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Sale of Home Gains & Losses

Sale of Home Gains & Losses

Sale of Home Gains & Losses of the property a capital asset and does receive special tax treatment. A gain on the sale of such property is subject to tax.

Accountants can explain the tax rules that apply when you sell or otherwise give up ownership of a home. If you meet certain conditions, you may exclude the first $250,000 of gain from the sale of your home from your income and avoid paying taxes on it. The exclusion is increased to $500,000 for a married couple filing jointly.

This Blog also has worksheets for calculations relating to the sale of your home. It will show you how to:

  1. Determine if you have a gain or loss on the sale of your home,
  2. Figure how much of any gain is taxable, and
  3. Report the transaction correctly on your tax return.

Does Your Home Sale Qualify for the Exclusion of Gain?

Sale of Home Gains & Losses IRS tax code recognizes the importance of home ownership by allowing you to exclude gain when you sell your main home. To qualify for the maximum exclusion of gain ($250,000 or $500,000 if married filing jointly) you must meet the Eligibility Test, explained later. To qualify for a partial exclusion of gain, meaning the exclusion of gain less than the full amount, you must meet one of the situations listed in Does Your Home Qualify for a Partial Exclusion of Gain? , later.

Before considering the Eligibility Test or whether your home qualifies for a partial exclusion, you should consider some preliminary items.

Sale of Home Gains & Losses due to the transfer of your home to a spouse or an ex-spouse. Generally, if you transferred your home (or share of a jointly owned home) to a spouse or ex-spouse as part of a divorce settlement, you are considered to have no gain or loss. You have nothing to report from the transfer and this entire Blog doesn’t apply to you. However, there is one exception to this rule. If your spouse or ex-spouse is a nonresident alien, then you likely will have a gain or loss from the transfer and the tests in this Blog apply.

Home’s date of sale. To determine if you meet the Eligibility Test or qualify for a partial exclusion, you will need to know the home’s date of sale, meaning when you sold it. If you received Form 1099-S, Proceeds From Real Estate Transactions, the date of sale appears in box 1. If you didn’t receive Form 1099-S, the date of sale is either the date the title transferred or the date the economic burdens and benefits of ownership shifted to the buyer, whichever date is earlier. In most cases, these dates are the same.

Sale of your main home. You may take the exclusion, whether maximum or partial, only on the sale of a home that is your principal residence, meaning your main home. An individual has only one main home at a time. If you own and live in just one home, then that property is your main home. If you own or live in more than one home, then you must apply a “facts and circumstances” test to determine which property is your main home. While the most important factor is where you spend the most time, other factors are relevant as well. They are listed below. The more of these factors that are true of a home, the more likely that it is your main home.

Sale of Home Gains & Losses The address listed on your:

 S. Postal Service address

  • Voter Registration Card
  • Federal and state tax returns
  • Driver’s license or car registration

Sale of Home Gains & Losses The home is near:

  • Where you work,
  • Where you bank,
  • The residence of one or more family members, and
  • Recreational clubs or religious organizations of which you are a member.

Finally, exclusion can apply to many different types of housing facilities. A single-family home, a condominium, a cooperative apartment, a mobile home, and a houseboat each may be the main home and therefore qualify for the exclusion.

Sale of Home Gains & Losses Eligibility Test

The Eligibility Test determines whether you are eligible for the maximum exclusion of gain ($250,000 or $500,000 if married filing jointly).

Eligibility Step 1—Automatic Disqualification

Determine whether any of the automatic disqualifications apply. Your home sale isn’t eligible for the exclusion if ANY of the following are true.

You acquired the property through a like-kind exchange (1031 exchange), during the past 5 years. See Pub. 544, Sales and Other Dispositions of Assets.

You are subject to expatriate tax. For more information about expatriate tax, see chapter 4 of Pub. 519, U.S. Tax Guide for Aliens.

If any of these conditions are true, the exclusion doesn’t apply. Skip to Figuring Gain or Loss, later.

Eligibility Step 2—Ownership

Determine whether you meet the ownership requirement. If you owned the home for at least 24 months (2 years) out of the last 5 years leading up to the date of sale (date of the closing), you meet the ownership requirement. For a married couple filing jointly, only one spouse has to meet the ownership requirement.

Eligibility Step 3—Residence

 Determine whether you meet the residence requirement. If you owned the home and used it as your residence for at least 24 months of the previous 5 years, you meet the residence requirement. The 24 months of residence can fall anywhere within the 5-year period, and it doesn’t have to be a single block of time. All that is required is a total of 24 months (730 days) of residence during the 5-year period. Unlike the ownership requirement, each spouse must meet the residence requirement individually for a married couple filing jointly to get the full exclusion.

Sale of Home Gains & Losses, If you were ever away from home, you need to determine whether that time counts towards your residence requirement. A vacation or other short absence counts as the time you lived at home (even if you rented out your home while you were gone).

If you become physically or mentally unable to care for yourself, and you use the residence as your principal residence for 12 months in the 5 years preceding the sale or exchange, any time you spent living in a care facility (such as a nursing home) counts toward your 2-year residence requirement, so long as the facility has a license from a state or other political entity to care for people with your condition.

