. She moved back into her own house in 2006 and lived there for 12 months until she sold it in July 2007. Susan meets the ownership and use tests because, during the 5-year period ending on the date of sale, she owned the house for 4 years and lived in it for a total of 25 (13 + 12) months.
Example 1.
David Johnson, who is single, bought and moved into his home on February 1, 2005. Each year during 2005 and 2006, David left his home for a 2-month summer vacation. David sold the house on March 1, 2007. Although the total time David used his home is less than 2 years (21 months), he may exclude any gain up to $250,000. 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.
Example 2.
Professor Paul Beard, who is single, bought and moved into a house on August 28, 2004. He lived in it as his main home continuously until January 5, 2006, when he went abroad for a 1-year sabbatical leave. On February 6, 2007, 1 month after returning from the leave, Paul sold the house at a gain. Because his leave was not a short temporary absence, he cannot include the period of leave to meet the 2-year use test. He cannot exclude any part of his gain because he did not use the residence for the required 2 years.
Example.
In 1998, Helen Jones lived in a rented apartment. The apartment building was later changed to a condominium, and she bought her apartment on December 3, 2004. In 2005, Helen became ill and on April 14 of that year she moved to her daughter's home. On July 12, 2007, while still living in her daughter's home, she sold her apartment.
Helen can exclude gain on the sale of her apartment because she met the ownership and use tests during the 5-year period from July 13, 2002, to July 12, 2007, the date she sold the apartment. She owned her apartment from December 3, 2004, to July 12, 2007 (more than 2 years). She lived in the apartment from July 13, 2002 (the beginning of the 5-year period), to April 14, 2005 (more than 2 years).
The time Helen lived in her daughter's home during the 5-year period can be counted as a period of ownership, and the time she lived in her rented apartment during the 5-year period can be counted as a period of use.
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Owned the stock for at least 2 years, and
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Lived in the house or apartment that the stock entitles you to occupy as your main home for at least 2 years.
Example.
David bought and moved into a home in 1999. He lived in it as his main home for 2½ years. For the next 6 years, he did not live in it because he was on qualified official extended duty with the Army. He then sold the home at a gain in 2007. To meet the use test, David chooses to suspend the 5-year test period for the 6 years he was on qualified official extended duty. This means he can disregard those 6 years. Therefore, David's 5-year test period consists of the 5 years before he went on qualified official extended duty. He meets the ownership and use tests because he owned and lived in the home for 2½ years during this test period.
Example.
Mary bought a home on April 1, 1991. She used it as her main home until September 1, 1994, when she went on qualified official extended duty with the Navy. She did not live in the house again before selling it on August 1, 2007. Mary chooses to use the entire 10-year suspension period. Therefore, the suspension period would extend back from August 1, 2007, to August 1, 1997, and the 5-year test period would extend back to August 1, 1992. During that period, Mary owned the house all 5 years and lived in it as her main home from August 1, 1992, until September 1, 1994, a period of 25 months. She meets the ownership and use tests because she owned and lived in the home for 2 years during this test period.
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The Armed Forces (the Army, Navy, Air Force, Marine Corps, and Coast Guard),
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The commissioned corps of the National Oceanic and Atmospheric Administration, and
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The commissioned corps of the Public Health Service.
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A Chief of mission.
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An Ambassador at large.
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A member of the Senior Foreign Service.
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A Foreign Service officer.
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Part of the Foreign Service personnel.
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The Office of the Director of National Intelligence.
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The Central Intelligence Agency.
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The National Security Agency.
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The Defense Intelligence Agency.
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The National Geospatial-Intelligence Agency.
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The National Reconnaissance Office and any other office within the Department of Defense for the collection of specialized national intelligence through reconnaissance programs.
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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.
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The Bureau of Intelligence and Research of the Department of State.
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Any of the elements of the Department of Homeland Security concerned with the analyses of foreign intelligence information.
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At a duty station at least 50 miles from your main home, or
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While you live in Government quarters under Government orders.
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You become physically or mentally unable to care for yourself, and
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You owned and lived in your home as your main home for a total of at least 1 year.
If you and your spouse file a joint return for the year of sale, you can exclude gain if either spouse meets the ownership and use tests. (But see Special rules for joint returns, next.)
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You are married and file a joint return for the year.
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Either you or your spouse meets the ownership test.
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Both you and your spouse meet the use test.
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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.
Example 1 — one spouse sells a home.
Emily sells her home in June 2007. She marries Jamie later in the year. She meets the ownership and use tests, but Jamie does not. Emily can exclude up to $250,000 of gain on a separate or joint return for 2007. The $500,000 maximum exclusion for certain joint returns does not apply because Jamie does not meet the use test.
Example 2 — each spouse sells a home.
The facts are the same as in Example 1 except that Jamie also sells a home in 2007 before he marries Emily. He meets the ownership and use tests on his home, but Emily does not. Emily and Jamie can each exclude up to $250,000 of gain. The $500,000 maximum exclusion for certain joint returns does not apply because Emily and Jamie do not jointly meet the use test for the same home.
You can claim an exclusion, but the maximum amount of gain you can exclude will be reduced if either of the following is true.
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You did not meet the ownership and use tests, but the reason you sold the home was:
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A change in place of employment,
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Health, or
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Unforeseen circumstances (as defined later).
