IRS Tax Info

SOURCE

If you have lived in a flip for two years or more, you may not have to pay Capital Gains Tax on the sale. Here is the most recent publication from the IRS:

Department of the Treasury Contents

Internal Revenue Service What’s New . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Reminders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Publication 523 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Cat. No. 15044W

Main Home . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Selling Figuring Gain or Loss . . . . . . . . . . . . . . . . . . . . . . . 4 Selling Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Amount Realized . . . . . . . . . . . . . . . . . . . . . . . . 4

Your Home Adjusted Basis . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Amount of Gain or Loss . . . . . . . . . . . . . . . . . . . 4

Other Dispositions . . . . . . . . . . . . . . . . . . . . . . . 4

For use in preparing Determining Basis . . . . . . . . . . . . . . . . . . . . . . . . . 5

2006 Returns Cost As Basis . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Basis Other Than Cost . . . . . . . . . . . . . . . . . . . . 7

Adjusted Basis . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Excluding the Gain . . . . . . . . . . . . . . . . . . . . . . . . . 9

Maximum Exclusion . . . . . . . . . . . . . . . . . . . . . . 12

Ownership and Use Tests . . . . . . . . . . . . . . . . . 12

Reduced Maximum Exclusion . . . . . . . . . . . . . . . 14

More Than One Home Sold During 2-Year

Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Business Use or Rental of Home . . . . . . . . . . . . . . 17

Property Used Partly for Business or Rental . . . . 18

Reporting the Sale . . . . . . . . . . . . . . . . . . . . . . . . . 20

Comprehensive Examples . . . . . . . . . . . . . . . . . 20

Special Situations . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Deducting Taxes in the Year of Sale . . . . . . . . . . . 27

Recapturing (Paying Back) a Federal

Mortgage Subsidy . . . . . . . . . . . . . . . . . . . . . . 27

How To Get Tax Help . . . . . . . . . . . . . . . . . . . . . . . 28

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

What’s New

Gulf Opportunity Zone Act of 2005 (Act). This Act provides

tax relief for persons affected by Hurricanes Katrina,

Rita, and Wilma. Under this Act, the rules for recapture of a

federal mortgage subsidy have changed if you received a

qualified home improvement loan (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 Recapturing (Paying

Back) a Federal Mortgage Subsidy, later.

Get forms and other information New credits affecting the basis of a home. If you claim

faster and easier by: the nonbusiness energy property credit or the residential

energy efficient property credit in 2006, you must decrease Internet • www.irs.gov the basis of your home by the amount of the credit claimed.

See Adjusted Basis, later. For more information about

these credits, see also Form 5695, Residential Energy Worksheets. This publication includes worksheets you

Credits. can use to figure your gain (or loss) and your exclusion.

Use Worksheet 1 to figure the adjusted basis of the home

you sold. Use Worksheet 2 to figure the gain (or loss), the

Reminders exclusion, and the taxable gain (if any) on the sale. In some situations, you may also need to use Worksheet 3 to figure

a reduced maximum exclusion.

Change of address. If you change your mailing address,

be sure to notify the Internal Revenue Service (IRS) using

Form 8822, Change of Address. Mail it to the Internal Date of sale. If you received a Form 1099-S, Proceeds

Revenue Service Center for your old address. (Addresses From Real Estate Transactions, the date of sale should be

for the Service Centers are on the back of the form.) shown in box 1. If you did not receive this form, the date of

sale is the earlier of (a) the date title transferred or (b) the

Home sold with undeducted points. If you have not date the economic burdens and benefits of ownership

deducted all the points you paid to secure a mortgage on shifted to the buyer. In most cases, these dates are the

your old home, you may be able to deduct the remaining same.

points in the year of sale. See Points in Part I of Publication

936, Home Mortgage Interest Deduction. What is not covered in this publication. This publicaPhotographs

of missing children. The Internal Reve- tion does not cover the sale of rental property, second

nue Service is a proud partner with the National Center for homes, or vacation homes. For information on how to

Missing and Exploited Children. Photographs of missing report those sales, see Publication 544, Sales and Other

children selected by the Center may appear in this publica- Dispositions of Assets.

tion on pages that would otherwise be blank. You can help

bring these children home by looking at the photographs Comments and suggestions. We welcome your comand

calling 1-800-THE-LOST (1-800-843-5678) if you rec- ments about this publication and your suggestions for

ognize a child. future editions.

You can write to us at the following address:

Introduction Internal Revenue Service

This publication explains the tax rules that apply when you Individual Forms and Publications Branch

sell your main home. Generally, your main home is the one SE:W:CAR:MP:T:I

in which you live most of the time. 1111 Constitution Ave. NW, IR-6406

Washington, DC 20224

If you sold your main home in 2006, 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 We respond to many letters by telephone. Therefore, it

the Gain, later. If you can exclude all of the gain, you do not would be helpful if you would include your daytime phone

need to report the sale on your tax return. number, including the area code, in your correspondence.

If you have gain that cannot be excluded, it is taxable. You can email us at *taxforms@irs.gov. (The asterisk

Report it on Schedule D (Form 1040). You may also have must be included in the address.) Please put “Publications

to include Form 4797, Sales of Business Property. See Comment” on the subject line. Although we cannot re-

Reporting the Sale, later. spond individually to each email, we do appreciate your

If you have a loss on the sale, you cannot deduct it on feedback and will consider your comments as we revise

your return. our tax products.

The main topics in this publication are: Ordering forms and publications. Visit www.irs.gov/

• Figuring gain or loss, formspubs to download forms and publications, call

1-800-829-3676, or write to the address below and receive

• Basis, a response within 10 business days after your request is

• Excluding the gain, received.

• Ownership and use tests, and

National Distribution Center

• Reporting the sale. P.O. Box 8903

• Business use or rental of home,

Tax questions. If you have a tax question, visit www. • Deducting taxes in the year of sale, and irs.gov or call 1-800-829-1040. We cannot answer tax

• Recapturing a federal mortgage subsidy. questions sent to either of the above addresses.

Page 2 Publication 523 (2006)

Useful Items Vacant land. The sale of vacant land is not a sale of

You may want to see: your main home unless:

• The vacant land is adjacent to land containing your

Publication home,

❏ 521 Moving Expenses • You owned and used the vacant land as part of your

❏ 527 Residential Rental Property main home,

❏ 530 Tax Information for First-Time Homeowners • The sale of your home satisfies the requirements for

exclusion and occurs within 2 years before or 2

❏ 544 Sales and Other Dispositions of Assets years after the date of the sale of the vacant land,

❏ 547 Casualties, Disasters, and Thefts and

❏ 551 Basis of Assets • The other requirements for excluding gain from the

sale of the vacant land have been satisfied. ❏ 587 Business Use of Your Home

If these requirements are met, the sale of the home and the ❏ 936 Home Mortgage Interest Deduction

sale of the vacant land are treated as one sale and only

Form (and Instructions) one maximum exclusion can be applied to any gain. See

Excluding the Gain, later.

❏ Schedule D (Form 1040) Capital Gains and

Losses More than one home. If you have more than one home,

❏ 1040X Amended U.S. Individual Income Tax you can exclude gain only from the sale of your main

Return home. You must include in income gain from the sale of

any other home. If you have two homes and live in both of

❏ 1099-S Proceeds From Real Estate Transactions them, your main home is ordinarily the one you live in most

❏ 4797 Sales of Business Property of the time.

❏ 8822 Change of Address Example 1. You own and live in a house in the city. You

❏ 8828 Recapture of Federal Mortgage Subsidy also own a beach house, which you use during the sumSee

How To Get Tax Help, near the end of this publica- mer months. The house in the city is your main home.

tion, for information about getting these publications and

forms. Example 2. You own a house, but you live in another

house that you rent. The rented house is your main home.

Factors used to determine main home. In addition to Main Home the amount of time you live in each home, other factors are

relevant in determining which home is your main home.

This section explains the term “main home.” Usually, the Those factors include the following.

home you live in most of the time is your main home and

can be a: 1. Your place of employment.

• House, 2. The location of your family members’ main home.

• Houseboat, 3. Your mailing address for bills and correspondence.

• Mobile home, 4. The address listed on your:

• Cooperative apartment, or a. Federal and state tax returns,

• Condominium. b. Driver’s license,

To exclude gain under the rules in this publication, you c. Car registration, and

generally must have owned and lived in the property as d. Voter registration card.

your main home for at least 2 years during the 5-year

period ending on the date of sale. 5. The location of the banks you use.

Land. If you sell the land on which your main home is 6. The location of recreational clubs and religious orgalocated,

but not the house itself, you cannot exclude any nizations you are a member of.

gain you have from the sale of the land.

Example. On March 4, 2006, you sell the land on which Property used partly as your main home. If you use

your main home is located. You buy another piece of land only part of the property as your main home, the rules

and move your house to it. This sale is not considered a discussed in this publication apply only to the gain or loss

sale of your main home, and you cannot exclude any gain on the sale of that part of the property. For details, see

on the sale of the land. Business Use or Rental of Home, later.

Publication 523 (2006) Page 3

Amount Realized Figuring Gain or Loss

The amount realized is the selling price minus selling

To figure the gain or loss on the sale of your main home, expenses.

you must know the selling price, the amount realized, and

the adjusted basis. Subtract the adjusted basis from the Selling expenses. Selling expenses include:

amount realized to get your gain or loss. • Commissions,

Selling price • Advertising fees,

− Selling expenses • Legal fees, and

Amount realized • Loan charges paid by the seller, such as loan placement

fees or “points.”

Amount realized

− Adjusted basis

Gain or loss Adjusted Basis

While you owned your home, you may have made adjust- Selling Price ments (increases or decreases) to the basis. This adjusted

basis must be determined before you can figure gain or

The selling price is the total amount you receive for your loss on the sale of your home. For information on how to

home. It includes money, all notes, mortgages, or other figure your home’s adjusted basis, see Determining Basis

debts assumed by the buyer as part of the sale, and the fair later.

market value of any other property or any services you

receive. Amount of Gain or Loss

Personal property. The selling price of your home does To figure the amount of gain or loss, compare the amount

not include amounts you received for personal property realized to the adjusted basis.

sold with your home. Personal property is property that is

not a permanent part of the home. Examples are furniture, Gain on sale. If the amount realized is more than the

draperies, and lawn equipment. Separately stated adjusted basis, the difference is a gain and, except for any

amounts you received for these items should not be shown part you can exclude, generally is taxable.

on Form 1099-S (discussed later). Any gains from sales of

personal property must be included in your income. Loss on sale. If the amount realized is less than the

adjusted basis, the difference is a loss. A loss on the sale

Payment by employer. You may have to sell your home of your main home cannot be deducted.

because of a job transfer. If your employer pays you for a

loss on the sale or for your selling expenses, do not include Jointly owned home. If you and your spouse sell your

the payment as part of the selling price. Your employer will jointly owned home and file a joint return, you figure your

include it as wages in box 1 of your Form W-2 and you will gain or loss as one taxpayer.

include it on Form 1040, line 7, or on Form 1040NR, line 8. Separate returns. If you file separate returns, each of

you must figure your own gain or loss according to your

Option to buy. If you grant an option to buy your home ownership interest in the home. Your ownership interest is

and the option is exercised, add the amount you receive for determined by state law.

the option to the selling price of your home. If the option is

not exercised, you must report the amount as ordinary Joint owners not married. If you and a joint owner

income in the year the option expires. Report this amount other than your spouse sell your jointly owned home, each

on Form 1040, line 21, or on Form 1040NR, line 21. of you must figure your own gain or loss according to your

ownership interest in the home. Each of you applies the

Form 1099-S. If you received Form 1099-S, Proceeds rules discussed in this publication on an individual basis.

From Real Estate Transactions, box 2 (gross proceeds) should show the total amount you received for your home. Other Dispositions

However, box 2 will not include the fair market value of The following rules apply to foreclosures and repossesany

property other than cash or notes, or any services, you sions, abandonments, trades, and transfers to a spouse.

received or will receive. Instead, box 4 will be checked to

indicate your receipt or expected receipt of these items. Foreclosure or repossession. If your home was fore-

If you can exclude the entire gain, the person responsi- closed on or repossessed, you have a sale.

ble for closing the sale generally will not have to report it on You figure the gain or loss from the sale in generally the

Form 1099-S. If you do not receive Form 1099-S, use sale same way as gain or loss from any sale. But the selling

documents and other records to figure the total amount price of your home used to figure the amount of your gain

you received for your home. or loss depends, in part, on whether you were personally

Page 4 Publication 523 (2006)

liable for repaying the debt secured by the home, as shown sales price would still be $50,000 (the $27,000 trade-in

in the following chart. allowed plus the $23,000 mortgage assumed).

IF you were... TinHcEluNd eyso.u..r selling price Transfer to spouse. If you transfer your home to your

spouse, or to your former spouse incident to your divorce,

not personally the full amount of debt canceled you generally have no gain or loss (unless the Exception,

liable for the debt by the foreclosure or discussed next, applies). This is true even if you receive

repossession. cash or other consideration for the home. Therefore, the

personally liable the amount of canceled debt up to rules explained in this publication do not apply.

for the debt the home’s fair market value. You If you owned your home jointly with your spouse and

may also have ordinary income, transfer your interest in the home to your spouse, or to your

as explained next. former spouse incident to your divorce, the same rule

applies. You have no gain or loss.

