Table of Contents
Exclusion on sale of main home by surviving spouse. If you are an unmarried widow or widower on the date of sale, you may qualify to exclude up to $500,000 of any gain from the sale or exchange of your main home. For more information, see Sale of main home by surviving spouse under Ownership and Use Tests, later.
Mortgage debt forgiveness. You can exclude from gross income any discharge of qualified principal residence indebtedness. This exclusion applies to discharges made after 2006 and before 2013. Additionally, the basis of the principal residence (main home) must be reduced (but not below zero) by the amount excluded from gross income. For more information, see Discharges of qualified principal residence indebtedness, later, and Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment).
New rule for employees and volunteers of the Peace Corps. If you or your spouse is an employee, enrolled volunteer, or volunteer leader of the Peace Corps, you may be able to exclude from income a gain from selling your main home, even if you did not live in it for 2 years during the 5-year period ending on the date of sale. Generally, you can elect to have the 5-year test period for ownership and use suspended (maximum of 10 years) during any period you or your spouse serves outside the United States (on qualified official extended duty if an employee). This provision applies to a sale of a main home after December 31, 2007, and is now included under a special rule that already allows similar benefits to members of the uniformed services or Foreign Service, or employees of the intelligence community. For more information, see Members of the uniformed service or Foreign Service, employees of the intelligence community, or employees or volunteers of the Peace Corps, later.
First-time homebuyer credit. If you bought a main home in the United States after April 8, 2008, and did not own a main home during the prior 3 years, you may be able to take the first-time homebuyer credit. See the instructions for Form 1040, line 69.
State and local general sales taxes. The option to deduct state and local general sales taxes instead of state and local income taxes was extended through 2009. See the instructions for Schedule A (Form 1040), line 5.
Nonqualifed use of property used partly for business or rental. Beginning with sales or exchanges of your main home after December 31, 2008, many of the rules discussed in Publication 523, Business Use or Rental of Home, will not apply. You will no longer be able to exclude gain allocated to periods of nonqualified use of the property. For information, see Publication 553, Highlights of 2008 Tax Changes.
Home sold with undeducted points. If you have not deducted all the points you paid to secure a mortgage on your old home, you may be able to deduct the remaining points in the year of the sale. See Mortgage ending early under Points in chapter 23.
This chapter explains the tax rules that apply when you sell your main home. Generally, your main home is the one in which you live most of the time.
If you sold your main home in 2008, you may be able to exclude from income any gain up to a limit of $250,000 ($500,000 on a joint return in most cases). See Excluding the Gain , later. If you can exclude all of the gain, you do not need to report the sale on your tax return.
If you have gain that cannot be excluded, it is taxable. Report it on Schedule D (Form 1040). You may also have to complete Form 4797, Sales of Business Property. See Reporting the Sale , later.
If you have a loss on the sale, you cannot deduct it on your return. However, you may need to report it. See Reporting the Sale, later.
The following are main topics in this chapter.
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Figuring gain or loss.
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Basis.
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Excluding the gain.
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Ownership and use tests.
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Reporting the sale.
Other topics include the following.
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Business use or rental of home.
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Recapturing a federal mortgage subsidy.
Publication
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523 Selling Your Home
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530 Tax Information for First-Time Homeowners
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547 Casualties, Disasters, and Thefts
Form (and Instructions)
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Schedule D (Form 1040) Capital Gains and Losses
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982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustments)
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8828 Recapture of Federal Mortgage Subsidy
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:
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House,
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Houseboat,
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Mobile home,
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Cooperative apartment, or
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Condominium.
To exclude gain under the rules of this chapter, 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.
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.
Some special rules apply to other dispositions of your main home.
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 figure 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.), your basis is either its fair market value when you received it or the adjusted basis of the previous owner.
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. See Adjusted Basis , later.
You can find more information on basis and adjusted basis in chapter 13 of this publication and in Publication 523.
The cost of property is the amount you pay for it in cash, debt obligations, other property, or services.
Adjusted basis is your cost or other basis increased or decreased by certain amounts. To figure your adjusted basis, you can use Worksheet 1 in Publication 523.
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Additions and other improvements that have a useful life of more than 1 year.
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Special assessments for local improvements.
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Amounts you spent after a casualty to restore damaged property.
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Discharges of qualified principal indebtedness (but do not reduce basis below zero).
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Gain you postponed from the sale of a previous home before May 7, 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.
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Deductible casualty losses.
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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.
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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).
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 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,
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Any Form 982 that you filed to report any discharge of qualified principal residence indebtedness,
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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, or other source of computations.
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.
You can use Worksheet 2 in Publication 523 to figure the amount of your exclusion and your taxable gain, if any.
If you have any 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.
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 at least 2 years.
Amanda bought and moved into her main home in September 2005. She sold the home at a gain on September 15, 2008. During the 5-year period ending on the date of sale (September 16, 2003–September 15, 2008), she owned and lived in the home for more than 2 years. She meets the ownership and use tests.
Example 2—ownership test met but use test not met.