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Your exclusion would have been disallowed because of the rule described in More Than One Home Sold During 2-Year Period, later, except that the reason you sold the home was:
Use Worksheet 3, shown later, to figure your reduced maximum exclusion.
A change in place of employment, health, or unforeseen circumstances (whichever applies) is considered to be the reason you sold your home if either of the following is true.
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Your home sale qualifies under a “safe harbor.” A safe harbor is a set of certain facts and circumstances that, if applicable, qualifies you to claim a reduced maximum exclusion. There are safe harbors for each of the three reasons you sold your home for which a reduced maximum exclusion may be claimed. The safe harbors are explained in detail later in the following discussions covering each of these reasons under Distance safe harbor, Doctor's recommendation safe harbor, and Specific event safe harbors.
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The primary reason you sold the home was a change in place of employment, health, or unforeseen circumstances. Factors that may be relevant in determining your primary reason for sale include whether:
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Your sale and the circumstances causing it were close in time,
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The circumstances causing your sale occurred during the time you owned and used the property as your main home,
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The circumstances causing your sale were not reasonably foreseeable when you began using the property as your main home,
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Your financial ability to maintain your home became materially impaired,
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The suitability of your property as a home materially changed, and
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During the time you owned the property, you used it as your home.
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The sale of your main home is because of a change in place of employment if your primary reason for the sale is a change in the location of employment of a qualified individual.
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You.
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Your spouse.
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A co-owner of the home.
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A person whose main home is the same as yours.
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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 the former place of employment was (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).
Example.
Justin was unemployed and living in a townhouse in Florida that he had owned and used as his main home since 2006. He got a job in North Carolina and sold his townhouse in 2007. 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. Justin's sale of his home is considered to be because of a change in place of employment and he is entitled to a reduced maximum exclusion of gain from the sale.
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.
For purposes of this reason, a qualified individual includes, in addition to the individuals listed earlier under Change in Place of Employment, any of the following family members of these individuals.
-
Parent, grandparent, stepmother, stepfather.
-
Child, grandchild, stepchild, adopted child.
-
Brother, sister, stepbrother, stepsister, half brother, half sister.
-
Mother-in-law, father-in-law, brother-in-law, sister-in-law, son-in-law, or daughter-in-law.
-
Uncle, aunt, nephew, niece, or cousin.
The sale of your home is not because of health if the sale merely benefits a qualified individual's general health or well-being.
Example.
In 2006, Chase and Lauren, husband and wife, bought a house that they used as their main home. Lauren's father has a chronic disease and is unable to care for himself. In 2007, Chase and Lauren sell their home in order to move into Lauren's father's house to provide care for him. 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.
Worksheet 3. Reduced Maximum Exclusion
Caution:Complete this worksheet only if you qualify for a reduced maximum exclusion. (See Reduced Maximum Exclusion .) Complete column (A). Fill in both columns (A) and (B) on lines 2 through 6 only if you are married filing a joint return. |
(A)
You |
(B)
Your Spouse |
|||
1. | Maximum amount | 1. | $250,000.00 | $250,000.00 | |
2a. | Enter the number of days (or months) that you used the property as a main home during the 5-year period* ending on the date of sale | 2a. |
|||
b. | Enter the number of days (or months) that you owned the property during the 5-year period* ending on the date of sale. If you used days on line 2a, you also must use days on this line and on lines 3 and 5. If you used months on line 2a, you also must use months on this line and on lines 3 and 5. (If married filing jointly and one spouse owned the property longer than the other spouse, both spouses are treated as owning the property for the longer period.) | b. |
|||
c. | Enter the smaller of line 2a or 2b | c. | |||
3. |
Have you (or your spouse, if filing jointly) excluded gain from the sale of another home during the 2-year period ending
on the date of this sale?
NO. Skip line 3 and enter the number of days (or months) from line 2c on line 4. YES. Enter the number of days (or months) between the date of the most recent sale of another home on which you excluded gain and the date of sale of this home |
3. |
|||
4. | Enter the smaller of line 2c or 3 | 4. | |||
5. | Divide the amount on line 4 by 730 days (or 24 months). Enter the result as a decimal (rounded to at least 3 places). But do not enter an amount greater than 1.000 | 5. |
|||
6. | Multiply the amount on line 1 by the decimal amount on line 5 | 6. | |||
7. | Add the amounts in columns (A) and (B) of line 6. This is your reduced maximum exclusion. Enter it here and on Worksheet 2, line 8 | 7. |
|||
*If you were a member of the uniformed services or Foreign Service or an employee of the intelligence community during the time you owned the home, see Members of the uniformed services or Foreign Service or employees of the intelligence community to determine your 5-year period. |
The sale of your main home is because of an unforeseen circumstance if your primary reason for the sale is the occurrence of an event that you could not reasonably have anticipated before buying and occupying your main home. 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 your finances improved.
-
An involuntary conversion of your home, such as when your home is destroyed or condemned.
-
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.
-
In the case of qualified individuals (listed earlier under Change in Place of Employment):
-
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, next) for his or her household,
-
Divorce or legal separation, or
-
Multiple births resulting from the same pregnancy.
-
-
An event the Commissioner of IRS determined to be an unforeseen circumstance in published guidance of general applicability. For example, the Commissioner determined the September 11, 2001, terrorist attacks to be an unforeseen circumstance.
-
Amounts spent for food.
-
Amounts spent for clothing.