Ordinary income. If you were personally liable for the Exception. These transfer rules do not apply if your

canceled debt, you may have ordinary income in addition

to any gain or loss. If the canceled debt is more than the spouse or former spouse is a nonresident alien. In that

home’s fair market value, you have ordinary income equal case, you generally will have a gain or loss.

to the difference. Report that income on Form 1040, line More information. See Property Settlements in Publi-

21, or on Form 1040NR, line 21. However, the income from cation 504, Divorced or Separated Individuals, if you need

cancellation of debt is not taxed to you if the cancellation is more information.

intended as a gift, or if you are insolvent or bankrupt. For

more information on insolvency or bankruptcy, see Publication

908, Bankruptcy Tax Guide. Determining Basis

Form 1099-A and Form 1099-C. Generally, you will

receive Form 1099-A, Acquisition or Abandonment of Se- You need to know your basis in your home to determine

cured Property, from your lender. This form will have the any gain or loss when you sell it. Your basis in your home is

information you need to determine the amount of your gain determined by how you got the home. Your basis is its cost

or loss and any ordinary income from cancellation of debt. if you bought it or built it. If you got it in some other way

If your debt is canceled, you may receive Form 1099-C, (inheritance, gift, etc.), its basis is either its fair market

Cancellation of Debt.

value when you got it or the adjusted basis of the person

More information. If part of your home is used for you got it from.

business or rental purposes, see Foreclosures and Repos- While you owned your home, you may have made

sessions in chapter 1 of Publication 544 for more informa- adjustments (increases or decreases) to your home’s bation.

Publication 544 has examples of how to figure gain or sis. The result of these adjustments is your home’s adloss

on a foreclosure or repossession.

justed basis, which is used to figure gain or loss on the sale

of your home.

Abandonment. If you abandon your home, you may have

ordinary income. If the abandoned home secures a debt To figure your adjusted basis, you can use Worksheet

for which you are personally liable and the debt is can- 1, shown later. Filled-in examples of that worksheet are

celed, you have ordinary income equal to the amount of included in the Comprehensive Examples, later.

canceled debt.

If the home is secured by a loan and the lender knows Cost As Basis

the home has been abandoned, the lender should send

you Form 1099-A or Form 1099-C. See Foreclosure or The cost of property is the amount you pay for it in cash,

repossession, earlier, for information about those forms. If debt obligations, other property, or services.

the home is later foreclosed on or repossessed, gain or

loss is figured as explained in that discussion. Purchase. If you buy your home, your basis is its cost to

you. This includes the purchase price and certain settle-

Trading homes. If you trade your old home for another ment or closing costs. Generally, your purchase price

home, treat the trade as a sale and a purchase. includes your down payment and any debt, such as a first

or second mortgage or notes you gave the seller in pay-

Example. You owned and lived in a home with an ment for the home. If you build, or contract to build, a new

adjusted basis of $41,000. A real estate dealer accepted home, your purchase price can include costs of construcyour

old home as a trade-in and allowed you $50,000

toward a new home priced at $80,000. This is treated as a tion, as discussed later.

sale of your old home for $50,000 with a gain of $9,000 Seller-paid points. If the person who sold you your

($50,000 − $41,000). home paid points on your loan, you may have to reduce

If the dealer had allowed you $27,000 and assumed your home’s basis by the amount of the points as shown in

your unpaid mortgage of $23,000 on your old home, your the following chart.

Publication 523 (2006) Page 5

THEN reduce your home’s 4. Any fee or cost that you deducted as a moving ex-

IF you bought your basis by the seller-paid pense (allowed for certain fees and costs before

home... points... 1994),

after 1990 but before only if you deducted them as 5. Charges connected with getting a mortgage loan,

April 4, 1994 home mortgage interest in the such as:

year paid.

after April 3, 1994 even if you did not deduct a. Mortgage insurance premiums (including funding

them. fees connected with loans guaranteed by the Department

of Veterans Affairs),

If you must reduce your basis by seller-paid points and b. Loan assumption fees,

you use Worksheet 1 to figure your adjusted basis, enter c. Cost of a credit report,

the seller-paid points on line 2 of the worksheet (unless

you used the seller-paid points to reduce the amount on d. Fee for an appraisal required by a lender, and

line 1).

Settlement fees or closing costs. When you bought 6. Fees for refinancing a mortgage.

your home, you may have paid settlement fees or closing Real estate taxes. Real estate taxes for the year you

costs in addition to the contract price of the property. You bought your home may affect your basis, as shown in the

can include in your basis some of the settlement fees and following chart.

closing costs you paid for buying the home. You cannot

include in your basis the fees and costs for getting a IF... AND... THEN the taxes...

mortgage loan. A fee paid for buying the home is any fee

you would have had to pay even if you paid cash for the you pay taxes the seller does are added to the

home (that is, without the need for financing). that the seller not reimburse basis of your

Settlement fees do not include amounts placed in es- owed on the you home.

cinrsouwr afnocr et.he future payment of items such as taxes and htdaoaxmteese o u(f tpsh aetole )the trheeim sbeullresres you dboa sniso to af fyfeocutr the

Some of the settlement fees or closing costs that you home.

can include in your basis are: the seller paid you do not are subtracted

1. Abstract fees (abstract of title fees), taxes for you reimburse the from the basis of

(the taxes seller your home.

2. Charges for installing utility services, beginning on

the date of you reimburse do not affect the

3. Legal fees (including fees for the title search and sale) the seller basis of your

preparing the sales contract and deed), home.

4. Recording fees,

Construction. If you contracted to have your house built

5. Survey fees, on land you own, your basis is:

6. Transfer or stamp taxes,

1. The cost of the land, plus

7. Owner’s title insurance, and 2. The amount it cost you to complete the house, in8.

Any amounts the seller owes that you agree to pay, cluding:

such as:

a. The cost of labor and materials,

a. Certain real estate taxes (discussed later), b. Any amounts paid to a contractor,

b. Back interest, c. Any architect’s fees,

c. Recording or mortgage fees, d. Building permit charges,

d. Charges for improvements or repairs, and e. Utility meter and connection charges, and

e. Sales commissions. f. Legal fees directly connected with building the

house.

Some settlement fees and closing costs you cannot

include in your basis are: Your cost includes your down payment and any debt

such as a first or second mortgage or notes you gave the

1. Fire insurance premiums, seller or builder. It also includes certain settlement or

2. Rent for occupancy of the house before closing, closing costs. You may have to reduce your basis by points

the seller paid for you. For more information, see

3. Charges for utilities or other services related to occu- Seller-paid points and Settlement fees or closing costs,

pancy of the house before closing, earlier.

Page 6 Publication 523 (2006)

Built by you. If you built all or part of your house IF the donor’s

yourself, its basis is the total amount it cost you to complete adjusted basis at

it. Do not include in the cost of the house: the time of the

gift was... THEN your basis is... • The value of your own labor, or

more than the fair the same as the donor’s adjusted • The value of any other labor you did not pay for. market value of the basis at the time of the gift.

home at that time

Temporary housing. If a builder gave you temporary Exception: If using the donor’s

housing while your home was being finished, you must adjusted basis results in a loss

reduce your basis by the part of the contract price that was when you sell the home, you

for the temporary housing. To figure the amount of the must use the fair market value of

reduction, multiply the contract price by a fraction. The tyhoeu rh boamseis a. tI ft hues intimg eth oef ftahire gift as

numerator is the value of the temporary housing, and the market value results in a gain,

denominator is the sum of the value of the temporary you have neither gain nor loss.

housing plus the value of the home.

equal to or less the smaller of the:

Cooperative apartment. If you are a tenant-stockholder than the fair • donor’s adjusted basis, plus

in a cooperative housing corporation, your basis in the market value at the any federal gift tax paid on

cooperative apartment used as your home is usually the time, and you the gift, or

cost of your stock in the corporation. This may include your received the gift • the home’s fair market value

share of a mortgage on the apartment building. before 1977 at the time of the gift.

Condominium. To determine your basis in a condomin- equal to or less the same as the donor’s adjusted

ium apartment used as your home, use the same rules as than the fair basis, plus the part of any federal

for any other home. market value at the gift tax paid that is due to the net

time, and you increase in value of the home

Basis Other Than Cost received the gift (explained next). after 1976

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 Part of federal gift tax due to net increase in value.

an inheritance, or in a trade. If you got your home in any of Figure the part of the federal gift tax paid that is due to the

these ways, see the following discussion that applies to net increase in value of the home by multiplying the total

you. If you want to figure your adjusted basis using Work- federal gift tax paid by a fraction. The numerator of the

sheet 1, see the Worksheet 1 Instructions, later, for help. fraction is the net increase in the value of the home, and

Fair market value. Fair market value is the price at which the denominator is the value of the home for gift tax

property would change hands between a willing buyer and purposes after reduction by any annual exclusion and

a willing seller, neither having to buy or sell, and both marital or charitable deduction that applies to the gift. The

having reasonable knowledge of all necessary facts. Sales net increase in the value of the home is its fair market value

of similar property, on or about the same date, may be minus the donor’s adjusted basis.

helpful in figuring the fair market value of the property.

Home received from spouse. If you received your home

Home received as gift. Use the following chart to find the from your spouse or from your former spouse incident to

basis of a home you received as a gift. your divorce, your basis in the home depends on the date

of the transfer.

Transfers after July 18, 1984. If you received the

home after July 18, 1984, there was no gain or loss on the

transfer. Your basis in this home is generally the same as

your spouse’s (or former spouse’s) adjusted basis just

before you received it. This rule applies even if you received

the home in exchange for cash, the release of

marital rights, the assumption of liabilities, or other consideration.

If you owned a home jointly with your spouse and your

spouse transferred his or her interest in the home to you,

your basis in the half interest received from your spouse is

generally the same as your spouse’s adjusted basis just

before the transfer. This also applies if your former spouse

transferred his or her interest in the home to you incident to

your divorce. Your basis in the half interest you already

owned does not change. Your new basis in the home is the

total of these two amounts.

Publication 523 (2006) Page 7

Transfers before July 19, 1984. If you received your To figure your adjusted basis, you can use Worksheet 1,

home before July 19, 1984, in exchange for your release of shown later. Filled-in examples of that worksheet are inmarital

rights, your basis in the home is generally its fair cluded in Comprehensive Examples, later.

market value at the time you received it.

More information. For more information on property Increases to basis. These include any:

received from a spouse or former spouse, see Property • Additions and other improvements that have a useful

Settlements in Publication 504. life of more than 1 year,

Hhoommee, yroeucre bivaesdis iass it si nfahire rmitaarnkceet .vaIfl ueyo oun tinhhee draiteted oyf othuer • Special assessments for local improvements, and

decedent’s death or the later alternate valuation date if that • Amounts you spent after a casualty to restore damdate

was chosen by the personal representative for the aged property.

estate. If an estate tax return was filed, the value listed for

the property generally is your basis. If a federal estate tax

return did not have to be filed, your basis in the home is the Decreases to basis. These include any:

same as its appraised value at the date of death for • Gain you postponed from the sale of a previous

purposes of state inheritance or transmission taxes. home before May 7, 1997,

Surviving spouse. If you are a surviving spouse and • Deductible casualty losses,

you owned your home jointly, your basis in the home will

change. The new basis for the half interest that your • Insurance payments you received or expect to respouse

owned will be one-half of the fair market value on ceive for casualty losses,

the date of death (or alternate valuation date). The basis in

your half will remain one-half of the adjusted basis deter- • Payments you received for granting an easement or

mined previously. Your new basis in the home is the total of right-of-way,

these two amounts. • Depreciation allowed or allowable if you used your

Example. Your jointly owned home had an adjusted home for business or rental purposes,

bthaes ifsa ior fm $a5r0k,e0t0 v0a loune tohne thdaatt ed aotfe y wouars s$p1o0u0s,0e0’s0 d. eYaotuhr, naenwd • Residential energy credit (generally allowed from

basis in the home is $75,000 ($25,000 for one-half of the 1977 through 1987) claimed for the cost of energy

adjusted basis plus $50,000 for one-half of the fair market improvements that you added to the basis of your

value). home,

Community property. In community property states • Nonbusiness energy property credit (allowed begin(

Arizona, California, Idaho, Louisiana, Nevada, New Mex- ning in 2006) claimed for making certain energy savico,

Texas, Washington, and Wisconsin), each spouse is ing improvements that you added to the basis of

usually considered to own half of the community property. your home,

When either spouse dies, the fair market value of the • Residential energy efficient property credit (allowed

community property generally becomes the basis of the

entire property, including the part belonging to the surviv- beginning in 2006) claimed for making certain ening

spouse. For this to apply, at least half the value of the ergy saving improvements that you added to the

community property interest must be includible in the dece- basis of your home,

dent’s gross estate, whether or not the estate must file a • Adoption credit you claimed for improvements added

return. to the basis of your home,

For more information about community property, see

Publication 555, Community Property. • Nontaxable payments from an adoption assistance

program of your employer that you used for improve-

Home received as trade. If you acquired your home as a ments you added to the basis of your home,

trade for other property, the basis of your home is generally the fair market value of the other property at the time of the • Energy conservation subsidy excluded from your

trade. If you traded one home for another, you have made gross income because you received it (directly or

a sale and purchase. In that case, you may have realized a indirectly) from a public utility after 1992 to buy or

gain. See Trading homes, earlier, for an example of figur- install any energy conservation measure. An energy

ing the gain. conservation measure is an installation or modification

that is primarily designed either to reduce con-

More information. For more information about basis, get sumption of electricity or natural gas or to improve

Publication 551. the management of energy demand for a home, and

Adjusted Basis • District of Columbia first-time homebuyer credit (allowed

on the purchase of a principal residence in the

Adjusted basis is your basis increased or decreased by District of Columbia from August 5, 1997, through

certain amounts. December 31, 2005).

