Other Dispositions

The following rules apply to foreclosures and repossessions, abandonments, trades, transfers to a spouse, and involuntary conversions (such as when your home is destroyed or condemned).

Foreclosure or repossession.   If your home was foreclosed on or repossessed, you have a sale.

  You figure the gain or loss from the sale in generally the same way as gain or loss from any sale. But the selling price of your home used to figure the amount of your gain or loss depends, in part, on whether you were personally liable for repaying the debt secured by the home, as shown in the following chart.

Ordinary income.   If you were personally liable for the canceled debt, you may have ordinary income in addition to any gain or loss. If the canceled debt is more than the home’s fair market value, you have ordinary income equal to the difference. Report that income on Form 1040, line 21, or on Form 1040NR, line 21. However, the income from cancellation of debt is not taxed to you if the cancellation is intended as a gift, or if you are insolvent or bankrupt. For more information on insolvency or bankruptcy, see Publication 908, Bankruptcy Tax Guide.

Form 1099-A and Form 1099-C.   Generally, you will receive Form 1099-A, Acquisition or Abandonment of Secured Property, from your lender if your home is transferred in a foreclosure. This form will have the information you need to determine the amount of your gain or loss and any ordinary income from cancellation of debt. If your debt is canceled, you may receive Form 1099-C, Cancellation of Debt.

More information.   If part of your home is used for business or rental purposes, see Foreclosures and Repossessions in chapter 1 of Publication 544 for more information. Publication 544 has examples of how to figure gain or loss on a foreclosure or repossession.

Abandonment.   If you abandon your home, you may have ordinary income. If the abandoned home secures a debt for which you are personally liable and the debt is canceled, you have ordinary income equal to the amount of canceled debt.

  If the home is secured by a loan and the lender knows the home has been abandoned, the lender should send you Form 1099-A or Form 1099-C. See Foreclosure or repossession, earlier, for information about those forms. If the home is later foreclosed on or repossessed, gain or loss is figured as explained in that discussion.

Trading homes.   If you trade your old home for another home, treat the trade as a sale and a purchase.

Example.

You owned and lived in a home with an adjusted basis of $41,000. A real estate dealer accepted your old home as a trade-in and allowed you $50,000 toward a new home priced at $80,000. This is treated as a sale of your old home for $50,000 with a gain of $9,000 ($50,000 - $41,000).

If the dealer had allowed you $27,000 and assumed your unpaid mortgage of $23,000 on your old home, your sales price would still be $50,000 (the $27,000 trade-in allowed plus the $23,000 mortgage assumed).

Transfer to spouse.   If you transfer your home to your spouse, or to your former spouse incident to your divorce, you generally have no gain or loss (unless the Exception, discussed next, applies). This is true even if you receive cash or other consideration for the home. Therefore, the rules explained in this publication do not apply.

  If you owned your home jointly with your spouse and transfer your interest in the home to your spouse, or to your former spouse incident to your divorce, the same rule applies. You have no gain or loss.

Exception.   These transfer rules do not apply if your spouse or former spouse is a nonresident alien. In that case, you generally will have a gain or loss.

More information.    See Property Settlements in Publication 504, Divorced or Separated Individuals, if you need more information.

Destruction or condemnation.   You have a sale when your home is destroyed or condemned and you receive other property or money in payment, such as insurance or a condemnation award. You may be able to exclude all or part of any gain from the destruction or condemnation of your home as explained later in the discussion about a home that was destroyed or condemned under Special Situations.

Determining Basis

You need to know your basis in your home to determine any gain or loss when you sell it. Your basis in your home is determined by how you got the home. Your basis is its cost if you bought it or built it. If you got it in some other way (inheritance, gift, etc.), its basis is either its fair market value when you got it or the adjusted basis of the person you got it from.

While you owned your home, you may have made adjustments (increases or decreases) to your home’s basis. The result of these adjustments is your home’s adjusted basis, which is used to figure gain or loss on the sale of your home.

To figure your adjusted basis, you can use Worksheet 1, shown later. Filled-in examples of that worksheet are included in the Comprehensive Examples, later.

Cost As Basis

The cost of property is the amount you pay for it in cash, debt obligations, other property, or services.

Purchase.   If you buy your home, your basis is its cost to you. This includes the purchase price and certain settlement or closing costs. Generally, your purchase price includes your down payment and any debt, such as a first or second mortgage or notes you gave the seller in payment for the home. If you build, or contract to build, a new home, your purchase price can include costs of construction, as discussed later.