-
Housing and related expenses.
-
Medical expenses.
-
Transportation expenses.
-
Tax payments.
-
Court-ordered payments.
-
Expenses reasonably necessary to produce income.
You generally cannot exclude gain on the sale of your home if, during the 2-year period ending on the date of the sale, you sold another home at a gain and excluded all or part of that gain. If you cannot exclude the gain, you must include it in your income.
For details about this exception, see Reduced Maximum Exclusion, earlier.
Example 1.
In September 2005, Paul and Nadine bought a new home. In November 2005, they sold their old home at a $40,000 gain. They had owned and lived in the old home for 4 years. They excluded the gain on the sale.
On October 1, 2007, Paul and Nadine sold the home they purchased in September 2005 at a $15,000 gain. The sale was not due to a change in place of employment, health, or unforeseen circumstances as defined in this publication. Because Paul and Nadine had excluded gain on the sale of another home within the 2-year period ending on October 1, 2007, they cannot exclude the gain on this sale.
Example 2.
The facts are the same as in Example 1 except that Paul and Nadine did not sell the home purchased in September 2005 until December 3, 2007. Because they had not excluded gain on the sale of another home within the 2-year period ending on December 3, 2007, they can exclude the gain on this sale.
You may be able to exclude gain from the sale of a home that you have used for business or to produce rental income. But you must meet the ownership and use tests.
Example 1.
On May 29, 2001, Amy bought a house. She moved in on that date and lived in it until May 31, 2003, when she moved out of the house and put it up for rent. The house was rented from June 1, 2003, to March 31, 2005. Amy moved back into the house on April 1, 2005, and lived there until she sold it on January 30, 2007. During the 5-year period ending on the date of the sale (January 31, 2002 - January 30, 2007), Amy owned and lived in the house for more than 2 years as shown in the following table.
Five-Year Period | Used as Home | Used as Rental |
1/31/02 - 5/31/03 | 16 months | |
6/01/03 - 3/31/05 | 22 months | |
4/01/05 - 1/30/07 | 22 months | |
38 months | 22 months | |
Amy can exclude gain up to $250,000. However, she cannot exclude the part of the gain equal to the depreciation she claimed or could have claimed for renting the house, as explained after Example 2.
Example 2.
William owned and used a house as his main home from 2001 through 2004. On January 1, 2005, he moved to another state. He rented his house from that date until April 30, 2007, when he sold it. During the 5-year period ending on the date of sale (May 1, 2002 - April 30, 2007), William owned and lived in the house for 32 months (more than 2 years). He must report the sale on Form 4797. He can exclude gain up to $250,000. 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.
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.
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. In addition, you do not need to report the sale of the business or rental part on Form 4797. This is true whether or not you were entitled to claim any depreciation. However, you cannot exclude the part of any gain equal to any depreciation allowed or allowable after May 6, 1997. See Depreciation after May 6, 1997 earlier.
Example 1.
Ray sold his main home in 2007 at a $30,000 gain. He has no gains or losses from the sale of property other than the gain from the sale of his home. He meets the ownership and use tests to exclude the gain from his income. However, he used part of the home as a business office in 2006 and claimed $500 depreciation. 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. In addition, he does not have to report any part of the gain on Form 4797. But since Ray was entitled to take a depreciation deduction, he must recognize $500 of the gain as unrecaptured section 1250 gain. He reports his gain, exclusion, and the taxable gain of $500 on Schedule D (Form 1040).
You may have used part of your property as your home and a separate part of it for business or to produce rental income. Examples are:
-
A working farm on which your house was located,
-
An apartment building in which you lived in one unit and rented the others, or
-
A store building with an upstairs apartment in which you lived.
Example 3.
In 2003, Lew bought property that consisted of a house and a stable. He used the house as his main home and used the stable in his business for the next 4 years. He sold the entire property in 2007 at a $10,000 gain. Lew met the ownership and use tests for the house but did not meet the use test for the stable. Lew must allocate the basis of the property and the amount realized between the part of the property he used for his home and the part he used for his business, since the business part was separate from his home. Lew must report the gain on the business part of his property on Form 4797. He can exclude the gain on the part of the property that was his main home.
Example 4.
In 2002, Mary bought property that consisted of a house and a barn. Mary used the house as her main home and used the barn in her antiques business. In 2006, Mary moved out of the house and rented it to tenants. She claimed depreciation on the house while renting it in 2006 and 2007. She continued to use the barn in her business. Mary sold the entire property in 2007 for a $21,000 gain. Mary must allocate the basis of the property and amount realized between the residential and business parts of the property since the barn is separate from her home. She must report the entire gain from the barn on Form 4797 since she did not meet the use test for the barn. She must also report gain on the home to the extent of the depreciation she claimed for the rental.
Example 5.
In January 2003, you bought and moved into a 4-story townhouse. In December 2005, you converted the basement level, which has a separate entrance, into a separate apartment by installing a kitchen and bathroom and removing the interior stairway that led from the basement to the upper floors. After you completed the conversion, your townhouse had a rental unit that was separate from the part of your house used as your home. You lived in the first, second, and third levels of the townhouse and rented the basement level to tenants until December 2007. You claimed depreciation of $2,000 for the basement apartment. You sold the entire townhouse in December 2007 for a $16,000 gain. Your records show the following.