Page 8 Publication 523 (2006)

At the time this publication went to print, Con- Repairs. These maintain your home in good condition but

gress was considering legislation that would ex- do not add to its value or prolong its life. You do not add

CAUTION tend the District of Columbia first-time homebuyer their cost to the basis of your property.

!

credit that expired for homes purchased after 2005. To find

out if this legislation was enacted, and for more details, go Examples. Repainting your house inside or outside,

to www.irs.gov, click on More Forms and Publications, and fixing your gutters or floors, repairing leaks or plastering,

then on What’s Hot in forms and publications, or see and replacing broken window panes are examples of rePublication

553, Highlights of 2006 Tax Changes. pairs.

Improvements. These add to the value of your home, Exception. The entire job is considered an improveprolong

its useful life, or adapt it to new uses. You add the ment if items that would otherwise be considered repairs

cost of additions and other improvements to the basis of are done as part of an extensive remodeling or restoration

your property. of your home.

Recordkeeping. You should keep records to

Examples. Putting a recreation room or another bath- prove your home’s adjusted basis. Ordinarily, you

room in your unfinished basement, putting up a new fence, RECORDS must keep records for 3 years after the due date

putting in new plumbing or wiring, putting on a new roof, or for filing your return for the tax year in which you sold your

paving your unpaved driveway are improvements. An ad- home. But if you sold a home before May 7, 1997, and

dition to your house, such as a new deck, a sunroom, or a postponed tax on any gain, the basis of that home affects

new garage, is also an improvement. the basis of the new home you bought. Keep records

The following chart lists some other examples of im- proving the basis of both homes as long as they are

provements. needed for tax purposes.

The records you should keep include:

Additions Heating & Air Bedroom Conditioning • Proof of the home’s purchase price and purchase

Bathroom Heating system expenses,

Deck Central air conditioning • Receipts and other records for all improvements,

Garage Furnace additions, and other items that affect the home’s

Porch Duct work adjusted basis,

Patio Central humidifier

Filtration system • Any worksheets you used to figure the adjusted baLawn

& Grounds sis of the home you sold, the gain or loss on the

Landscaping Plumbing sale, the exclusion, and the taxable gain,

DWraivlkewwaayy SWeapteticr hseysatteemr • Any Form 2119, Sale of Your Home, that you filed to

Fence Soft water system postpone gain from the sale of a previous home

Retaining wall Filtration system before May 7, 1997, and

Sprinkler system • Any worksheets you used to prepare Form 2119,

Swimming pool Interior such as the Adjusted Basis of Home Sold Worksheet

Improvements or the Capital Improvements Worksheet from the

Miscellaneous Built-in appliances Form 2119 instructions.

Storm windows, doors Kitchen modernization

New roof Flooring

Central vacuum Wall-to-wall carpeting

Wiring upgrades Excluding the Gain

Satellite dish Insulation

Security system Attic You may qualify to exclude from your income all or part of

Walls any gain from the sale of your main home. This means that,

Floors if you qualify, you will not have to pay tax on the gain up to

Pipes and duct work the limit described under Maximum Exclusion, next. To

qualify, you must meet the ownership and use tests deImprovements

no longer part of home. Your home’s scribed later.

adjusted basis does not include the cost of any improve- You can choose not to take the exclusion by including

ments that are replaced and are no longer part of the the gain from the sale in your gross income on your tax

home. return for the year of the sale. This choice can be made (or

revoked) at any time before the expiration of a 3-year

Example. You put wall-to-wall carpeting in your home period beginning on the due date of your return (not includ15

years ago. Later, you replaced that carpeting with new ing extensions) for the year of the sale.

wall-to-wall carpeting. The cost of the old carpeting you You can use Worksheet 2, shown later, to figure the

replaced is no longer part of your home’s adjusted basis. amount of your exclusion and your taxable gain, if any.

Publication 523 (2006) Page 9

Worksheet 1 Instructions.

If you use Worksheet 1 to figure the adjusted basis of your home, follow these instructions.

IF... THEN...

1 you inherited your home 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 1 read Home received as gift and enter on lines 1 and 3 of the worksheet either the donor’s adjusted

gift 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 1 enter on line 1 of the worksheet the fair market value of the other property. (But if you received your

trade for other property 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 1 skip lines 1–4 of the worksheet.

your spouse after July 18,

1984 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 fill out one worksheet, including adjustments to basis for events both before and after the transfer.

his or her interest in the home

to you after July 18, 1984

you received your home from 1 skip lines 1–4 of the worksheet.

your spouse before July 19,

1984 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 1 fill out a worksheet, lines 1–13, making adjustments to basis only for events before the transfer.

your spouse, who transferred

his or her interest in the home 2 multiply the amount on line 13 of that worksheet by one-half (0.5) to get the adjusted basis of your

to you before July 19, 1984 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.

Page 10 Publication 523 (2006)

Worksheet 1 Instructions. (Continued)

IF... THEN...

1 you owned your home jointly fill out a worksheet, lines 1–13, making adjustments to basis only for events before your spouse’s

with your spouse who died 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 1 skip lines 1–4 of the worksheet.

with your spouse who died,

and your permanent home is 2 enter the amount of your basis on line 5 of the worksheet. Generally, this is the fair market value of

in a community property state the home at the time of death. (But see Community property for special rules.)

3 fill out the rest of the worksheet, making adjustments to basis only for events after your spouse’s

death.

your home was ever 1 on line 8 of the worksheet, enter any amounts you spent to restore the home to its condition before

damaged as a result of a the casualty.

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.

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.

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.

Publication 523 (2006) Page 11

Worksheet 2. Gain or (Loss), Exclusion, and Taxable Gain

on Sale of Home Keep for Your Records

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 zero 6.

7. Subtract line 6 from line 5. (If the result is less than zero, enter zero.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.

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.

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.

Maximum Exclusion Ownership and Use Tests

You can exclude up to $250,000 of the gain on the sale of To claim the exclusion, you must meet the ownership and

your main home if all of the following are true. use tests. This means that during the 5-year period ending

• You meet the ownership test. on the date of the sale, you must have:

• You meet the use test. • Otewstn),e adn tdhe home for at least 2 years (the ownership

• During the 2-year period ending on the date of the • Lived in the home as your main home for at least 2

sale, you did not exclude gain from the sale of an- years (the use test).

other home.

If you and another person owned the home jointly but file Exception. If you owned and lived in the property as your

separate returns, each of you can exclude up to $250,000 main home for less than 2 years, you can still claim an

of gain from the sale of your interest in the home if each of exclusion in some cases. The maximum amount you can

you meets the three conditions just listed. exclude will be reduced. See Reduced Maximum ExcluYou

can exclude up to $500,000 of the gain on the sale sion, later.

of your main home if all of the following are true.

Example 1—home owned and occupied for 3 years.

• You are married and file a joint return for the year. Amanda bought and moved into her main home in Sep•

Either you or your spouse meets the ownership test. tember 2003. She sold the home at a gain on September

15, 2006. During the 5-year period ending on the date of • Both you and your spouse meet the use test. sale (September 16, 2001 – September 15, 2006), she

• During the 2-year period ending on the date of the owned and lived in the home for 3 years. She meets the

sale, neither you nor your spouse excluded gain ownership and use tests.

from the sale of another home.

Example 2—met ownership test but not use test.

If either spouse does not satisfy all these requirements, the Dan bought a home in 2000. After living in it for 6 months,

maximum exclusion that can be claimed by the couple is he moved out. He never lived in the home again and sold it

the total of the maximum exclusions that each spouse at a gain on June 28, 2006. He owned the home during the

would qualify for if not married and the amounts were entire 5-year period ending on the date of sale (June 29,

figured separately. For this purpose, each spouse is 2001 – June 28, 2006). However, he did not live in it for the

treated as owning the property during the period that either required 2 years. He meets the ownership test but not the

spouse owned the property. use test. He cannot exclude any part of his gain on the

Page 12 Publication 523 (2006)

sale, unless he qualified for a reduced maximum exclusion Helen can exclude gain on the sale of her apartment

(explained later). because she met the ownership and use tests during the

5-year period from July 13, 2001, to July 12, 2006, the date

she sold the apartment. She owned her apartment from

Period of Ownership and Use December 3, 2003, to July 12, 2006 (more than 2 years).

The required 2 years of ownership and use during the She lived in the apartment from July 13, 2001 (the begin5-

year period ending on the date of the sale do not have to ning of the 5-year period), to April 14, 2004 (more than 2

be continuous. years).

The time Helen lived in her daughter’s home during the

You meet the tests if you can show that you owned and 5-year period can be counted as a period of ownership,

lived in the property as your main home for either 24 full and the time she lived in her rented apartment during the

months or 730 days (365 × 2) during the 5-year period 5-year period can be counted as a period of use.

ending on the date of sale.

Cooperative apartment. If you sold stock in a coopera-

Example. Susan bought and moved into a house in July tive housing corporation, the ownership and use tests are

2002. She lived there for 13 months and then moved in met if, during the 5-year period ending on the date of sale,

with a friend. She moved back into her own house in 2005 you:

Sanuds alinv emde tehtesr eth feo or w12n emrsohnitph sa nudn tuils seh tee sstosl db eitc ianu Jsuel,y d 2u0r0in6g. • Owned the stock for at least 2 years, and

the 5-year period ending on the date of sale, she owned • Lived in the house or apartment that the stock entithe

house for 4 years and lived in it for a total of 25 months. tles you to occupy as your main home for at least 2

years.

Temporary absence. Short temporary absences for vacations

or other seasonal absences, even if you rent out

the property during the absences, are counted as periods Members of the uniformed services or Foreign Servof

use. The following examples assume that the reduced ice. You can choose to have the 5-year test period for

maximum exclusion (discussed later) does not apply to the ownership and use suspended during any period you or

sales. your spouse serve on “qualified official extended duty” as a

member of the uniformed services or Foreign Service of

Example 1. David Johnson, who is single, bought and the United States. This means that you may be able to

moved into his home on February 1, 2004. Each year meet the 2-year use test even if, because of your service,

during 2004 and 2005, David left his home for a 2-month you did not actually live in your home for at least the

summer vacation. David sold the house on March 1, 2006. required 2 years during the 5-year period ending on the

Although the total time David used his home is less than 2 date of sale.

years (21 months), he may exclude any gain up to If this helps you qualify to exclude gain, you can choose

$250,000. The 2-month vacations are short temporary to have the 5-year test period suspended by filing a return

absences and are counted as periods of use in determin- for the year of sale that does not include the gain.

ing whether David used the home for the required 2 years.

Example. David bought and moved into a home in

Example 2. Professor Paul Beard, who is single, 1998. He lived in it as his main home for 21/2 years. For the

bought and moved into a house on August 28, 2003. He next 6 years, he did not live in it because he was on

lived in it as his main home continuously until January 5, qualified official extended duty with the Army. He then sold

2005, when he went abroad for a 1-year sabbatical leave. the home at a gain in 2006. To meet the use test, David

On February 6, 2006, 1 month after returning from the chooses to suspend the 5-year test period for the 6 years

leave, Paul sold the house at a gain. Because his leave he was on qualified official extended duty. This means he

was not a short temporary absence, he cannot include the can disregard those 6 years. Therefore, David’s 5-year test

period of leave to meet the 2-year use test. He cannot period consists of the 5 years before he went on qualified

exclude any part of his gain because he did not use the official extended duty. He meets the ownership and use

tests because he owned and lived in the home for 21/2 residence for the required 2 years.

years during this test period.