Dan bought a home in 2002. 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, 2008. He owned the home during the entire 5-year period ending on the date of sale (June 29, 2003–June 28, 2008). 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 nor do they have to occur at the same time.
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.
Example 1.
David Johnson, who is single, bought and moved into his home on February 1, 2006. Each year during 2006 and 2007, David left his home for a 2-month summer vacation. David sold the house on March 1, 2008. 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, 2005. He lived in it as his main home continuously until January 5, 2007, when he went abroad for a 1-year sabbatical leave. On February 6, 2008, 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 1999, Helen Jones lived in a rented apartment. The apartment building was later converted to condominiums, and she bought her same apartment on December 3, 2005. In 2006, Helen became ill and on April 14 of that year she moved to her daughter's home. On July 12, 2008, while still living in her daughter's home, she sold her condominium.
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, 2003, to July 12, 2008, the date she sold the condominium. She owned her condominium from December 3, 2005, to July 12, 2008 (more than 2 years). She lived in the property from July 13, 2003 (the beginning of the 5-year period), to April 14, 2006 (more than 2 years).
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.
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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.
The following sections contain exceptions to the ownership and use tests for certain taxpayers.
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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 meet this exception to the use test, you still have to meet the 2-out-of-5-year ownership test to claim the exclusion.
Example.
David bought and moved into a home in 2000. 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 2008. 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.
For more information about the suspension of the 5-year test period, see Members of the uniformed services or Foreign Service, employees of the intelligence community, or employees or volunteers of the Peace Corps in Publication 523.
If you and your spouse file a joint return for the year of sale and one spouse meets the ownership and use test, you can exclude up to $250,000 of the gain. (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 2008. 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 2008. 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 2008 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.
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The sale or exchange took place after 2007.
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The sale or exchange took place no more than 2 years after the date of death of your spouse.
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You have not remarried.
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You and your spouse met the use test at the time of your spouse's death.
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You or your spouse met the ownership test at the time of your spouse's death.
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Neither you nor your spouse excluded gain from the sale of another home during the last 2 years.
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. This applies to those who:
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Fail to meet the ownership and use tests, or
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Have used the exclusion within 2 years of selling their current home.
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In both cases, to qualify for a reduced exclusion, the sale of your main home must be due to one of the following reasons.
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A change in place of employment.
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Health.
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Unforeseen circumstances.
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, 2002, Amy bought a house. She moved in on that date and lived in it until May 31, 2004, when she moved out of the house and put it up for rent. The house was rented from June 1, 2004, to March 31, 2006. Amy moved back into the house on April 1, 2006, and lived there until she sold it on January 30, 2008. During the 5-year period ending on the date of the sale (January 31, 2003–January 30, 2008), 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 |
||
1/31/03 – 5/31/04 |
16 months | |||
6/1/04 – 3/31/06 |
22 months | |||
4/1/06 – 1/30/08 |
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 2002 through 2005. On January 1, 2006, he moved to another state. He rented his house from that date until April 30, 2008, when he sold it. During the 5-year period ending on the date of sale (May 1, 2003–April 30, 2008), William owned and lived in the house for 32 months (more than 2 years). He must report the sale on Form 4797 because it was rental property at the time of sale. Because he met the ownership and use tests, 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.
Do not report the 2008 sale of your main home on your tax return unless:
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You have a gain and you do not qualify to exclude all of it,
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You have a gain and you choose not to exclude it, or
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You have a loss and you received Form 1099-S.
If you have any taxable gain on the sale of your main home that cannot be excluded, report the entire gain 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, show it on the line directly below the line on which you report the gain. Enter “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 have a loss on the sale of your main home for which you received a Form 1099-S, you must report the loss on Schedule D even though the loss is not deductible. Report the transaction on line 1 or 8, as above. Complete columns (a) through (e). Enter -0- in column (f).
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 in Publication 523 and the Instructions for Form 4797.
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, in the case of a home that was destroyed, or
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Publication 544, chapter 1, in the case of a home that was condemned.
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 in the case of a QHIL used to repair damage from Hurricane Katrina to homes in the hurricane disaster area; a QHIL funded by a qualified mortgage bond that is a qualified Gulf Opportunity Zone Bond; or a QHIL for an owner-occupied home in the Gulf Opportunity Zone (GO Zone), Rita GO Zone, or Wilma GO Zone. For more information, see Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma. Also see Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas.
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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). If your home was located in the Kansas disaster area, one of the Midwestern disaster areas, or another federally declared disaster area, see Replacement Period in Publication 547.
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You refinance your mortgage loan (unless you later meet the conditions listed previously under When the recapture applies ).
Use Form 5405 and see the instructions for Form 1040, line 69, to claim the first-time homebuyer credit. The credit may give you a refund even if you do not owe any tax. The credit operates much like an interest-free loan. You generally must repay it over a 15-year period. You (and your spouse if married) are considered a first-time homebuyer if:
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You purchased your main home in the United States after April 8, 2008.
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You did not own any other main home during the 3-year period ending on the date of purchase.
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