Purchase price | $ 96,000 |
Improvements (kitchen and bath) | 4,000 |
Depreciation (on rental part; all after 5/6/1997) | 2,000 |
Selling price | 124,000 |
Selling expenses | 10,000 |
Because you met the ownership and use tests for both the basement apartment and the part of the house you used as your home, you can claim an exclusion for both parts. However, you must allocate your basis, selling price, and selling expenses between the part of the property you used as a main home and the part you rented out to tenants. You start by finding the adjusted basis of each part. You determine that three-fourths (75%) of your purchase price was for the part used as your home; one-fourth (25%) was for the rental part.
Home | Rental | |
(3/4) | (1/4) | |
Purchase price | $72,000 | $24,000 |
Plus: Improvements | -0- | 4,000 |
Minus: Depreciation | -0- | 2,000 |
Adjusted basis | $72,000 | $26,000 |
Next, to figure the gain on each part, you decide to fill out a separate Worksheet 2 (Part 1) for each part, dividing your selling price and selling expenses between the two parts.
Home | Rental | ||
(3/4) | (1/4) | ||
Part 1 - Gain or (Loss) on Sale | |||
1) | Selling price of home | $93,000 | $31,000 |
2) | Selling expenses | 7,500 | 2,500 |
3) | Subtract line 2 from line 1. This is the amount realized | $85,500 | $28,500 |
4) | Adjusted basis of home sold | 72,000 | 26,000 |
5) | Subtract line 4 from line 3. This is the gain or (loss) | $13,500 | $2,500 |
Then, to figure your taxable gain and exclusion, you decide to fill out a separate Worksheet 2 (Part 2) for each part, dividing your maximum exclusion between the two parts. You are single, so the maximum exclusion is $250,000.
Home | Rental | ||
(3/4) | (1/4) | ||
Part 2 - Exclusion and Taxable Gain | |||
6) | Depreciation allowed or allowable after May 6, 1997 | $-0- | $2,000 |
7) | Subtract line 6 from gain figured earlier on line 5 | 13,500 | 500 |
8) | Maximum exclusion | $187,500 | $62,500 |
9) |
Exclusion (smaller of line 7 or
line 8) |
13,500 | 500 |
10) | Taxable gain (gain figured earlier on line 5 minus line 9) | -0- | * |
11) | Smaller of line 6 or line 10 | -0- | * |
* Lines 10 and 11 do not need to be filled out for the rental part. |
Do not report the gain from the part used as your home, $13,500, because you can exclude all of it. You report the gain from the rental part, $2,500, in Part III of Form 4797. You enter your $500 exclusion as a loss (in parentheses) on Form 4797, line 2, in column (g), and write “Section 121 exclusion” on that line. Your taxable gain from the rental part is $2,000 ($2,500 - $500).
Example 6.
Assume the same facts as in Example 5, except that in March 2007, you combined the two separate dwelling units by eliminating the basement kitchen and building a new interior stairway to the upper floors. You used the entire townhouse as your main home for the rest of 2007. The entire townhouse was used as your main home for at least 2 years during the 5-year period ending on the date of the sale. You report the gain, $16,000, and the allowable exclusion ($14,000), in Part II of Schedule D (Form 1040). Since your $2,000 taxable gain is from depreciation, it is unrecognized section 1250 gain, so you must also enter it on line 12 of the Unrecaptured Section 1250 Gain Worksheet in the Schedule D (Form 1040) instructions. You have no gains or losses from the sale of property other than the gain from the sale of your home, so you also enter $2,000 on lines 13 and 18 of the worksheet and on line 19 of Schedule D. You then figure your tax using the Schedule D Tax Worksheet.
Do not report the 2007 sale of your main home on your tax return unless:
-
You have a gain and you do not qualify to exclude all of it, or
-
You have a gain and choose not to exclude it.
If you have any taxable gain on the sale of your main home that cannot be excluded, report the entire gain realized (line 5 of Worksheet 2) on Schedule D (Form 1040). Report it in column (f) of line 1 or line 8 of Schedule D, as short term or long term capital gain depending on how long you owned the home. If you qualify for an exclusion (line 9 of Worksheet 2), show it on the line directly below the line on which you report the gain. Write “Section 121 exclusion” in column (a) of that line and show the amount of the exclusion in column (f) as a loss (in parentheses).
If you used the home for business or to produce rental income, you may have to use Form 4797 to report the sale of the business or rental part (or the sale of the entire property if used entirely for business or rental). See Business Use or Rental of Home, earlier, and the instructions for Form 4797.
Example 1.
Peter and Betty Clark, who are married and file a joint return, bought a home in 1965. They lived in it as their main home until they sold it in February 2007 and moved into a retirement community. The Clarks can exclude gain on the sale of their home because they owned and lived in it for at least 2 years of the 5-year period ending on the date of sale.
Their records show the following:
Original cost | $ 40,000 |
Legal fees for title search | 250 |
Improvements (roof) | 2,000 |
Selling price | 395,000 |
Selling expenses, including commission | 25,000 |
The Clarks use Worksheet 1 to figure the adjusted basis of the home they sold ($42,250). They use Worksheet 2 to figure the gain on the sale ($327,750) and the amount of their exclusion ($327,750). Their completed Worksheets 1 and 2 follow.
Since the Clarks are married and file a joint return for the year, they qualify to exclude the full amount of their gain. Because they choose to exclude the gain, they do not report the sale of the home on their return.