Ownership and use tests met at different times. You Period of suspension. The period of suspension cancan

meet the ownership and use tests during different not last more than 10 years. Together, the 10-year suspen-

2-year periods. However, you must meet both tests during sion period and the 5-year test period can be as long as,

the 5-year period ending on the date of the sale. but no more than, 15 years. You cannot suspend the

5-year period for more than one property at a time. You can

Example. In 1997, Helen Jones lived in a rented apart- revoke your choice to suspend the 5-year period at any

ment. The apartment building was later changed to a time.

condominium, and she bought her apartment on December

3, 2003. In 2004, Helen became ill and on April 14 of Example. Mary bought a home on April 1, 1990. She

that year she moved to her daughter’s home. On July 12, used it as her main home until September 1, 1993, when

2006, while still living in her daughter’s home, she sold her she went on qualified official extended duty with the Navy.

apartment. She did not live in the house again before selling it on

Publication 523 (2006) Page 13

August 1, 2006. Mary chooses to use the entire 10-year Previous home destroyed or condemned. For the ownsuspension

period. Therefore, the suspension period ership and use tests, you add the time you owned and lived

would extend back from August 1, 2006, to August 1, 1996, in a previous home that was destroyed or condemned to

and the 5-year test period would extend back to August 1, the time you owned and lived in the home on which you

1991. During that period, Mary owned the house all 5 years wish to exclude gain. This rule applies if any part of the

and lived in it as her main home from August 1, 1991, until basis of the home you sold depended on the basis of the

September 1, 1993, a period of 25 months. She meets the destroyed or condemned home. Otherwise, you must have

ownership and use tests because she owned and lived in owned and lived in the same home for 2 of the 5 years

the home for 2 years during this test period. before the sale to qualify for the exclusion.

Uniformed services. The uniformed services are:

Married Persons • The Armed Forces (the Army, Navy, Air Force,

Marine Corps, and Coast Guard), If you and your spouse file a joint return for the year of sale,

• The commissioned corps of the National Oceanic you can exclude gain if either spouse meets the ownership

and Atmospheric Administration, and and use tests. (But see Maximum Exclusion, earlier.)

• The commissioned corps of the Public Health Serv- Example 1 — one spouse sells a home. Emily sells

ice. her home in June 2006. She marries Jamie later in the

year. She meets the ownership and use tests, but Jamie

Foreign Service member. For purposes of the choice does not. Emily can exclude up to $250,000 of gain on a

to suspend the 5-year test period for ownership and use, separate or joint return for 2006. The $500,000 maximum

you are a member of the Foreign Service if you are any of exclusion for certain joint returns does not apply because

the following. Jamie does not meet the use test.

• A Chief of mission. Example 2 — each spouse sells a home. The facts

• An Ambassador at large. are the same as in Example 1 except that Jamie also sells

a home in 2006 before he marries Emily. He meets the • A member of the Senior Foreign Service. ownership and use tests on his home, but Emily does not.

• A Foreign Service officer. Emily and Jamie can each exclude up to $250,000 of gain.

The $500,000 maximum exclusion for certain joint returns • Part of the Foreign Service personnel. does not apply because Emily and Jamie do not jointly

meet the use test for the same home.

Qualified official extended duty. You are on qualified

official extended duty if you serve on extended duty either: Death of spouse before sale. If your spouse died and

• At a duty station at least 50 miles from your main you did not remarry before the date of sale, you are

home, or considered to have owned and lived in the property as your

main home during any period of time when your spouse

• While you live in Government quarters under Gov- owned and lived in it as a main home.

ernment orders.

Home transferred from spouse. If your home was transYou

are on extended duty when you are called or or- ferred to you by your spouse (or former spouse if the

dered to active duty for a period of more than 90 days or for transfer was incident to divorce), you are considered to

an indefinite period. have owned it during any period of time when your spouse

owned it.

Exception for individuals with a disability. There is an Use of home after divorce. You are considered to have

exception to the use test if, during the 5-year period before used property as your main home during any period when:

the sale of your home:

• You owned it, and • You become physically or mentally unable to care

for yourself, and • Your spouse or former spouse is allowed to live in it

under a divorce or separation instrument and uses it • You owned and lived in your home as your main as his or her main home.

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 Reduced Maximum Exclusion

facility (including a nursing home) that is licensed by a

state or political subdivision to care for persons in your You can claim an exclusion, but the maximum amount of

condition. gain you can exclude will be reduced if either of the following

is true.

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 exclu- 1. You did not meet the ownership and use tests, but

sion. the reason you sold the home was:

Page 14 Publication 523 (2006)

a. A change in place of employment, • Your spouse.

b. Health, or • A co-owner of the home.

c. Unforeseen circumstances (as defined later). • A person whose main home is the same as yours.

2. Your exclusion would have been disallowed because Employment. For this purpose, employment includes the

of the rule described in More Than One Home Sold start of work with a new employer or continuation of work

During 2-Year Period, later, except that the reason with the same employer. It also includes the start or continyou

sold the home was: uation of self-employment.

a. A change in place of employment, Distance safe harbor. A change in place of employment

b. Health, or is considered to be the reason you sold your home if:

c. Unforeseen circumstances (as defined later). • The change occurred during the period you owned

and used the property as your main home, and

Use Worksheet 3, shown later, to figure your reduced • The new place of employment is at least 50 miles

maximum exclusion. farther from the home you sold than the former place

A change in place of employment, health, or unforeseen of employment was (or, if there was no former place

circumstances (whichever applies) is considered to be the of employment, the distance between your new

reason you sold your home if either of the following is true. place of employment and the home sold is at least

50 miles).

1. Your home sale qualifies under a “safe harbor.” A

safe harbor is a set of certain facts and circum-

stances that qualifies you to claim a reduced maxi- Example. Justin was unemployed and living in a

mum exclusion. The safe harbors are explained in townhouse in Florida that he had owned and used as his

detail later. main home since 2005. He got a job in North Carolina and

sold his townhouse in 2006. Because the distance be-

2. The primary reason you sold the home was a change tween Justin’s new place of employment and the home he

in place of employment, health, or unforeseen cir- sold is at least 50 miles, the sale satisfies the conditions of

cumstances. Factors that may be relevant in deter- the distance safe harbor. Justin’s sale of his home is

mining your primary reason for sale include whether: considered to be because of a change in place of employa.

Your sale and the circumstances causing it were ment and he is entitled to a reduced maximum exclusion of

close in time, gain from the sale.

b. The circumstances causing your sale occurred

during the time you owned and used the property Health

as your main home,

The sale of your main home is because of health if your

c. The circumstances causing your sale were not primary reason for the sale is:

trheea spornoapbelryty f oarse syeoeuar bmlea iwn hheonm yeo,u began using • To obtain, provide, or facilitate the diagnosis, cure,

mitigation, or treatment of disease, illness, or injury

d. Your financial ability to maintain your home be- of a qualified individual, or

came materially impaired, • To obtain or provide medical or personal care for a

e. The suitability of your property as a home materi- qualified individual suffering from a disease, illness,

ally changed, and or injury.

f. During the time you owned the property, you used For purposes of this reason, a qualified individual includes,

it as your home. in addition to the individuals listed earlier under Change in

Place of Employment, any of the following.

• Parent, grandparent, stepmother, stepfather.

Change in Place of Employment • Child, grandchild, stepchild, adopted child.

The sale of your main home is because of a change in • Brother, sister, stepbrother, stepsister, half brother,

place of employment if your primary reason for the sale is a half sister.

cuhaal.nge in the location of employment of a qualified individ- • Mother-in-law, father-in-law, brother-in-law, sister-

in-law, son-in-law, or daughter-in-law.

Qualified individual. For purposes of the reduced maxi- • Uncle, aunt, nephew, niece, or cousin.

mum exclusion, a qualified individual is any of the follow-

ing. The sale of your home is not because of health if the sale

merely benefits a qualified individual’s general health or

• You. well-being.

Publication 523 (2006) Page 15

Worksheet 3. Reduced Maximum Exclusion Keep for Your Records

Caution: Complete this worksheet only if you qualify for a reduced maximum exclusion. (See (A) (B)

Reduced Maximum Exclusion.) Complete column (A). Fill in both columns (A) and (B) on lines 2 You Your Spouse

through 6 only if you are married filing a joint return.

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 during the time you owned the home, see Members of the uniformed

services or Foreign Service to determine your 5-year period.

Example. In 2005, Chase and Lauren, husband and 1. An involuntary conversion of your home.

wife, bought a house that they used as their main home.

Lauren’s father has a chronic disease and is unable to care 2. Natural or man-made disasters or acts of war or

for himself. In 2006, Chase and Lauren sell their home in terrorism resulting in a casualty to your home,

order to move into Lauren’s father’s house to provide care whether or not your loss is deductible.

for him. Because the primary reason for the sale of their

home was to provide care for Lauren’s father, Chase and 3. In the case of qualified individuals (listed earlier

Lauren are entitled to a reduced maximum exclusion. under Change in Place of Employment):

Doctor’s recommendation safe harbor. Health is con- a. Death,

sidered to be the reason you sold your home if, for one or

more of the reasons listed at the beginning of this discus- b. Unemployment (if the individual is eligible for unsion,

a doctor recommends a change of residence. employment compensation),

c. A change in employment or self-employment sta-

Unforeseen Circumstances tus that results in the individual’s inability to pay

The sale of your main home is because of an unforeseen reasonable basic living expenses (listed under

circumstance if your primary reason for the sale is the Reasonable basic living expenses next) for his or

occurrence of an event that you could not reasonably have her household,

anticipated before buying and occupying your main home.

You are not considered to have an unforeseen circum- d. Divorce or legal separation, or

stance if the primary reason you sold your home was that e. Multiple births resulting from the same pregnancy.

you preferred to get a different home or your finances

improved. 4. An event the Commissioner of IRS determined to be

Specific event safe harbors. Unforeseen circumstances an unforeseen circumstance in published guidance

are considered to be the reason you sold your home if any of general applicability. For example, the Commisof

the following events occurred while you owned and used sioner determined the September 11, 2001, terrorist

the property as your main home. attacks to be an unforeseen circumstance.

Page 16 Publication 523 (2006)

Reasonable basic living expenses. Reasonable basic

living expenses for your household include the follow- Business Use or Rental of

ing• eAxpmeonusnetss. spent for food. Home

• Amounts spent for clothing. You may be able to exclude gain from the sale of a home

• Housing and related expenses. that you have used for business or to produce rental

income. But you must meet the ownership and use tests.

• Medical expenses.

• Transportation expenses. Example 1. On May 29, 2000, Amy bought a house.

She moved in on that date and lived in it until May 31, 2002,

• Tax payments. when she moved out of the house and put it up for rent.

• Court-ordered payments. The house was rented from June 1, 2002, to March 31,

2004. Amy moved back into the house on April 1, 2004,

• Expenses reasonably necessary to produce income. and lived there until she sold it on January 30, 2006. During

the 5-year period ending on the date of the sale (January

Amounts spent on these items to maintain an affluent or 31, 2001 – January 30, 2006), Amy owned and lived in the

luxurious standard of living are not reasonable basic living house for more than 2 years as shown in the following

expenses. table.

More Than One Home Sold During Five-Year Period Used as Home Used as Rental

2-Year Period 1/31/01 – 5/31/02 16 months

6/01/02 – 3/31/04 22 months

You generally cannot exclude gain on the sale of your 4/01/04 – 1/30/06 22 months

home if, during the 2-year period ending on the date of the 38 months 22 months

sale, you sold another home at a gain and excluded all or

part of that gain. If you cannot exclude the gain, you must Amy can exclude gain up to $250,000. However, she

include it in your income. cannot exclude the part of the gain equal to the depreciation

she claimed or could have claimed for renting the

Exception. You still can claim an exclusion, but the maxi- house, as explained after Example 2.

mum amount of gain you can exclude will be reduced, if the

reason you sold the home was: Example 2. William owned and used a house as his

• A change in place of employment, mhea imn ohvoemde t ofr aonmo t2h0e0r0 s ttharteo.u Hghe 2re0n0t3e.d O hnis J haonuusaery f r1o,m 2 0t0h4a,t

• Health, or date until April 30, 2006, when he sold it. During the 5-year

period ending on the date of sale (May 1, 2001 – April 30,

• Unforeseen circumstances (as defined earlier). 2006), William owned and lived in the house for 32 months

(more than 2 years). He must report the sale on Form

For details about this exception, see Reduced Maximum 4797. He can exclude gain up to $250,000. However, he

Exclusion, earlier. cannot exclude the part of the gain equal to the depreciation

he claimed or could have claimed for renting the

Example 1. In September 2004, Paul and Nadine house, as explained next.

bought a new home. In November 2004, they sold their old

home at a $40,000 gain. They had owned and lived in the Depreciation after May 6, 1997. If you were entitled to

old home for 4 years. They excluded the gain on the sale. take depreciation deductions because you used your

On October 1, 2006, Paul and Nadine sold the home home for business purposes or as rental property, you

they purchased in September 2004 at a $15,000 gain. The cannot exclude the part of your gain equal to any depreciasale

was not due to a change in place of employment, tion allowed or allowable as a deduction for periods after

health, or unforeseen circumstances as defined in this May 6, 1997. If you can show by adequate records or other

publication. Because Paul and Nadine had excluded gain evidence that the depreciation allowed was less than the

on the sale of another home within the 2-year period amount allowable, the amount you cannot exclude is the

ending on October 1, 2006, they cannot exclude the gain amount allowed.

on this sale.

Example. Dan sold his main home in 2006 at a $10,000

Example 2. The facts are the same as in Example 1 gain. He meets the ownership and use tests to exclude the

except that Paul and Nadine did not sell the home pur- gain from his income. However, he used one room of the

chased in September 2004 until December 3, 2006. Be- home for business in 2005 and has records showing he

cause they had not excluded gain on the sale of another claimed $1,000 depreciation. He can exclude $9,000

home within the 2-year period ending on December 3, ($10,000 – $1,000) of his gain. He has a taxable gain of

2006, they can exclude the gain on this sale. $1,000.