Eligibility Step 4—Look-Back

Sale of Home Gains & Losses determines whether you meet the look-back requirement. If you didn’t sell another home during the 2-year period before the date of sale (or, if you did sell another home during this period, but didn’t take an exclusion of the gain earned from it), you meet the look-back requirement. You may take the exclusion only once during a 2-year period.

Eligibility Step 5—Exceptions to the Eligibility Test

 There are some exceptions to the Eligibility Test. If any of the following situations apply to you, read on to see if they may affect your qualification. If none of these situations apply, skip to Step 6.

A separation or divorce occurred during the ownership of the home. See Separated or divorced taxpayers.

  • The death of a spouse occurred during the ownership of the home. See Widowed taxpayers.
  • The sale involved vacant land. See Vacant land next to home.
  • You owned a remainder interest, meaning the right to own a home in the future, and you sold that right. See Remainder’s interest.
  • Your previous home was destroyed or condemned. See Home destroyed or condemned—considerations for benefits.
  • You were a service member during the ownership of the home. See Service, Intelligence, and Peace Corps personnel.
  • You acquired or are relinquishing the home in a like-kind exchange. See Like-kind/1031 exchange.

Separated or divorced taxpayers. If you were separated or divorced prior to the sale of the home, you can treat the home as your residence if:

You are a sole or joint owner, and

Your spouse or former spouse is allowed to live in the home under a divorce or separation agreement and uses the home as his or her main home.

Sale of Home Gains & Losses If your home was transferred to you by a spouse or ex-spouse (whether in connection with a divorce or not), you can count any time when your spouse owned the home as the time when you owned it. However, you must meet the residence requirement on your own.

Widowed taxpayers. If you are a widowed taxpayer who doesn’t meet the 2-year ownership and residence requirements on your own, consider the following rule. If you haven’t remarried at the time of the sale, then you may include any time when your late spouse owned and lived in the home, even if without you, to meet the ownership and residence requirements.

Also, you may be able to increase your exclusion amount from $250,000 to $500,000. You may take the higher exclusion if you meet all of the following conditions.

  • You sell your home within 2 years of the death of your spouse;
  • You haven’t remarried at the time of the sale;
  • Neither you nor your late spouse took the exclusion on another home sold less than 2 years before the date of the current home sale; and
  • You meet the 2-year ownership and residence requirements (including your late spouse’s times of ownership and residence if need be).

Sale of Home Gains & Losses Service, Intelligence, and Peace Corps personnel. If you or your spouse are a member of the Uniformed Services or the Foreign Service, or an employee of the intelligence community in the United States, you may choose to suspend the 5-year test period for ownership and residence when you’re on qualified official extended duty. This means you may be able to meet the 2-year residence test even if, because of your service, you didn’t actually live in your home for at least the 2 years during the 5-year period ending on the date of sale.

Qualified extended duty. You are on qualified extended duty if:

  • You are called or ordered to active duty for an indefinite period, or for a definite period of more than 90 days.
  • You are serving at a duty station at least 50 miles from your main home, or you are living in government quarters under government orders.
  • You are one of the following:
  • A member of the armed forces (Army, Navy, Air Force, Marine Corps, Coast Guard);
  • A member of the commissioned corps of the National Oceanic and Atmospheric Administration (NOAA) or the Public Health Service;
  • A Foreign Service chief of mission, ambassador-at-large, or officer;
  • A member of the Senior Foreign Service or the Foreign Service personnel;
  • An employee enrolled volunteer, or enrolled volunteer leader of the Peace Corps serving outside the United States; or
  • An employee of the intelligence community, meaning:
  • The Office of the Director of National Intelligence, the Central Intelligence Agency, the National Security Agency, the Defense Intelligence Agency, the National Geospatial-Intelligence Agency, or the National Reconnaissance Office;
  • Any other office within the Department of Defense for the collection of specialized national intelligence through reconnaissance programs;
  • 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;
  • The Bureau of Intelligence and Research of the Department of State; or
  • Any of the elements of the Department of Homeland Security concerned with the analyses of foreign intelligence information.

Sale of Home Gains & Losses Period of suspension. The period of suspension can’t last more than 10 years. Together, the 10-year suspension period and the 5-year test period can be if, but no more than, 15 years. You can’t suspend the 5-year period for more than one property at a time. You can revoke your choice to suspend the 5-year period at any time.

Example 1. Mary bought a home on May 1, 2003. She used it as her main home until August 27, 2006. On August 28, 2006, she went on qualified official extended duty with the Navy. She didn’t live in the house again before selling it on August 1, 2019. Mary chooses to use the entire 10-year suspension period. Therefore, the suspension period would extend back from August 1, 2019, to August 2, 2009, and the 5-year test period would extend back to August 2, 2004. During that period, Mary owned the house all 5 years and lived in it as her main home from August 2, 2004, until August 28, 2006, a period of more than 24 months. She meets the ownership and uses tests because she owned and lived in the home for at least 2 years during this test period.

Home destroyed or condemned considerations for benefits. If an earlier home of yours was destroyed or condemned, you may be able to count your time there towards the ownership and residence test.

If your home was destroyed, see Pub. 547, Casualties, Disasters, or Thefts. If your home was condemned, see Pub. 544, Sales and Other Disposition of Assets.

Sale of Home Gains & Losses

Sale of Home Gains & Losses of the property a capital asset and does receive special tax treatment. A gain on the sale of such property is subject to tax
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