Rules for Sales

You may be able to exclude any gain from income up to a limit of $250,000 ($500,000 on a joint return in most cases). 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, report it on Schedule D (Form 1040).

How to Figure Gain or Loss

To figure the gain or loss on the selling price of your main home, you must know the selling price, the amount realized, and the adjusted basis.

Selling price. 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.
     Personal property. The selling price of your home does not include amounts you received for personal property sold with your home. Personal property is property that is not a permanent part of the home. Examples are furniture, draperies, and lawn equipment. Separately stated cash you received for these items should not be shown on Form 1099-S (discussed later).
    Form 1099-S. If you received Form 1099-S, box 2 should show the total amount you received for your home.
    However, box 2 will not include the fair market value of any property other than cash or notes, or any services you received or will receive. Instead, box 4 will be checked.
    If you can exclude the entire gain, the person responsible for closing the sale generally will not have to report it on Form 1099-S. You will use sale documents and other records to figure the total amount you received for your home.
    Amount realized. The amount realized is the selling price minus selling expenses.
    Selling expenses. Selling expenses include commissions, advertising fees, legal fees, and loan charges paid by the seller, such as loan placement fees, and "points".
     Adjusted basis. While you owned your home, you may have made adjustments (increases or decreases) to the basis. This adjusted basis is used to figure gain or loss on the sale of your home.

Basis

You will need to know your basis in your home as a starting point for determining 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, its basis is either its fair market value when you received it or the adjusted basis of the person that you received it from.
    While you owned your home, you may have made adjustments (increases or decreases) to the basis. This adjusted basis is used to figure gain or loss on the sale of your home.
    If you buy your home, your basis is its cost to you. This includes the purchase price and certain settlement or closing costs. Your purchase price includes your down payment and any debt, such as first or second mortgage or notes you gave the seller in payment for the home.
    Some of the settlement fees or closing costs that you can include in the basis of your property are:

    1) Abstract fees (Abstract of title fees),

    2) Charges for installing utility services,

    3) Legal fees (including fees for the title search and preparing the sales contract and deed,

    4)Recording fees,

    5)Survey fees,

    6) Transfer taxes,

    7) Owners title insurance, and

    8) Any amount the seller owes that you agree to pay, such as:

       a) certain real estate taxes,

       b) Back interest

       c) recording or mortgage fees,

       d) Charges for improvements or repairs, and

       e) sales commissions.

       Some settlement fees and closing costs not included in your basis are:

    1) Fire insurance premiums,

    2) Rent for occupancy of the house before closing,

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    3) Charges for utilities or other services related to occupancy of the house before closing.

    4) Any fee or cost that you deducted as a moving expense (allowed for certain fees or costs before 1994).

    5) Charges connected with getting a mortgage loan, such as:

       a) Mortgage insurance premiums (including VA funding fees),

       b) Loan assumption fees,

      c) Cost of a credit report, and

      d) Fee for an appraisal required by a lender, and

    6) Fees for refinancing a mortgage.

     Amount of gain or loss. When you know the amount realized, and the homes adjusted basis, you can figure your gain or loss. If the amount realized is more than the adjusted basis, the difference is a gain and, except for any part you can exclude, generally is taxable.

    If the amount realized is less than the adjusted basis, the difference is a loss. A loss on the sale of your main home cannot be deducted.

     Jointly owned home. If you and your spouse sell your jointly owned home and file a joint return, you figure your gain or loss as one taxpayer.

    Separate returns. If you file separate returns, each of you must figure your own gain or loss according to your ownership interest in the home. Your ownership interest is determined by state law.
    Joint owners not married. If you and a joint owner other than your spouse sell your jointly owned home, each of you must figure your own gain or loss according to your ownership interest in the home. Each of you applies the rules discussed in this publication on an individual basis.

Adjusted Basis

Adjusted basis is your basis increased or decreased by certain amounts.

Increases to basis. These include any:

     1) Improvements that have a useful life of more than 1 year,

    2) Additions,

    3) Special assessments to local improvements, and

    4) Amounts you spent after a casualty to restore damaged property.

    Repairs. These maintain your home in good condition but do not add to its value or prolong its life. You do not add their cost to the basis of your property.

    Examples. Repainting your house inside or outside, fixing your gutters or floors, repairing leaks or plastering, and replacing broken window panes are examples of repairs.

Maximum Amount of Exclusion

You can exclude the entire gain on the sale of your main home up to:

    1) $250,000, or

    2) $500,000 if all of the following are true.

      a) You are married and file a joint return for the year.

      b) Either you or your spouse meets the ownership test.

      c) Both you and your spouse meet the use test.

      d) 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 (not including any sales from before May 7, 1997).

Reduced Maximum Exclusion

You can claim an exclusion, but the maximum amount of gain you can exclude will be reduced, if any of the following are true.

    1) You did not meet the ownership and use tests for a home you owned on August 5, 1997, and sold before August 5, 1999.

    2) You did not meet the ownership and use tests for a home you sold due to a change in health or place of employment.

    3) Your exclusion would have been disallowed, except. that you sold the home due to a change in health or place of employment.