Publication 523 (2006) Page 17

Property Used Partly for Business or For this purpose, you must allocate the basis of the propRental

erty and the amount realized upon its sale between the business or rental part and the part used as a home. See

If you use property partly as a home and partly for business Example 5, later, for an example of how to do this. You

or to produce rental income, the treatment of any gain on must report the sale of the business or rental part on Form

the sale depends partly on whether the business or rental 4797.

part of the property is part of your home or separate from it.

Example 3. In 2002, Lew bought property that consisted

of a house and a stable. He used the house as his

Part of Home Used for Business or Rental main home and used the stable in his business for the next

4 years. He sold the entire property in 2006 at a $10,000

If the part of your property used for business or to produce gain. Lew met the ownership and use tests for the house

rental income is within your home, such as a room used as but did not meet the use test for the stable. Lew must

a home office for a business, you do not need to allocate allocate the basis of the property and the amount realized

gain on the sale of the property between the business part between the part of the property he used for his home and

of the property and the part used as a home. In addition, the part he used for his business, since the business part

you do not need to report the sale of the business or rental was separate from his home. Lew must report the gain on

part on Form 4797. This is true whether or not you were the business part of his property on Form 4797. He can

entitled to claim any depreciation. However, you cannot exclude the gain on the part of the property that was his

exclude the part of any gain equal to any depreciation main home.

allowed or allowable after May 6, 1997. See Depreciation

after May 6, 1997 earlier. Example 4. In 2001, Mary bought property that consisted

of a house and a barn. Mary used the house as her

Example 1. Ray sold his main home in 2006 at a main home and used the barn in her antiques business. In

$30,000 gain. He meets the ownership and use tests to 2005, Mary moved out of the house and rented it to

exclude the gain from his income. However, he used part tenants. She claimed depreciation on the house while

of the home as a business office in 2005 and claimed $500 renting it in 2005 and 2006. She continued to use the barn

depreciation. Because the business office was part of his in her business. Mary sold the entire property in 2006 for a

home (not separate from it), he does not have to allocate $21,000 gain. Mary must allocate the basis of the property

the gain on the sale between the business part of the and amount realized between the residential and business

property and the part used as a home. In addition, he does parts of the property since the barn is separate from her

not have to report any part of the gain on Form 4797. He home. She must report the entire gain from the barn on

reports his gain, exclusion, and taxable gain of $500 on Form 4797 since she did not meet the use test for the barn.

Schedule D (Form 1040). She must also report gain on the home to the extent of the

depreciation she claimed for the rental.

Example 2. The facts are the same as in Example 1

except that Ray was not entitled to claim depreciation for Use test met for business part (business use in year of

the business use of his home. Since Ray did not claim any sale). If you used a separate part of your property for

depreciation, he can exclude the entire $30,000 gain. business or to produce rental income in the year of sale,

you should treat the sale of the property as the sale of two

properties, even if you met the use test for the business or

Separate Part of Property Used for Business rental part. You must report the sale of the business or

or Rental rental part on Form 4797.

To determine the amounts to report on Form 4797, you

You may have used part of your property as your home must divide your selling price, selling expenses, and basis

and a separate part of it for business or to produce rental between the part of the property used for business or rental

income. Examples are: and the separate part used as your home. In the same

• A working farm on which your house was located, way, if you qualify to exclude any of the gain on the

• An apartment building in which you lived in one unit bmuasxinimeussm o erx rcelunstaiol np abret twofe eyonu trh aptr oppaertr toyf, tahles op rdoipviedrety yaonudr

and rented the others, or the separate part used as your home. If you want to use

• A store building with an upstairs apartment in which Worksheet 2 (shown earlier) to figure your exclusion and

you lived. taxable gain from each part, fill out a separate Worksheet 2

(Part 2) for each.

Use test not met for business part. You cannot exclude Excluding gain on the business or rental part of your

gain on the separate part of your property used for busi- property. You generally can exclude gain on the part of

ness or to produce rental income unless you owned and your property used for business or rental if you owned and

lived in that part of your property for at least 2 years during lived in that part as your main home for at least 2 years

the 5-year period ending on the date of the sale. If you do during the 5-year period ending on the date of the sale. If

not meet the use test for the business or rental part of the you used a separate Worksheet 2 (Part 2) to figure the

property, an allocation of the gain on the sale is required. exclusion for the business or rental part, do not fill out lines

Page 18 Publication 523 (2006)

10 and 11 of that Worksheet 2. Fill it out only through line 9. Worksheet 2. Gain or (Loss), Exclusion,

Then fill out Form 4797. Enter the exclusion for the busi- and Taxable Gain on Sale of Home

ness or rental part on Form 4797 as explained in the Form

4797 instructions. (Also see Example 5, next.) Home Rental

If you have any taxable gain due to depreciation, you will (3/4) (1/4)

need to use the Schedule D Tax Worksheet in the Sched- Part 1 – Gain or (Loss) on Sale

ule D (Form 1040) instructions, rather than the Qualified 1) Selling price of home . . . . . . . . $93,000 $31,000

Dividends and Capital Gain Tax Worksheet in the Form 2) Selling expenses . . . . . . . . . . . 7,500 2,500

1040 instructions, to figure your tax. First, fill out the Unre- 3) Subtract line 2 from line 1. This is

captured Section 1250 Gain Worksheet in the Schedule D the amount realized . . . . . . . . . $85,500 $28,500

instructions. See line 11 of Worksheet 2. 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 Example 5. In January 2002, you bought and moved

into a 4-story townhouse. In December 2004, you con- Then, to figure your taxable gain and exclusion, you

verted the basement level, which has a separate entrance, decide to fill out a separate Worksheet 2 (Part 2) for each

into a separate apartment by installing a kitchen and bath- part, dividing your maximum exclusion between the two

room and removing the interior stairway that led from the parts. You are single, so the maximum exclusion is

basement to the upper floors. After you completed the $250,000.

conversion, your townhouse had a rental unit that was

separate from the part of your house used as your home. Home Rental

You lived in the first, second, and third levels of the (3/4) (1/4)

townhouse and rented the basement level to tenants until Part 2 – Exclusion and Taxable Gain

December 2006. You claimed depreciation of $2,000 for 6) Depreciation allowed or allowable

the basement apartment. You sold the entire townhouse in after May 6, 1997 . . . . . . . . . . . $–0– $2,000

December 2006 for a $16,000 gain. Your records show the 7) Subtract line 6 from gain figured

following. earlier on line 5 . . . . . . . . . . . . . 13,500 500

8) Maximum exclusion . . . . . . . . . . $187,500 $62,500

Purchase price . . . . . . . . . . . . . . . . . . . . . . . . . $ 96,000 9) Exclusion (smaller of line 7 or

Improvements (kitchen and bath) . . . . . . . . . . . . 4,000 line 8) . . . . . . . . . . . . . . . . . . . 13,500 500

Depreciation (on rental part; all after 5/6/1997) . . 2,000 10) Taxable gain (gain figured earlier

Selling price . . . . . . . . . . . . . . . . . . . . . . . . . . . 124,000 on line 5 minus line 9) . . . . . . . . –0– *

Selling expenses . . . . . . . . . . . . . . . . . . . . . . . 10,000 11) Smaller of line 6 or line 10 . . . . . –0– *

Because you met the ownership and use tests for both the * Lines 10 and 11 do not need to be filled out for the rental part.

basement apartment and the part of the house you used as

your home, you can claim an exclusion for both parts. Do not report the gain from the part used as your home,

However, you must allocate your basis, selling price, and $13,500, because you can exclude all of it. You report the

selling expenses between the part of the property you used gain from the rental part, $2,500, in Part III of Form 4797.

as a main home and the part you rented out to tenants. You You enter your exclusion, ($500), on Form 4797, line 2.

start by finding the adjusted basis of each part. You deter- Your taxable gain from the rental part is $2,000 ($2,500 –

mine that three-fourths (75%) of your purchase price was $500).

for the part used as your home; one-fourth (25%) was for Use test met for business part (no business use in

the rental part. year of sale). If you have used a separate part of your

Home Rental property for business or to produce rental income (though

(3/4) (1/4) not in the year of sale) but meet the use test for both the

business or rental part and the part you use as a home, you

Purchase price . . . . . . . . . . . . . . . . . $72,000 $24,000 do not need to treat the transaction as the sale of two

Plus: Improvements . . . . . . . . . . . . . –0– 4,000 properties. Also, you do not need to file Form 4797. You

Minus: Depreciation . . . . . . . . . . . . . –0– 2,000 generally can exclude gain on the entire property.

Adjusted basis . . . . . . . . . . . . . . . . . $72,000 $26,000

Example 6. Assume the same facts as in Example 5,

Next, to figure the gain on each part, you decide to fill except that in March 2006, you combined the two separate

out a separate Worksheet 2 (Part 1) for each part, dividing dwelling units by eliminating the basement kitchen and

your selling price and selling expenses between the two building a new interior stairway to the upper floors. You

parts. used the entire townhouse as your main home for the rest

of 2006. 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)

Publication 523 (2006) Page 19

instructions. You have no other amounts to enter on that second home, you must also report the name, address,

worksheet, so you also enter $2,000 on line 19 of Schedule and social security number (SSN) of the buyer on line 1 of

D. You then figure your tax using the Schedule D Tax either Schedule B (Form 1040) or Schedule 1 (Form

Worksheet. 1040A). The buyer must give you his or her SSN and you

must give the buyer your SSN. Failure to meet these

requirements may result in a $50 penalty for each failure. If

Reporting the Sale you or the buyer does not have and is not eligible to get an

SSN, see the next discussion.

Do not report the 2006 sale of your main home on your tax Individual taxpayer identification number (ITIN). If

return unless: either you or the buyer of your home is a nonresident or

• You have a gain and you do not qualify to exclude all resident alien who does not have and is not eligible to get

of it, or an SSN, the IRS will issue you (or the buyer) an ITIN. To

apply for an ITIN, file Form W-7, Application for IRS Indi- • You have a gain and choose not to exclude it. vidual Taxpayer Identification Number, with the IRS.

If you have any taxable gain on the sale of your main If you have to include the buyer’s SSN on your return

home that cannot be excluded, report the entire gain real- and the buyer is an alien who does not have and cannot

ized (line 5 of Worksheet 2) on Schedule D (Form 1040). get an SSN, enter the buyer’s ITIN. If you have to give an

Report it in column (f) of line 1 or line 8 of Schedule D, as SSN to the buyer and you are an alien who does not have

short term or long term capital gain depending on how long and cannot get one, give the buyer your ITIN.

you owned the home. If you qualify for an exclusion (line 9 An ITIN is for tax use only. It does not entitle the holder

of Worksheet 2), show it on the line directly below the line to social security benefits or change the holder’s employon

which you report the gain. Write “Section 121 exclusion” ment or immigration status under U.S. law.

in column (a) of that line and show the amount of the More information. For more information on installment

exclusion in column (f) as a loss (in parentheses). sales, see Publication 537, Installment Sales.

If you used the home for business or to produce rental

income, you may have to use Form 4797 to report the sale Comprehensive Examples of the business or rental part (or the sale of the entire

property if used entirely for business or rental). See Busi-

ness Use or Rental of Home, earlier. Example 1. Peter and Betty Clark, who are married and

file a joint return, bought a home in 1964. They lived in it as

Installment sale. Some sales are made under arrange- their main home until they sold it in February 2006 and

ments that provide for part or all of the selling price to be moved into a retirement community. The Clarks can expaid

in a later year. These sales are called “installment clude gain on the sale of their home because they owned

sales.” If you finance the buyer’s purchase of your home and lived in it for at least 2 years of the 5-year period

yourself, instead of having the buyer get a loan or mort- ending on the date of sale.

gage from a bank, you probably have an installment sale.

You may be able to report the part of the gain you cannot Their records show the following:

exclude on the installment basis. Original cost . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,000

Use Form 6252, Installment Sale Income, to report the Legal fees for title search . . . . . . . . . . . . . . . . . . 250

sale. Enter your exclusion (line 9 of Worksheet 2) on line Improvements (roof) . . . . . . . . . . . . . . . . . . . . . 2,000

15 of Form 6252. Selling price . . . . . . . . . . . . . . . . . . . . . . . . . . . 395,000

Selling expenses, including commission . . . . . . . 25,000

Seller-financed mortgage. If you sell your home and

hold a note, mortgage, or other financial agreement, the The Clarks use Worksheet 1 to figure the adjusted basis of

payments you receive generally consist of both interest the home they sold ($42,250). They use Worksheet 2 to

and principal. You must separately report as interest in- figure the gain on the sale ($327,750) and the amount of

come the interest you receive as part of each payment. If their exclusion ($327,750). Their completed Worksheets 1

the buyer of your home uses the property as a main or and 2 follow.

Page 20 Publication 523 (2006)

Worksheet 1. Adjusted Basis of Home Sold

Illustrated Example 1 for Peter and Betty Clark Keep for Your Records

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 zero 6. 0

7. Subtract line 6 from line 5. (If the result is less than zero, enter zero.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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

Publication 523 (2006) Page 21

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.

