Publication 554 - Tax Guide for Seniors

Publication 554

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You may be able to exclude from income any gain up to $250,000 ($500,000 on a joint return in most cases) on the sale of your main home. Generally, if you can exclude all of the gain, you do not need to report the sale on your tax return. 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.

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Usually, your main home is the home you live in most of the time and can be a:

House,
Houseboat,
Mobile home,
Cooperative apartment, or
Condominium.

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If you claimed the first-time homebuyer credit in 2008, and you sold the home or the home stopped being your main home in 2012, you generally must repay the credit. If you are required to repay the balance of the unpaid credit, complete Form 5405.

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If you claimed the 2009, 2010, or 2011 first-time homebuyer credit when you purchased your home, the credit is not required to be repaid unless your home ceases to be your main home within 36 months of the purchase date.

See Publication 523, Selling Your Home, for exceptions to the recapture rule.

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Exclusion, Maximum Amount

You can generally exclude up to $250,000 of the gain on the sale of your main home if all of the following are true.

You meet the ownership test.
You meet the use test.
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.

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Ownership and Use Tests

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:

Owned the home for at least 2 years (the ownership test), and
Lived in the home as your main home for at least 2 years (the use test).

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If you owned and lived in the property as your main home for less than 2 years, you still can claim an exclusion in some cases. Generally, you must have sold the home due to a change in place of employment, health, or unforeseen circumstances. The maximum amount you can exclude will be reduced. See Publication 523, Selling Your Home, for more information.

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There is an exception to the use test if, during the 5-year period before the sale of your home:

You become physically or mentally unable to care for yourself, and
You owned and lived in your home as your main home for a total of at least 1 year.

Under this exception, you are considered to live in your home during any time that you own the home and live in a facility (including a nursing home) that is licensed by a state or political subdivision to care for persons in your condition.

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.

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You must have owned your main home for at least 5 years to qualify for the exclusion if you acquired your main home in a like-kind exchange. This special 5-year ownership rule continues to apply to a home you acquired in a like-kind exchange and gave to another person. A like-kind exchange is an exchange of property held for productive use in a trade or business or for investment. See Publication 523 for more information.

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Generally, the gain from the sale or exchange of your main home will not qualify for the exclusion to the extent that the gain is allocated to periods of nonqualified use. Nonqualified use is any period after December 31, 2008, during which the property is not used as the main home. See Publication 523 for more information.

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Married

In the special situations discussed below, 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 gain. However, see Special rules for joint returns, next.

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You can exclude up to $500,000 of the gain on the sale of your main home if all of the following are true.

You are married and file a joint return for the year.
Either you or your spouse meets the ownership test.
Both you and your spouse meet the use test.
During the 2-year period ending on the date of the sale, neither you nor your spouse exclude gain from the sale of another home.

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If your spouse died and you did not remarry before the date of sale, you are considered to have owned and lived in the property as your main home during any period of time when your spouse owned and lived in it as a main home.

If you meet all of the following requirements, you may qualify to exclude up to $500,000 of any gain from the sale or exchange of your main home in 2012.

The sale or exchange took place no more than 2 years after the date of death of your spouse.
You have not remarried.
You and your spouse met the use test at the time of your spouse's death.
You or your spouse met the ownership test at the time of your spouse's death.
Neither you nor your spouse excluded gain from the sale of another home during the last 2 years.

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If your home was transferred to you by your spouse (or former spouse if the transfer was incident to divorce), you are considered to have owned it during any period of time when your spouse owned it.

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You are considered to have used property as your main home during any period when:

You owned it, and
Your spouse or former spouse is allowed to live in it under a divorce or separation instrument and uses it as his or her main home.

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Business Use or Rental of Home

You may be able to exclude gain from the sale of a home that you have used for business or to produce rental income. However, you must meet the ownership and use tests. See Publication 523 for more information.

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If you were entitled to take depreciation deductions because you used your home for business purposes or as rental property, you cannot exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997. See Publication 523 for more information.

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Reporting the Sale

Do not report the 2012 sale of your main home on your tax return unless:

You have a gain and you do not qualify to exclude all of it,
You have a gain and you choose not to exclude it, or
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). If you used your home for business or to produce rental income, you may have to use Form 4797, Sales of Business Property, to report the sale of the business or rental part. See Publication 523 for more information.

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Sale of Home(p17)

Main home.(p17)

Recapturing of 2008 first-time homebuyer credit.(p17)

Recapture of the first-time homebuyer credit for purchases in 2009, 2010, or 2011.(p17)

Maximum Amount of Exclusion(p17)

Ownership and Use Tests(p17)

Exception to ownership and use tests.(p17)

Exception to use test for individuals with a disability.(p17)

Exception to ownership test for property acquired in a like-kind exchange.(p17)

Period of nonqualified use.(p17)

Married Persons(p17)

Special rules for joint returns.(p18)

Sale of home by surviving spouse.(p18)

Home transferred from spouse.(p18)

Use of home after divorce.(p18)

Business Use or Rental of Home(p18)

Depreciation after May 6, 1997.(p18)

Reporting the Sale(p18)