Example 2.
The facts are the same as in Example 1, except that Peter and Betty Clark sold their home for $695,000 and they had no selling expenses. Their gain on the sale is $652,750. Since they are married, meet the ownership and use tests, and file a joint return for the year, they qualify to exclude $500,000 of the gain. They report the remaining gain of $152,750 ($652,750 - $500,000) on Schedule D (Form 1040). Their completed Worksheet 2 appears next. (Worksheet 1 remains the same as shown in Example 1.) The front page of the Clarks' Schedule D follows.
Worksheet 1. Adjusted Basis of Home Sold Illustrated Example 1 for Peter and Betty Clark
Caution:See the Worksheet 1 Instructions before you use this worksheet. | |||||||
1. | Enter the purchase price of the home sold. (If you filed Form 2119 when you originally acquired that home to postpone gain on the sale of a previous home before May 7, 1997, enter the adjusted basis of the new home from that Form 2119.) | 1. | $40,000 | ||||
2. | Seller-paid points for home bought after 1990. (See Seller-paid points.) Do not include any seller-paid points you already subtracted to arrive at the amount entered on line 1 | 2. | |||||
3. | Subtract line 2 from line 1 | 3. | 40,000 | ||||
4. | Settlement fees or closing costs. (See Settlement fees or closing costs.) If line 1 includes the adjusted basis of the new home from Form 2119, go to line 6. | ||||||
a. | Abstract and recording fees | 4a. | |||||
b. | Legal fees (including fees for title search and preparing documents) | 4b. | 250 | ||||
c. | Survey fees | 4c. | |||||
d. | Title insurance | 4d. | |||||
e. | Transfer or stamp taxes | 4e. | |||||
f. | Amounts that the seller owed that you agreed to pay (back taxes or interest, recording or mortgage fees, and sales commissions) | 4f. | |||||
g. | Other | 4g. | |||||
5. | Add lines 4a through 4g | 5. | 250 | ||||
6. | Cost of additions and improvements. Do not include any additions and improvements included on line 1 | 6. | 2,000 | ||||
7. | Special tax assessments paid for local improvements, such as streets and sidewalks | 7. | |||||
8. | Other increases to basis | 8. | |||||
9. | Add lines 3, 5, 6, 7, and 8 | 9. | 42,250 | ||||
10. | Depreciation allowed or allowable, related to the business use or rental of the home | 10. | |||||
11. | Other decreases to basis (See Decreases to basis.) | 11. | |||||
12. | Add lines 10 and 11 | 12. | |||||
13. | Adjusted basis of home sold. Subtract line 12 from line 9. Enter here and on Worksheet 2, line 4 | 13. | $42,250 |
Worksheet 2. Gain or (Loss), Exclusion, and Taxable Gain on Sale of Home Illustrated Example 1 for Peter and Betty Clark
Part 1 - Gain or (Loss) on Sale | |||||
1. | Selling price of home | 1. | $395,000 | ||
2. | Selling expenses (including commissions, advertising and legal fees, and seller-paid loan charges) | 2. | 25,000 | ||
3. | Subtract line 2 from line 1. This is the amount realized | 3. | 370,000 | ||
4. | Adjusted basis of home sold (from Worksheet 1, line 13) | 4. | 42,250 | ||
5. | Subtract line 4 from line 3. This is the gain or (loss) on the sale. If this is a loss, stop here | 5. | 327,750 | ||
Part 2 - Exclusion and Taxable Gain | |||||
6. | Enter any depreciation allowed or allowable on the property for periods after May 6, 1997. If none, enter -0- | 6. | -0- | ||
7. | Subtract line 6 from line 5. (If the result is less than zero, enter -0-.) | 7. | 327,750 | ||
8. | If you qualify to exclude gain on the sale, enter your maximum exclusion. (See Maximum Exclusion.) If you do not qualify to exclude gain, enter -0- | 8. | 500,000 | ||
9. | Enter the smaller of line 7 or line 8. This is your exclusion | 9. | 327,750 | ||
10. | Subtract line 9 from line 5. This is your taxable gain. Report it as described under Reporting the Sale. If the amount on this line is zero, do not report the sale or exclusion on your tax return. If the amount on line 6 is more than zero, complete line 11 | 10. | -0- | ||
11. | Enter the smaller of line 6 or line 10. Enter this amount on line 12 of the Unrecaptured Section 1250 Gain Worksheet in the instructions for Schedule D (Form 1040) | 11. |
Worksheet 2. Gain or (Loss), Exclusion, and Taxable Gain on Sale of Home Illustrated Example 2 for Peter and Betty Clark
Part 1 - Gain or (Loss) on Sale | |||||
1. | Selling price of home | 1. | $695,000 | ||
2. | Selling expenses (including commissions, advertising and legal fees, and seller-paid loan charges) | 2. | |||
3. | Subtract line 2 from line 1. This is the amount realized | 3. | 695,000 | ||
4. | Adjusted basis of home sold (from Worksheet 1, line 13) | 4. | 42,250 | ||
5. | Subtract line 4 from line 3. This is the gain or (loss) on the sale. If this is a loss, stop here | 5. | 652,750 | ||
Part 2 - Exclusion and Taxable Gain | |||||
6. | Enter any depreciation allowed or allowable on the property for periods after May 6, 1997. If none, enter -0-. | 6. | -0- | ||
7. | Subtract line 6 from line 5. (If the result is less than zero, enter -0-.) | 7. | 652,750 | ||
8. | If you qualify to exclude gain on the sale, enter your maximum exclusion. (See Maximum Exclusion.) If you do not qualify to exclude gain, enter -0- | 8. | 500,000 | ||
9. | Enter the smaller of line 7 or line 8. This is your exclusion | 9. | 500,000 | ||
10. | Subtract line 9 from line 5. This is your taxable gain. Report it as described under Reporting the Sale. If the amount on this line is zero, do not report the sale or exclusion on your tax return. If the amount on line 6 is more than zero, complete line 11 | 10. | 152,750 | ||
11. | Enter the smaller of line 6 or line 10. Enter this amount on line 12 of the Unrecaptured Section 1250 Gain Worksheet in the instructions for Schedule D (Form 1040) | 11. |
Example 3.