Since the Clarks are married and file a joint return for the ownership and use tests, and file a joint return for the year,

year, they qualify to exclude the full amount of their gain. they qualify to exclude $500,000 of the gain. They report

Because they choose to exclude the gain, they do not the remaining gain of $152,750 ($652,750 – $500,000) on

report the sale of the home on their return. Schedule D (Form 1040). Their completed Worksheet 2

appears next. (Worksheet 1 remains the same as shown in

Example 2. The facts are the same as in Example 1, Example 1.) The front page of the Clarks’ Schedule D

except that Peter and Betty Clark sold their home for follows.

$695,000 and they had no selling expenses. Their gain on

the sale is $652,750. Since they are married, meet the

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 zero 6. 0

7. Subtract line 6 from line 5. (If the result is less than zero, enter zero.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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.

Page 22 Publication 523 (2006)

OMB No. 1545-0074 SCHEDULE D Capital Gains and Losses

(Form 1040)

Attach to Form 1040 or Form 1040NR. See Instructions for Schedule D (Form 1040).

Department of the Treasury

Internal Revenue Service

Attachment

Use Schedule D-1 to list additional transactions for lines 1 and 8. Sequence No. 12

Name(s) shown on return Your social security number

Short-Term Capital Gains and Losses—Assets Held One Year or Less

(f) Gain or (loss)

Subtract (e) from (d)

(e) Cost or other basis

(see page D-7 of

the instructions)

(a) Description of property

(Example: 100 sh. XYZ Co.)

(d) Sales price

(see page D-6 of

the instructions)

(c) Date sold

(Mo., day, yr.)

Enter your short-term totals, if any, from Schedule D-1,

line 2

Total short-term sales price amounts. Add lines 1 and 2 in

column (d)

3

3

5

Short-term gain from Form 6252 and short-term gain or (loss) from Forms 4684, 6781, and 8824

5

6

6

Net short-term gain or (loss) from partnerships, S corporations, estates, and trusts from

Schedule(s) K-1

Short-term capital loss carryover. Enter the amount, if any, from line 10 of your Capital Loss

Carryover Worksheet on page D-7 of the instructions

Net short-term capital gain or (loss). Combine lines 1 through 6 in column (f)

Long-Term Capital Gains and Losses—Assets Held More Than One Year

8

Enter your long-term totals, if any, from Schedule D-1,

line 9

10 Total long-term sales price amounts. Add lines 8 and 9 in

column (d) 10

Gain from Form 4797, Part I; long-term gain from Forms 2439 and 6252; and long-term gain or

(loss) from Forms 4684, 6781, and 8824

11

12

12

13

Net long-term gain or (loss) from partnerships, S corporations, estates, and trusts from

Schedule(s) K-1

Capital gain distributions. See page D-2 of the instructions

14

15

Long-term capital loss carryover. Enter the amount, if any, from line 15 of your Capital Loss

Carryover Worksheet on page D-7 of the instructions ( )

Net long-term capital gain or (loss). Combine lines 8 through 14 in column (f). Then go to

Part III on the back 15

For Paperwork Reduction Act Notice, see Form 1040 or Form 1040NR instructions. Cat. No. 11338H Schedule D (Form 1040) 2006

( )

4 4

Part I

Part II

13

(b) Date

acquired

(Mo., day, yr.)

2

9

(99)

(a) Description of property

(Example: 100 sh. XYZ Co.)

(c) Date sold

(Mo., day, yr.)

(b) Date

acquired

(Mo., day, yr.)

(e) Cost or other basis

(see page D-7 of

the instructions)

(d) Sales price

(see page D-6 of

the instructions)

7

(f) Gain or (loss)

Subtract (e) from (d)

2006

Peter and Betty Clark 000 00 0000

Main home

section 121 exclusion

3/5/64 2/5/06 695,000 42,250 652,750

695,000

(500,000)

152,750

Publication 523 (2006) Page 23

Example 3. Emily White, a single person, bought a the gain on the sale, $127,541, and the amount of her

home in 1995. She lived in the home until May 31, 2004, exclusion, ($125,750). Emily cannot exclude $1,791, the

when she moved out of the house and put it up for rent. part of her gain equal to the depreciation claimed while the

Emily rented her home until May 31, 2005. She moved house was rented.

back into the house and lived there until she sold it on Emily reports her gain and exclusion in Part II of Sched-

January 12, 2006. ule D (Form 1040). She enters $1,791 on line 12 of the

Emily can exclude gain on the sale of her home because Unrecaptured Section 1250 Gain Worksheet in the Schedshe

owned and lived in the home for at least 2 years of the ule D (Form 1040) instructions. She has no other amounts

5-year period ending on the date of the sale. to enter on that worksheet so, after completing it, she also

Emily’s records show the following: enters $1,791 on line 19 of Schedule D. She then figures

her tax using the Schedule D Tax Worksheet in the Sched-

Original cost . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50,000 ule D (Form 1040) instructions.

Legal fees for title search . . . . . . . . . . . . . . . . . . 750 Emily’s completed Worksheet 1 appears next. Her com-

Back taxes paid for prior owner . . . . . . . . . . . . . 1,500 Improvements (deck) . . . . . . . . . . . . . . . . . . . . . 2,000 pleted Worksheet 2 and the front page of her Schedule D

Selling price . . . . . . . . . . . . . . . . . . . . . . . . . . . 195,000 follow. Page 2 of Schedule D and her Unrecaptured SecSelling

expenses, including commission . . . . . . . 15,000 tion 1250 Gain Worksheet are not shown.

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

Worksheet 1. Adjusted Basis of Home Sold

Illustrated Example 3 for Emily White Keep for Your Records

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

Page 24 Publication 523 (2006)

Worksheet 2. Gain or (Loss), Exclusion, and Taxable Gain

on Sale of Home

Illustrated Example 3 for Emily White Keep for Your Records

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 zero 6. 1,791

7. Subtract line 6 from line 5. (If the result is less than zero, enter zero.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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

exchange (discussed above under Sale of home acquired

Special Situations in like-kind exchange). This can occur if you used your

property as your main home for a period before the exThe

situations that follow may affect your exclusion. change that meets the use test, but at the time of the

exchange, you used your home for business or rental

Sale of home acquired in like-kind exchange. You can- purposes. This can also occur if you used your main home

not claim the exclusion if: partly for business or rental purposes and then exchange

• You acquired your home in a like-kind exchange the home. In these situations, you would first exclude the

(also known as a section 1031 exchange); or your gain from the sale of your main home to the extent allowabasis

in your home is determined by reference to the ble, and then apply the nonrecognition of gain provisions of

basis of the home in the hands of the person who section 1031 for like-kind exchanges to defer any remainacquired

the property in a like-kind exchange (for ing gain. For more information, see Revenue Procedure

example, you received the home from that person as 2005-14, which is on page 528 of Internal Revenue Bulletin

a gift), and 2005-7 at www.irs.gov/pub/irs-irbs/irb05-07.pdf.

• You sold the home during the 5-year period begin- Expatriates. You cannot claim the exclusion if the expatrining

with the date your home was acquired in the ation tax applies to you. The expatriation tax applies to

like-kind exchange. U.S. citizens who have renounced their citizenship (and

Gain from a like-kind exchange is not taxable. This means long-term residents who have ended their residency). For

that gain will not be recognized until you sell the property more information about the expatriation tax, see chapter 4

you receive. To defer gain from a like-kind exchange, you of Publication 519, U.S. Tax Guide for Aliens.

must have exchanged business or investment property for

business or investment property of a like kind. For more Home destroyed or condemned. If your home was deinformation

about like-kind exchanges, see Publication stroyed or condemned, any gain (for example, because of

544, Sales and Other Dispositions of Assets. insurance proceeds you received) qualifies for the exclusion.

Home relinquished in a like-kind exchange. The same Any part of the gain that cannot be excluded (because it

tests that apply to determine if you qualify to exclude gain is more than the maximum exclusion) can be postponed

from the sale of your main home (discussed earlier) also under the rules explained in:

apply to determine if you qualify to exclude gain from the • Publication 547, Casualties, Disasters, and Thefts, in

exchange of your main home for another property. Under the case of a home that was destroyed, or

certain circumstances, you may meet the requirements for

both the exclusion of gain from the exchange of a main • Chapter 1 of Publication 544, in the case of a home

home and the nonrecognition of gain from a like-kind that was condemned.

Publication 523 (2006) Page 25

OMB No. 1545-0074 SCHEDULE D Capital Gains and Losses

(Form 1040)

Attach to Form 1040 or Form 1040NR. See Instructions for Schedule D (Form 1040).

Department of the Treasury

Internal Revenue Service

Attachment

Use Schedule D-1 to list additional transactions for lines 1 and 8. Sequence No. 12

Name(s) shown on return Your social security number

Short-Term Capital Gains and Losses—Assets Held One Year or Less

(f) Gain or (loss)

Subtract (e) from (d)

(e) Cost or other basis

(see page D-7 of

the instructions)

(a) Description of property

(Example: 100 sh. XYZ Co.)

(d) Sales price

(see page D-6 of

the instructions)

(c) Date sold

(Mo., day, yr.)

Enter your short-term totals, if any, from Schedule D-1,

line 2

Total short-term sales price amounts. Add lines 1 and 2 in

column (d)

3

3

5

Short-term gain from Form 6252 and short-term gain or (loss) from Forms 4684, 6781, and 8824

5

6

6

Net short-term gain or (loss) from partnerships, S corporations, estates, and trusts from

Schedule(s) K-1

Short-term capital loss carryover. Enter the amount, if any, from line 10 of your Capital Loss

Carryover Worksheet on page D-7 of the instructions

Net short-term capital gain or (loss). Combine lines 1 through 6 in column (f)

Long-Term Capital Gains and Losses—Assets Held More Than One Year

8

Enter your long-term totals, if any, from Schedule D-1,

line 9

10 Total long-term sales price amounts. Add lines 8 and 9 in

column (d) 10

Gain from Form 4797, Part I; long-term gain from Forms 2439 and 6252; and long-term gain or

(loss) from Forms 4684, 6781, and 8824

11

12

12

13

Net long-term gain or (loss) from partnerships, S corporations, estates, and trusts from

Schedule(s) K-1

Capital gain distributions. See page D-2 of the instructions

14

15

Long-term capital loss carryover. Enter the amount, if any, from line 15 of your Capital Loss

Carryover Worksheet on page D-7 of the instructions ( )

Net long-term capital gain or (loss). Combine lines 8 through 14 in column (f). Then go to

Part III on the back 15

For Paperwork Reduction Act Notice, see Form 1040 or Form 1040NR instructions. Cat. No. 11338H Schedule D (Form 1040) 2006

( )

4 4

Part I

Part II

13

(b) Date

acquired

(Mo., day, yr.)

2

9

(99)

(a) Description of property

(Example: 100 sh. XYZ Co.)

(c) Date sold

(Mo., day, yr.)

(b) Date

acquired

(Mo., day, yr.)

(e) Cost or other basis

(see page D-7 of

the instructions)

(d) Sales price

(see page D-6 of

the instructions)

7

(f) Gain or (loss)

Subtract (e) from (d)

2006

Emily White 000 00 0000

Main home

section 121 exclusion

9/3/95 1/12/06 180,000 52,459 127,541

180,000

(125,750)

1,791

Page 26 Publication 523 (2006)

Sale of remainder interest. Subject to the other rules in Since the buyers paid all of the taxes, Dennis and Beth

this publication, you can choose to exclude gain from the also include the $214 in the home’s selling price. The

sale of a remainder interest in your home. If you make this buyers add the $214 to their basis in the home. The buyers

choice, you cannot choose to exclude gain from your sale can deduct $406 ($620 – $214), the taxes for the part of

of any other interest in the home that you sell separately. the year they owned the home.

Exception for sales to related persons. You cannot Form 1099-S. If the person responsible for closing the

exclude gain from the sale of a remainder interest in your sale (generally the settlement agent) must file Form

home to a related person. Related persons include your 1099-S, the information reported on the form to you and

brothers and sisters, half-brothers and half-sisters, the IRS must include (in box 5) the part of any real estate

spouse, ancestors (parents, grandparents, etc.), and lineal tax that the buyer can deduct. If you actually paid the taxes

descendants (children, grandchildren, etc.). Related per- for the year of sale, you must subtract the amount shown in

sons also include certain corporations, partnerships, box 5 of Form 1099-S from the amount you paid. The result

trusts, and exempt organizations. is the amount you can deduct.

More information. For more information about real estate

taxes, see Publication 530.