Seller-paid points.   If the person who sold you your home paid points on your loan, you may have to reduce your home’s basis by the amount of the points as shown in the following chart.

  If you must reduce your basis by seller-paid points and you use Worksheet 1 to figure your adjusted basis, enter the seller-paid points on line 2 of the worksheet (unless you used the seller-paid points to reduce the amount on line 1).

Settlement fees or closing costs.   When you bought your home, you may have paid settlement fees or closing costs in addition to the contract price of the property. You can include in your basis some of the settlement fees and closing costs you paid for buying the home. You cannot include in your basis the fees and costs for getting a 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 home (that is, without the need for financing).

  Settlement fees do not include amounts placed in escrow for the future payment of items such as taxes and insurance.

  Some of the settlement fees or closing costs that you can include in your basis are:

1. Abstract fees (abstract of title fees),


2. Charges for installing utility services,


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


4. Recording fees,


5. Survey fees,


6. Transfer or stamp taxes,


7. Owner’s title insurance, and


8. Any amounts the seller owes that you agree to pay, such as:


9. Certain real estate taxes (discussed later),


10. Back interest,


11. Recording or mortgage fees,


12. Charges for improvements or repairs, and


13. Sales commissions.

  Some settlement fees and closing costs you cannot include in your basis are:

1. Fire insurance premiums,


2. Rent for occupancy of the house before closing,


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


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


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


6. Mortgage insurance premiums (including funding fees connected with loans guaranteed by the Department of Veterans Affairs),


7. Loan assumption fees,


8. Cost of a credit report,


9. Fee for an appraisal required by a lender, and


10. Fees for refinancing a mortgage.

Real estate taxes.   Real estate taxes for the year you bought your home may affect your basis, as shown in the following chart.

Construction.   If you contracted to have your house built on land you own, your basis is:

1. The cost of the land, plus


2. The amount it cost you to complete the house, including:


3. The cost of labor and materials,


4. Any amounts paid to a contractor,


5. Any architect’s fees,


6. Building permit charges,


7. Utility meter and connection charges, and


8. Legal fees directly connected with building the house.

  Your cost includes your down payment and any debt such as a first or second mortgage or notes you gave the seller or builder. It also includes certain settlement or closing costs. You may have to reduce your basis by points the seller paid for you. For more information, see Seller-paid points and Settlement fees or closing costs, earlier.

Built by you.   If you built all or part of your house yourself, its basis is the total amount it cost you to complete it. Do not include in the cost of the house:

• The value of your own labor, or


• The value of any other labor you did not pay for.

Temporary housing.   If a builder gave you temporary housing while your home was being finished, you must reduce your basis by the part of the contract price that was for the temporary housing. To figure the amount of the reduction, multiply the contract price by a fraction. The numerator is the value of the temporary housing, and the denominator is the sum of the value of the temporary housing plus the value of the home.

Cooperative apartment.   If you are a tenant-stockholder in a cooperative housing corporation, your basis in the cooperative apartment used as your home is usually the cost of your stock in the corporation. This may include your share of a mortgage on the apartment building.

Condominium.   To determine your basis in a condominium apartment used as your home, use the same rules as for any other home.

Basis Other Than Cost

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 an inheritance, or in a trade. If you got your home in any of these ways, see the following discussion that applies to you. If you want to figure your adjusted basis using Worksheet 1, see the Worksheet 1 Instructions, later, for help.

Fair market value.   Fair market value is the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts. Sales of similar property, on or about the same date, may be helpful in figuring the fair market value of the property.

Home received as gift.   Use the following chart to find the basis of a home you received as a gift.

Part of federal gift tax due to net increase in value.   Figure the part of the federal gift tax paid that is due to the net increase in value of the home by multiplying the total federal gift tax paid by a fraction. The numerator of the fraction is the net increase in the value of the home, and the denominator is the value of the home for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. The net increase in the value of the home is its fair market value minus the donor’s adjusted basis.

Home received from spouse.   If you received your home from your spouse or from your former spouse incident to 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 considerations.

  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.

Transfers before July 19, 1984.   If you received your home before July 19, 1984, in exchange for your release of marital rights, your basis in the home is generally its fair market value at the time you received it.

More information.   For more information on property received from a spouse or former spouse, see Property Settlements in Publication 504.

Home received as inheritance.   If you inherited your home, your basis is its fair market value on the date of the decedent’s death or the later alternate valuation date if that date was chosen by the personal representative for the 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 same as its appraised value at the date of death for purposes of state inheritance or transmission taxes.