Emily White, a single person, bought a home in 1996. She lived in the home until May 31, 2005, when she moved out of the house and put it up for rent. Emily rented her home until May 31, 2006. She moved back into the house and lived there until she sold it on January 12, 2007.
Emily can exclude gain on the sale of her home because she owned and lived in the home for at least 2 years of the 5-year period ending on the date of the sale.
Emily's records show the following:
Original cost | $ 50,000 |
Legal fees for title search | 750 |
Back taxes paid for prior owner | 1,500 |
Improvements (deck) | 2,000 |
Selling price | 195,000 |
Selling expenses, including commission | 15,000 |
Depreciation claimed after May 6, 1997 | 1,791 |
Emily uses Worksheet 1 to figure the adjusted basis of the home she sold, $52,459. She uses Worksheet 2 to figure the gain on the sale, $127,541, and the amount of her exclusion, ($125,750). Emily cannot exclude $1,791, the part of her gain equal to the depreciation claimed while the house was rented.
Emily reports her gain and exclusion in Part II of Schedule D (Form 1040). She enters $1,791 on line 12 of the Unrecaptured Section 1250 Gain Worksheet in the Schedule D (Form 1040) instructions. She has no gains or losses from the sale of property other than the gain from the sale of her home. Therefore, she also enters $1,791 on lines 13 and 18 of the worksheet and on line 19 of Schedule D. She then figures her tax using the Schedule D Tax Worksheet in the Schedule D (Form 1040) instructions.
Emily's completed Worksheet 1 appears next. Her completed Worksheet 2 and the front page of her Schedule D follow. Page 2 of Schedule D and her Unrecaptured Section 1250 Gain Worksheet are not shown.
Worksheet 1. Adjusted Basis of Home Sold Illustrated Example 3 for Emily White
Caution:See the Worksheet 1 Instructions before you use this worksheet. | |||||||
1. | Enter the purchase price of the home sold. (If you filed Form 2119 when you originally acquired that home to postpone gain on the sale of a previous home before May 7, 1997, enter the adjusted basis of the new home from that Form 2119.) | 1. | $50,000 | ||||
2. | Seller-paid points for home bought after 1990. (See Seller-paid points.) Do not include any seller-paid points you already subtracted to arrive at the amount entered on line 1 | 2. | |||||
3. | Subtract line 2 from line 1 | 3. | 50,000 | ||||
4. | Settlement fees or closing costs. (See Settlement fees or closing costs.) If line 1 includes the adjusted basis of the new home from Form 2119, go to line 6. | ||||||
a. | Abstract and recording fees | 4a. | |||||
b. | Legal fees (including fees for title search and preparing documents) | 4b. | 750 | ||||
c. | Survey fees | 4c. | |||||
d. | Title insurance | 4d. | |||||
e. | Transfer or stamp taxes | 4e. | |||||
f. | Amounts that the seller owed that you agreed to pay (back taxes or interest, recording or mortgage fees, and sales commissions) | 4f. | 1,500 | ||||
g. | Other | 4g. | |||||
5. | Add lines 4a through 4g | 5. | 2,250 | ||||
6. | Cost of additions and improvements. Do not include any additions and improvements included on line 1 | 6. | 2,000 | ||||
7. | Special tax assessments paid for local improvements, such as streets and sidewalks | 7. | |||||
8. | Other increases to basis | 8. | |||||
9. | Add lines 3, 5, 6, 7, and 8 | 9. | 54,250 | ||||
10. | Depreciation allowed or allowable, related to the business use or rental of the home | 10. | 1,791 | ||||
11. | Other decreases to basis (See Decreases to basis.) | 11. | |||||
12. | Add lines 10 and 11 | 12. | 1,791 | ||||
13. | Adjusted basis of home sold. Subtract line 12 from line 9. Enter here and on Worksheet 2, line 4 | 13. | $52,459 |
Worksheet 2. Gain or (Loss), Exclusion, and Taxable Gain on Sale of Home Illustrated Example 3 for Emily White
Part 1 - Gain or (Loss) on Sale | |||||
1. | Selling price of home | 1. | $195,000 | ||
2. | Selling expenses (including commissions, advertising and legal fees, and seller-paid loan charges) | 2. | 15,000 | ||
3. | Subtract line 2 from line 1. This is the amount realized | 3. | 180,000 | ||
4. | Adjusted basis of home sold (from Worksheet 1, line 13) | 4. | 52,459 | ||
5. | Subtract line 4 from line 3. This is the gain or (loss) on the sale. If this is a loss, stop here | 5. | 127,541 | ||
Part 2 - Exclusion and Taxable Gain | |||||
6. | Enter any depreciation allowed or allowable on the property for periods after May 6, 1997. If none, enter -0- | 6. | 1,791 | ||
7. | Subtract line 6 from line 5. (If the result is less than zero, enter -0-.) | 7. | 125,750 | ||
8. | If you qualify to exclude gain on the sale, enter your maximum exclusion. (See Maximum Exclusion.) If you do not qualify to exclude gain, enter -0- | 8. | 250,000 | ||
9. | Enter the smaller of line 7 or line 8. This is your exclusion | 9. | 125,750 | ||
10. | Subtract line 9 from line 5. This is your taxable gain. Report it as described under Reporting the Sale. If the amount on this line is zero, do not report the sale or exclusion on your tax return. If the amount on line 6 is more than zero, complete line 11 | 10. | 1,791 | ||
11. | Enter the smaller of line 6 or line 10. Enter this amount on line 12 of the Unrecaptured Section 1250 Gain Worksheet in the instructions for Schedule D (Form 1040) | 11. | $1,791 |
The situations that follow may affect your exclusion.