Deducting Taxes in the

Transfer taxes. You cannot deduct transfer taxes, stamp

Year of Sale taxes, and other incidental taxes and charges on the sale

of a home as itemized deductions. However, if you pay

When you sell your main home, treat real estate and these amounts as the seller of the property, they are

transfer taxes on that home as discussed in this section. expenses of the sale and reduce the amount you realize on

the sale. If you pay these amounts as the buyer, include

Real estate taxes. You and the buyer must deduct the them in your cost basis of the property.

real estate taxes on your home for the year of sale according

to the number of days in the real property tax year (the period to which the tax relates) that each owned the home. Recapturing (Paying Back) a

• You are treated as paying the taxes up to, but not Federal Mortgage Subsidy

including, the date of sale. You can deduct these

taxes as an itemized deduction on Schedule A If you financed your home under a federally subsidized

(Form 1040) in the year of sale. It does not matter program (loans from tax-exempt qualified mortgage bonds

what part of the taxes you actually paid. or loans with mortgage credit certificates), you may have to

recapture all or part of the benefit you received from that • The buyer is treated as paying the taxes beginning program when you sell or otherwise dispose of your home.

with the date of sale. You recapture the benefit by increasing your federal income

tax for the year of the sale. You may have to pay this

If the buyer paid your share of the taxes (or any delin- recapture tax even if you can exclude your gain from

quent taxes you owed), the payment increases the selling income under the rules discussed earlier; that exclusion

price of your home. The buyer adds the amount paid to his does not affect the recapture tax.

or her basis in the property.

Loans subject to recapture rules. The recapture applies

Example. The tax on Dennis and Beth White’s home to loans that:

was $620 for the year. Their real property tax year was the

calendar year, with payment due August 1. They sold the 1. Came from the proceeds of qualified mortgage

home on May 7. Dennis and Beth are considered to have bonds, or

paid a proportionate share of the real estate taxes on the

home even though they did not actually pay them to the 2. Were based on mortgage credit certificates.

taxing authority. The recapture also applies to assumptions of these loans.

Dennis and Beth owned their home during the real

property tax year for 126 days (January 1 to May 6, the day Federal subsidy benefit. If you received a mortgage loan

before the sale). They figure their deduction for taxes as from the proceeds of a tax-exempt bond, you received the

follows. benefit of a lower interest rate than was customarily

charged on other mortgage loans. If you received a mort1.

Enter the total real estate taxes for the real gage credit certificate with your mortgage loan, you were

property tax year . . . . . . . . . . . . . . . . . . . . . . $620 able to reduce your federal income taxes by a mortgage

2. Enter the number of days in the real property interest tax credit. Both of these benefits are federal morttax

year that you owned the property . . . . . . . 126 gage subsidies.

3. Divide line 2 by 365 . . . . . . . . . . . . . . . . . . . . .345

4. Multiply line 1 by line 3. This is your Sale or other disposition. The sale or other disposition

deduction. Enter it on line 6 of Schedule A of your home includes an exchange, involuntary conver-

(Form 1040) . . . . . . . . . . . . . . . . . . . . . . . . . $214 sion, or any other disposition.

Publication 523 (2006) Page 27

For example, if you give away your home (other than to 8828 even if you do not owe a recapture tax. Attach Form

your spouse or ex-spouse incident to divorce), you are 8828 to your Form 1040. For more information, see Form

considered to have “sold” it. You figure your recapture tax 8828 and its instructions.

as if you had sold your home for its fair market value on the

date you gave it away.

When the recapture applies. The recapture of the fed- How To Get Tax Help

eral mortgage subsidy applies only if you meet both of the

following conditions. You can get help with unresolved tax issues, order free

publications and forms, ask tax questions, and get informa- • Within the first 9 years after the date you close your tion from the IRS in several ways. By selecting the method

mortgage loan, you sell or otherwise dispose of your that is best for you, you will have quick and easy access to

home at a gain. tax help.

• Your income for the year of disposition is more than

that year’s adjusted qualifying income for your family Contacting your Taxpayer Advocate. The Taxpayer

size for that year (related to the income require- Advocate Service is an independent organization within

ments a person must meet to qualify for the federally the IRS whose employees assist taxpayers who are expersubsidized

program). iencing economic harm, who are seeking help in resolving

tax problems that have not been resolved through normal

channels, or who believe that an IRS system or procedure

When recapture does not apply. The recapture does not is not working as it should.

apply if any of the following situations apply to you: You can contact the Taxpayer Advocate Service by

• Your mortgage loan was a qualified home improve- calling toll-free 1-877-777-4778 or TTY/TDD

ment loan (QHIL) of not more than $15,000 1-800-829-4059 to see if you are eligible for assistance.

($150,000 for a QHIL used to repair damage from You can also call or write to your local taxpayer advocate,

Hurricane Katrina to homes in the hurricane disaster whose phone number and address are listed in your local

area; for a QHIL funded by a qualified mortgage telephone directory and in Publication 1546, The Taxpayer

bond that is a qualified Gulf Opportunity Zone Bond; Advocate Service of the IRS - How To Get Help With

or for a QHIL for an owner-occupied home in the Unresolved Tax Problems. You can file Form 911, ApplicaGulf

Opportunity Zone (GO Zone), Rita GO Zone, or tion for Taxpayer Assistance Order, or ask an IRS emWilma

GO Zone. See Publication 4492, Information ployee to complete it on your behalf. For more information,

for Taxpayers Affected by Hurricanes Katrina, Rita, go to www.irs.gov/advocate.

and Wilma, for more information), Low income tax clinics (LITCs). LITCs are indepen•

The home is disposed of as a result of your death, dent organizations that provide low income taxpayers with

representation in federal tax controversies with the IRS for

• You dispose of the home more than 9 years after the free or for a nominal charge. The clinics also provide tax

date you closed your mortgage loan, education and outreach for taxpayers with limited English

• You transfer the home to your spouse, or to your proficiency or who speak English as a second language.

former spouse incident to a divorce, where no gain is Publication 4134, Low Income Taxpayer Clinic List, proincluded

in your income, vides information on clinics in your area. It is available at

www.irs.gov or at your local IRS office. • You dispose of the home at a loss,

• Your home is destroyed by a casualty, and you re- Free tax services. To find out what services are availplace

it on its original site within 2 years after the able, get Publication 910, IRS Guide to Free Tax Services.

end of the tax year when the destruction happened It contains a list of free tax publications and describes other

(within 5 years if the home was in the Hurricane free tax information services, including tax education and

Katrina disaster area and was destroyed by reason assistance programs and a list of TeleTax topics.

of the hurricane after August 24, 2005), or Internet. You can access the IRS website at

• You refinance your mortgage loan (unless you later www.irs.gov 24 hours a day, 7 days a week to:

meet the conditions listed previously under When

the recapture applies). • E-file your return. Find out about commercial tax

preparation and e-file services available free to eligi-

Notice of amounts. At or near the time of settlement of ble taxpayers.

your mortgage loan, you should receive a notice that pro- vides the federally subsidized amount and other informa- • Check the status of your 2006 refund. Click on

tion you will need to figure your recapture tax. Where’s My Refund. Wait at least 6 weeks from the

date you filed your return (3 weeks if you filed elec-

How to figure and report the recapture. The recapture tronically). Have your 2006 tax return available betax

is figured on Form 8828, Recapture of Federal Mort- cause you will need to know your social security

gage Subsidy. If you sell your home and your mortgage number, your filing status, and the exact whole dollar

loan is subject to the recapture rules, you must file Form amount of your refund.

Page 28 Publication 523 (2006)

• Download forms, instructions, and publications. telephone calls. Another is to ask some callers to complete

• Order IRS products online. a short survey at the end of the call.

• Research your tax questions online. Walk-in. Many products and services are avail•

Search publications online by topic or keyword. able on a walk-in basis.

• View Internal Revenue Bulletins (IRBs) published in

the last few years. • Products. You can walk in to many post offices,

libraries, and IRS offices to pick up certain forms,

• Figure your withholding allowances using our with- instructions, and publications. Some IRS offices, liholding

calculator. braries, grocery stores, copy centers, city and county

• Sign up to receive local and national tax news by government offices, credit unions, and office supply

email. stores have a collection of products available to print

from a CD or photocopy from reproducible proofs.

• Get information on starting and operating a small Also, some IRS offices and libraries have the Interbusiness.

nal Revenue Code, regulations, Internal Revenue

Bulletins, and Cumulative Bulletins available for research

purposes.

Phone. Many services are available by phone. • 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 • Ordering forms, instructions, and publications. Call help you set up a payment plan. If you need to

1-800-829-3676 to order current-year forms, instruc- resolve a tax problem, have questions about how the

tions, and publications, and prior-year forms and in- tax law applies to your individual tax return, or you’re

structions. You should receive your order within 10 more comfortable talking with someone in person,

days. visit your local Taxpayer Assistance Center where

• Asking tax questions. Call the IRS with your tax you can spread out your records and talk with an

questions at 1-800-829-1040. IRS representative face-to-face. No appointment is

necessary, but if you prefer, you can call your local

• Solving problems. You can get face-to-face help Center and leave a message requesting an appointsolving

tax problems every business day in IRS Tax- ment to resolve a tax account issue. A representapayer

Assistance Centers. An employee can explain tive will call you back within 2 business days to

IRS letters, request adjustments to your account, or schedule an in-person appointment at your convehelp

you set up a payment plan. Call your local nience. To find the number, go to www.irs.gov/local-

Taxpayer Assistance Center for an appointment. To contacts or look in the phone book under United

find the number, go to www.irs.gov/localcontacts or States Government, Internal Revenue Service.

look in the phone book under United States Government,

Internal Revenue Service. Mail. You can send your order for forms, instruc•

TTY/TDD equipment. If you have access to TTY/ tions, and publications to the address below. You

TDD equipment, call 1-800-829-4059 to ask tax should receive a response within 10 business

questions or to order forms and publications. days after your request is received.

• TeleTax topics. Call 1-800-829-4477 to listen to

pre-recorded messages covering various tax topics. National Distribution Center

P.O. Box 8903

• Refund information. To check the status of your Bloomington, IL 61702-8903

2006 refund, call 1-800-829-4477 and press 1 for

automated refund information or call CD for tax products. You can order Publication

1-800-829-1954. Be sure to wait at least 6 weeks 1796, IRS Tax Products CD, and obtain:

from the date you filed your return (3 weeks if you

filed electronically). Have your 2006 tax return avail- able because you will need to know your social se- • A CD that is released twice so you have the latest

curity number, your filing status, and the exact whole products. The first release ships in January and the

dollar amount of your refund. final release ships in March.

• Current-year forms, instructions, and publications.

Evaluating the quality of our telephone services. To • Prior-year forms, instructions, and publications.

ensure IRS representatives give accurate, courteous, and professional answers, we use several methods to evaluate • Bonus: Historical Tax Products DVD - Ships with the

the quality of our telephone services. One method is for a final release.

second IRS representative to listen in on or record random • Tax Map: an electronic research tool and finding aid.

Publication 523 (2006) Page 29

• Tax law frequently asked questions. • All the business tax forms, instructions, and publica-

• Tax Topics from the IRS telephone response sys- tions needed to successfully manage a business.

tem. • Tax law changes for 2006.

• Fill-in, print, and save features for most tax forms. • Tax Map: an electronic research tool and finding aid.

• Internal Revenue Bulletins. • Web links to various government agencies, business

• Toll-free and email technical support. associations, and IRS organizations.

• “Rate the Product” survey—your opportunity to sug-

Buy the CD from National Technical Information Service gest changes for future editions.

(oNr TcaISll) 1 a-8t 7w7w-CwD.irFsO.gRovM/cSd (o1r-d8e7r7s -f2o3r3 $-62756 (7n)o t ohlal nfrdelein tgo fbeuey) • A site map of the CD to help you navigate the pages

the CD for $25 (plus a $5 handling fee). Price is subject to of the CD with ease.

change. • An interactive “Teens in Biz” module that gives practical

tips for teens about starting their own business,

CD for small businesses. Publication 3207, The creating a business plan, and filing taxes.

Small Business Resource Guide CD for 2006, is a

must for every small business owner or any tax- An updated version of this CD is available each year in

payer about to start a business. This year’s CD includes: early April. You can get a free copy by calling

• Helpful information, such as how to prepare a busi- 1-800-829-3676 or by visiting www.irs.gov/smallbiz.

ness plan, find financing for your business, and

much more.

To help us develop a more useful index, please let us know if you have ideas for index entries.

Index See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.

A C D

Abandonment of home . . . . . . . . . . . 5 Casualties: Date of sale . . . . . . . . . . . . . . . . . . . . . . . 2

Absence, temporary . . . . . . . . . . . . . 13 Amounts spent after to restore Death:

Abstract fees . . . . . . . . . . . . . . . . . . . . . . 6 damaged property . . . . . . . . . . . . . 8 Sale due to . . . . . . . . . . . . . . . . . . . . . 16

Address, change of . . . . . . . . . . . . . . . 2 Deductible casualty losses . . . . . . . 8 Spouse’s death before sale,

Adjusted basis . . . . . . . . . . . . . . . . . . 4, 8 Disaster as cause of . . . . . . . . . . . . 16 ownership and use tests . . . . . . 14

Definition of . . . . . . . . . . . . . . . . . . . . . . 5 Insurance payments for casualty Decreases to basis . . . . . . . . . . . . . . . 8

Worksheet 1 to figure . . . . 5, 13, 21, losses . . . . . . . . . . . . . . . . . . . . . . . . . 8 Depreciation:

24 Change of address . . . . . . . . . . . . . . . 2 After May 6, 1997 . . . . . . . . . . . . . . . 17

Adoption: Closing costs . . . . . . . . . . . . . . . . . . . . . 6 Home used for business or rental

Adjusted basis of home for credit Comments on publication . . . . . . . . 2 purposes . . . . . . . . . . . . . . . . . . . . . . 8

claimed . . . . . . . . . . . . . . . . . . . . . . . . 8 Commissions . . . . . . . . . . . . . . . . . . . 4, 6 Destroyed homes:

Advertising fees . . . . . . . . . . . . . . . . . . 4 Community property: Gain exclusion . . . . . . . . . . . . . . . . . . 25

Amount realized . . . . . . . . . . . . . . . . . . 4 Basis determination . . . . . . . . . . . . . . 8 Ownership and use test when

Appraisal fees . . . . . . . . . . . . . . . . . . . . 6 Condemnation: previous home destroyed . . . . 14

Architect’s fees . . . . . . . . . . . . . . . . . . . 6 Gain exclusion . . . . . . . . . . . . . . . . . . 25 Disabilities, individuals with:

Armed forces: Ownership and use test when Ownership and use test . . . . . . . . 14

previous home Disasters . . . . . . . . . . . . . . . . . . . . . . . . . 16

Ownership and use tests . . . . . . . 13 condemned. . . . . . . . . . . . . . . . . . . 14 District of Columbia:

Assistance (See Tax help) Condominiums: First-time homebuyer credit . . . . . . 9

As main home . . . . . . . . . . . . . . . . . . . 3 Divorce:

B CoBnasstirsu dcetitoenrm cionasttison. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 67 HHoommee rtreacnesivfeerdre fdro tmo ssppoouussee .. .. .. .. .. 75

Back interest . . . . . . . . . . . . . . . . . . . . . . 6 Built by you . . . . . . . . . . . . . . . . . . . . . . 7 Ownership and use tests . . . . . . . 14

Basis: Cooperative apartments: Sale due to . . . . . . . . . . . . . . . . . . . . . 16

Adjusted basis (See Adjusted As main home . . . . . . . . . . . . . . . . . . . 3 Transfers after July 18, 1984 . . . . 7

basis) Basis determination . . . . . . . . . . . . . . 7 Transfers before July 19,

Determination of . . . . . . . . . . . . . . . 5-9 Ownership and use tests . . . . . . . 13 1984. . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Other than cost . . . . . . . . . . . . . . . . . . 7 Cost as basis . . . . . . . . . . . . . . . . . . . . . 5 Use of home after divorce . . . . . . 14

Building permit fees . . . . . . . . . . . . . . 6 Credit reports: Doctor’s recommendation for

Business use of home . . . . . . . . 17-19 Cost of obtaining . . . . . . . . . . . . . . . . . 6 sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Page 30 Publication 523 (2006)

Gifts: Maximum exclusion E . . . . . . . . . . . . . 12

Easements . . . . . . . . . . . . . . . . . . . . . . . . 8 Home received as . . . . . . . . . . . . . . . 7 Reduced . . . . . . . . . . . . . . . . . . . . . . . . 14

Employment: Military (See Armed forces)

Change in place of H Missing children, photographs employment . . . . . . . . . . . . . . 15, 17 Health: of . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Payment by employer, when job Sale of home due to . . . . . . . . 15, 17 Mobile homes:

transfer involved . . . . . . . . . . . . . . . 4 Help (See Tax help) As main home . . . . . . . . . . . . . . . . . . . 3

Energy: Houseboats: More information (See Tax help)

Conservation subsidies . . . . . . . . . . 8 As main home . . . . . . . . . . . . . . . . . . . 3 More than one home. . . . . . . . . . . . . . 3

Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Sold during 2-year period . . . . . . . 17

Exclusion of gain . . . . . . . . . . . . . . 9-17 Mortgage fees . . . . . . . . . . . . . . . . . . . . . 6

Reduced maximum I Mortgage insurance

exclusion . . . . . . . . . . . . . . . . . . . . . 14 Important reminders: premiums . . . . . . . . . . . . . . . . . . . . . . . 6

Expatriates . . . . . . . . . . . . . . . . . . . . . . . 25 Change of address . . . . . . . . . . . . . . 2 Mortgage subsidies:

Home sold with undeducted Recapturing (paying back) federal

F Imprpoovienmtse.n.t.s.:. . . . . . . . . . . . . . . . . . . . . 2 Mortmgaogrtegsa,g see slluebrs-fidinyan. .c.e. .d. .. .. .. .. .. .. 2270

Fair market value . . . . . . . . . . . . . . . . . 7 Adjusted basis determination . . . . 9 Moving expense . . . . . . . . . . . . . . . . . . 6

Federal mortgage subsidies: Charges for . . . . . . . . . . . . . . . . . . . . . . 6 Multiple births:

Recapture of . . . . . . . . . . . . . . . . . . . . 27 Receipts and other records . . . . . . 9 Sale due to . . . . . . . . . . . . . . . . . . . . . 16

Figuring gain or loss . . . . . . . . . . . 4-5 Useful life of more than 1

Fire insurance premiums . . . . . . . . . 6 year . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

First-time homebuyer credit . . . . . 9 Increases to basis . . . . . . . . . . . . . . . . 8 N

Foreclosure . . . . . . . . . . . . . . . . . . . . . . . 4 Individual taxpayer identification Nonresident aliens:

Foreign Service . . . . . . . . . . . . . . . . . . 14 numbers (ITINs) . . . . . . . . . . . . . . . 20 Spouse as, transfer of home

Ownership and use tests . . . . . . . 13 Inheritance: to . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Form 1040: Home received as . . . . . . . . . . . . . . . 8

Ordinary income . . . . . . . . . . . . . . . . . 5 Installment sales . . . . . . . . . . . . . . . . . 20 O

Reporting sale of home . . . . . . . . . 20 Involuntary conversion . . . . . . . . . . 16 Option to buy home . . . . . . . . . . . . . . 4

Seller-financed mortgages . . . . . . 20 ITINs (Individual taxpayer Ordinary income . . . . . . . . . . . . . . . . . . 5

Form 1040, Schedule A: identification numbers) . . . . . . . 20 Ownership and use tests . . . . 12, 13

Real estate taxes . . . . . . . . . . . . . . . 27

FFooARrrmmceqp u11oi00rst49iitn09iog,-n ASs :oacrlhe ae obdfa uhnloedm oDne:m.e. .n.t. o. .f. . 20 JJJooOiinnwtt nroeewrtsunhreniprss a n.n.od.t . u.ms. e.a. rt.re.is.e.tds. . ... ... ... ... ..1444 PPPearrstloyn uasl epdr ofopre rbtuys: iness . . . . . . . . 18

secured property . . . . . . . . . . . . . . 5 Selling price of home not to

Form 1099-C: include . . . . . . . . . . . . . . . . . . . . . . . . 4

Cancellation of debt . . . . . . . . . . . . . 5 L Points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Form 1099-S: Land: Home sold with undeducted

Proceeds from real estate Sale of land on which home points . . . . . . . . . . . . . . . . . . . . . . . . . 2

transactions . . . . . . . . . . . . . 2, 4, 27 located . . . . . . . . . . . . . . . . . . . . . . . . 3 Seller-paid . . . . . . . . . . . . . . . . . . . . . . . 5

Form 2119: Sale of vacant land . . . . . . . . . . . . . . 3 Publications (See Tax help)

Sale of home . . . . . . . . . . . . . . . . . . . . 9 Legal fees . . . . . . . . . . . . . . . . . . . . . . . 4, 6

Form 6252: Legal separation: R Installment sale income . . . . . . . . . 20 Sale due to . . . . . . . . . . . . . . . . . . . . . 16 Real estate taxes . . . . . . . . . . . . . . . . . 6 Form 8828: Like-kind exchange . . . . . . . . . . . . . . 25 Deducting in year of sale . . . . . . . 27

Recapture tax . . . . . . . . . . . . . . . . . . . 28 Living expenses . . . . . . . . . . . . . . . . . 17 Recapture of federal mortgage

Free tax services . . . . . . . . . . . . . . . . 28 Loan assumption fees . . . . . . . . . . . . 6 subsidy . . . . . . . . . . . . . . . . . . . . . . . . 27

Loan placement fees . . . . . . . . . . . . . 4 Recording fees. . . . . . . . . . . . . . . . . . . . 6

G Loss (See Gain or loss) Recordkeeping. . . . . . . . . . . . . . . . . . . . 9

Gain or loss: Reduced maximum

Basis determination . . . . . . . . . . . . 5-9 M exclusion . . . . . . . . . . . . . . . . . . . . . . 14

Exclusion of gain . . . . . . . . . . . . . 9-17 Main home: Worksheet 3 . . . . . . . . . . . . . . . . 15, 17

Gain on sale . . . . . . . . . . . . . . . . . . . . . 4 Defined . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Refinancing . . . . . . . . . . . . . . . . . . . . . . . 6

Loss on sale . . . . . . . . . . . . . . . . . . . . . 4 Factors used to determine . . . . . . . 3 Relatives:

Postponed from sale of previous Property used partly as . . . . . . 3, 18 Sale of home to . . . . . . . . . . . . . . . . . 27

home before May 7, 1997 . . . . . 8 Married taxpayers (See Joint Remainder interest:

Worksheet 2 to figure . . . . . . . 13, 24 returns) Sale of . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Publication 523 (2006) Page 31

Remodeling: (See also Spouse: Uniformed services (See Armed

Improvements) . . . . . . . . . . . . . . . . . . 9 Death of (See Surviving spouse) forces)

Rental of home. . . . . . . . . . . . . . . . 17-19 Divorce, transfers subsequent to Use tests . . . . . . . . . . . . . . . . . . . . . 12, 13

Before closing, by buyer . . . . . . . . . 6 (See Divorce) Utilities:

Partial use . . . . . . . . . . . . . . . . . . . . . . 18 Suggestions for publication . . . . . 2 Charges for installing . . . . . . . . . . . . 6

Repairs: (See also Survey fees . . . . . . . . . . . . . . . . . . . . . . . 6 Charges related to occupancy of

Improvements) . . . . . . . . . . . . . . . . 6, 9 Surviving spouse: house before closing . . . . . . . . . . 6

Reporting the sale . . . . . . . . . . . 20, 24 Basis determination . . . . . . . . . . . . . . 8 Energy conservation subsidy . . . . 8

Repossession . . . . . . . . . . . . . . . . . . . . . 4 Ownership and use tests . . . . . . . 14 Meter and connection charges for

Right-of-ways . . . . . . . . . . . . . . . . . . . . . 8 construction . . . . . . . . . . . . . . . . . . . 6

S Tax help . . . . . . . . . . . . . . . . . . . . . . . . . . 28 V

Safe harbors: Taxpayer Advocate . . . . . . . . . . . . . . 28 Vacant land:

Distance safe harbor . . . . . . . . . . . 15 Temporary absence . . . . . . . . . . . . . 13 Sale of . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Doctor’s recommendation for Temporary housing . . . . . . . . . . . . . . . 7

sale . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Title insurance . . . . . . . . . . . . . . . . . . . . 6 W

Unforeseeable events . . . . . . . . . . 16 Title search fees . . . . . . . . . . . . . . . . . . 6 Worksheets . . . . . . . . . . . . . . . . . . . . . . . 2

Sales commissions . . . . . . . . . . . . . 4, 6 Trading homes . . . . . . . . . . . . . . . . . . 5, 8 Adjusted basis (Worksheet

Sales to related persons . . . . . . . . 27 Transfer taxes . . . . . . . . . . . . . . . . 6, 27 1) . . . . . . . . . . . . . . . . . . . 5, 13, 21, 24

Self-employed persons: Transfer to spouse . . . . . . . . . . . . . . . 5 Gain (or loss), exclusion, and

Change in status causing inability After July 18, 1984 . . . . . . . . . . . . . . . 7 taxable gain (Worksheet

to pay basic expenses . . . . . . . . 16 Before July 19, 1984 . . . . . . . . . . . . . 8 2) . . . . . . . . . . . . . . . . . . . . . . . . . 13, 24

SSeelllleerr--fpinaiadn pceodin mtso.r.t.g.a. .g.e.s. . .. .. .. .. .. .. .205 TTY/TDD information . . . . . . . . . . . . 28 RReecdourcdekde empainxgim aunmd e. .x.c.l.u.s.i.o.n. . . . . 9

Selling expenses . . . . . . . . . . . . . . . . . 4 U (Worksheet 3) . . . . . . . . . . . . 15, 17

Selling price . . . . . . . . . . . . . . . . . . . . . . 4 Unemployment. . . . . . . . . . . . . . . . . . . 16 ■

Separate returns . . . . . . . . . . . . . . . . . . 4 Unforeseen circumstances. . . . . 15,

Settlement fees . . . . . . . . . . . . . . . . . . . 6 16, 17

Page 32 Publication 523 (2006)

Prepared 2006-2011 David Ullian Larson
dularson@bellsouth.net
Other websites which may be of interest:
http://www.electricianeducation.com
http://www.electricianmath.com
http://www.technicianeducation.com
http://www.visiteuropeonline.com
http://www.swedenroots.com
http://www.stampdealerlots.com
http://www.oldpostcardsforsale.com
http://www.greenfieldvillageonline.com
http://www.6901st.org