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You acquired your home in a like-kind exchange (also known as a section 1031 exchange); or your basis in your home is determined by reference to the basis of the home in the hands of the person who acquired the property in a like-kind exchange (for example, you received the home from that person as a gift), and
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You sold the home during the 5-year period beginning with the date your home was acquired in the like-kind exchange.
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Publication 547, Casualties, Disasters, and Thefts, in the case of a home that was destroyed, or
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Chapter 1 of Publication 544, in the case of a home that was condemned.
When you sell your main home, treat real estate and transfer taxes on that home as discussed in this section.
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You are treated as paying the taxes up to, but not including, the date of sale. You can deduct these taxes as an itemized deduction on Schedule A (Form 1040) in the year of sale. It does not matter what part of the taxes you actually paid.
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The buyer is treated as paying the taxes beginning with the date of sale.
Example.
The tax on Dennis and Beth White's home was $620 for the year. Their real property tax year was the calendar year, with payment due August 1. They sold the home on May 7. Dennis and Beth are considered to have paid a proportionate share of the real estate taxes on the home even though they did not actually pay them to the taxing authority.
Dennis and Beth owned their home during the real property tax year for 126 days (January 1 to May 6, the day before the sale). They figure their deduction for taxes as follows.
1. | Enter the total real estate taxes for the real property tax year | $620 |
2. | Enter the number of days in the real property tax year that you owned the property | 126 |
3. | Divide line 2 by 365 | .345 |
4. | Multiply line 1 by line 3. This is your deduction. Enter it on line 6 of Schedule A (Form 1040) | $214 |
Since the buyers paid all of the taxes, Dennis and Beth also include the $214 in the home's selling price. The buyers add the $214 to their basis in the home. The buyers can deduct $406 ($620 - $214), the taxes for the part of the year they owned the home.
If you financed your home under a federally subsidized program (loans from tax-exempt qualified mortgage bonds or loans with mortgage credit certificates), you may have to recapture all or part of the benefit you received from that program when you sell or otherwise dispose of your home. You recapture the benefit by increasing your federal income tax for the year of the sale. You may have to pay this recapture tax even if you can exclude your gain from income under the rules discussed earlier; that exclusion does not affect the recapture tax.
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Came from the proceeds of qualified mortgage bonds, or
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Were based on mortgage credit certificates.
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Within the first 9 years after the date you close your mortgage loan, you sell or otherwise dispose of your home at a gain.
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Your income for the year of disposition is more than that year's adjusted qualifying income for your family size for that year (related to the income requirements a person must meet to qualify for the federally subsidized program).
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Your mortgage loan was a qualified home improvement loan (QHIL) of not more than $15,000 used for alterations, repairs, and improvements that protect or improve the basic livability or energy efficiency of your home,
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Your mortgage loan was a QHIL of not more than $150,000 for a QHIL used to repair damage from Hurricane Katrina to homes in the hurricane disaster area; a QHIL funded by a qualified mortgage bond that is a qualified Gulf Opportunity Zone Bond; or a QHIL for an owner-occupied home in the Gulf Opportunity Zone (GO Zone), Rita GO Zone, or Wilma GO Zone. See Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma, for more information,
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The home is disposed of as a result of your death,
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You dispose of the home more than 9 years after the date you closed your mortgage loan,
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You transfer the home to your spouse, or to your former spouse incident to a divorce, where no gain is included in your income,
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You dispose of the home at a loss,
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Your home is destroyed by a casualty, and you replace it on its original site within 2 years after the end of the tax year when the destruction happened (within 5 years if the home was in the Hurricane Katrina disaster area and was destroyed by reason of the hurricane after August 24, 2005), or
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You refinance your mortgage loan (unless you later meet the conditions listed previously under When the recapture applies).
You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get information from the IRS in several ways. By selecting the method that is best for you, you will have quick and easy access to tax help.
www.improveirs.org.
Internet. You can access the IRS website at www.irs.gov 24 hours a day, 7 days a week to:
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E-file your return. Find out about commercial tax preparation and e-file services available free to eligible taxpayers.
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Check the status of your 2007 refund. Click on Where's My Refund. Wait at least 6 weeks from the date you filed your return (3 weeks if you filed electronically). Have your 2007 tax return available because you will need to know your social security number, your filing status, and the exact whole dollar amount of your refund.
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Download forms, instructions, and publications.
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Order IRS products online.
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Research your tax questions online.
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Search publications online by topic or keyword.
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View Internal Revenue Bulletins (IRBs) published in the last few years.
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Figure your withholding allowances using the withholding calculator online at
www.irs.gov/individuals. -
Determine if Form 6251 must be filed using our Alternative Minimum Tax (AMT) Assistant.
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Sign up to receive local and national tax news by email.
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Get information on starting and operating a small business.
Phone. Many services are available by phone.
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Ordering forms, instructions, and publications. Call 1-800-829-3676 to order current-year forms, instructions, and publications, and prior-year forms and instructions. You should receive your order within 10 days.
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Asking tax questions. Call the IRS with your tax questions at 1-800-829-1040.
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Solving problems. You can get face-to-face help solving tax problems every business day in IRS Taxpayer Assistance Centers. An employee can explain IRS letters, request adjustments to your account, or help you set up a payment plan. Call your local Taxpayer Assistance Center for an appointment. To find the number, go to www.irs.gov/localcontacts or look in the phone book under United States Government, Internal Revenue Service.
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TTY/TDD equipment. If you have access to TTY/TDD equipment, call 1-800-829-4059 to ask tax questions or to order forms and publications.
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TeleTax topics. Call 1-800-829-4477 to listen to pre-recorded messages covering various tax topics.
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Refund information. To check the status of your 2007 refund, call 1-800-829-4477 and press 1 for automated refund information or call 1-800-829-1954. Be sure to wait at least 6 weeks from the date you filed your return (3 weeks if you filed electronically). Have your 2007 tax return available because you will need to know your social security number, your filing status, and the exact whole dollar amount of your refund.
Evaluating the quality of our telephone services. To ensure IRS representatives give accurate, courteous, and professional answers, we use several methods to evaluate the quality of our telephone services. One method is for a second IRS representative to listen in on or record random telephone calls. Another is to ask some callers to complete a short survey at the end of the call.
Walk-in. Many products and services are available on a walk-in basis.
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Products. You can walk in to many post offices, libraries, and IRS offices to pick up certain forms, instructions, and publications. Some IRS offices, libraries, grocery stores, copy centers, city and county government offices, credit unions, and office supply stores have a collection of products available to print from a CD or photocopy from reproducible proofs. Also, some IRS offices and libraries have the Internal Revenue Code, regulations, Internal Revenue Bulletins, and Cumulative Bulletins available for research purposes.
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Services. You can walk in to your local Taxpayer Assistance Center every business day for personal, face-to-face tax help. An employee can explain IRS letters, request adjustments to your tax account, or help you set up a payment plan. If you need to resolve a tax problem, have questions about how the tax law applies to your individual tax return, or you're more comfortable talking with someone in person, visit your local Taxpayer Assistance Center where you can spread out your records and talk with an IRS representative face-to-face. No appointment is necessary, but if you prefer, you can call your local Center and leave a message requesting an appointment to resolve a tax account issue. A representative will call you back within 2 business days to schedule an in-person appointment at your convenience. To find the number, go to www.irs.gov/localcontacts or look in the phone book under United States Government, Internal Revenue Service.
Mail. You can send your order for forms, instructions, and publications to the address below. You should receive a response within 10 days after your request is received.
National Distribution Center
P.O. Box 8903
Bloomington, IL 61702-8903
CD/DVD for tax products. You can order Publication 1796, IRS Tax Products CD/DVD, and obtain:
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Current-year forms, instructions, and publications.
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Prior-year forms, instructions, and publications.
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Bonus: Historical Tax Products DVD - Ships with the final release.
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Tax Map: an electronic research tool and finding aid.
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Tax law frequently asked questions.
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Tax Topics from the IRS telephone response system.
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Fill-in, print, and save features for most tax forms.
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Internal Revenue Bulletins.
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Toll-free and email technical support.
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The CD which is released twice during the year.
- The first release will ship the beginning of January 2008.
- The final release will ship the beginning of March 2008.
Purchase the CD/DVD from National Technical Information Service (NTIS) at www.irs.gov/cdorders for $35 (no handling fee) or call 1-877-CDFORMS (1-877-233-6767) toll free to buy the CD/DVD for $35 (plus a $5 handling fee). Price is subject to change.
CD for small businesses. Publication 3207, The Small Business Resource Guide CD for 2007, is a must for every small business owner or any taxpayer about to start a business. This year's CD includes:
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Helpful information, such as how to prepare a business plan, find financing for your business, and much more.
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All the business tax forms, instructions, and publications needed to successfully manage a business.
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Tax law changes for 2007.
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Tax Map: an electronic research tool and finding aid.
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Web links to various government agencies, business associations, and IRS organizations.
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“Rate the Product” survey—your opportunity to suggest changes for future editions.
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A site map of the CD to help you navigate the pages of the CD with ease.
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An interactive “Teens in Biz” module that gives practical tips for teens about starting their own business, creating a business plan, and filing taxes.
An updated version of this CD is available each year in early April. You can get a free copy by calling 1-800-829-3676 or by visiting www.irs.gov/smallbiz.
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