Surviving spouse.   If you are a surviving spouse and you owned your home jointly, your basis in the home will change. The new basis for the half interest that your spouse owned will be one-half of the fair market value on the date of death (or alternate valuation date). The basis in your half will remain one-half of the adjusted basis determined previously. Your new basis in the home is the total of these two amounts.

Example.

Your jointly owned home had an adjusted basis of $50,000 on the date of your spouse’s death, and the fair market value on that date was $100,000. Your new basis in the home is $75,000 ($25,000 for one-half of the adjusted basis plus $50,000 for one-half of the fair market value).

Community property.   In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), each spouse is usually considered to own half of the community property. When either spouse dies, the total fair market value of the community property generally becomes the basis of the entire property, including the part belonging to the surviving spouse. For this to apply, at least half the value of the community property interest must be includible in the decedent’s gross estate, whether or not the estate must file a return.

  For more information about community property, see Publication 555, Community Property.

Home received as trade.   If you acquired your home as a trade for other property, the basis of your home is generally the fair market value of the other property at the time of the trade. If you traded one home for another, you have made a sale and purchase. In that case, you may have realized a gain. See Trading homes, earlier, for an example of figuring the gain.

Home destroyed or condemned.   If you acquired your home with insurance proceeds or a condemnation award that you received as a result of an involuntary conversion, such as when your home is destroyed or condemned, the basis of your replacement home is its cost decreased by any gain not recognized on the conversion under the rules explained in:

• Publication 547, Casualties, Disasters, and Thefts, in the case of a home that was destroyed, or


• Chapter 1 of Publication 544, in the case of a home that was condemned.

Example.

A fire destroyed your home that you owned and used for only 6 months. The home had an adjusted basis of $80,000 and the insurance company paid you $130,000 for the loss. You realized a gain of $50,000 ($130,000 - $80,000). You bought a replacement home for $100,000. You recognize a gain of $30,000 ($130,000 - $100,000), the unspent part of the payment from the insurance company. Your gain not recognized is $20,000, the difference between the $50,000 realized gain and the $30,000 recognized gain. The basis of the new home is figured as follows:

More information.   For more information about basis, see Publication 551.

Adjusted Basis

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

To figure your adjusted basis, you can use Worksheet 1, shown later. Filled-in examples of that worksheet are included in Comprehensive Examples, later.

Increases to basis.   These include any:

• Additions and other improvements that have a useful life of more than 1 year,


• Special assessments for local improvements, and


• Amounts you spent after a casualty to restore damaged property.

Decreases to basis.   These include any:

• Gain you postponed from the sale of a previous home before May 7, 1997,


• Deductible casualty losses,


• Insurance payments you received or expect to receive for casualty losses,


• Payments you received for granting an easement or right-of-way,


• Depreciation allowed or allowable if you used your home for business or rental purposes,


• Residential energy credit (generally allowed from 1977 through 1987) claimed for the cost of energy improvements that you added to the basis of your home,


• Nonbusiness energy property credit (allowed beginning in 2006) claimed for making certain energy saving improvements that you added to the basis of your home,


• Residential energy efficient property credit (allowed beginning in 2006) claimed for making certain energy saving improvements that you added to the basis of your home,


• Adoption credit you claimed for improvements added to the basis of your home,


• Nontaxable payments from an adoption assistance program of your employer that you used for improvements you added to the basis of your home,


• Energy conservation subsidy excluded from your gross income because you received it (directly or indirectly) from a public utility after 1992 to buy or install any energy conservation measure. An energy conservation measure is an installation or modification that is primarily designed either to reduce consumption of electricity or natural gas or to improve the management of energy demand for a home, and


• District of Columbia first-time homebuyer credit (allowed on the purchase of a principal residence in the District of Columbia beginning on August 5, 1997).


• General sales taxes claimed as an itemized deduction on Schedule A (Form 1040) that were imposed on the purchase of personal property, such as a houseboat used as your home or a mobile home.

Improvements.   These add to the value of your home, prolong its useful life, or adapt it to new uses. You add the cost of additions and other improvements to the basis of your property.

Examples.

Putting a recreation room or another bathroom in your unfinished basement, putting up a new fence, putting in new plumbing or wiring, putting on a new roof, or paving your unpaved driveway are improvements. An addition to your house, such as a new deck, a sunroom, or a new garage, is also an improvement.

  The following chart lists some other examples of improvements.

Improvements no longer part of home.   Your home’s adjusted basis does not include the cost of any improvements that are replaced and are no longer part of the home.

Example.

You put wall-to-wall carpeting in your home 15 years ago. Later, you replaced that carpeting with new wall-to-wall carpeting. The cost of the old carpeting you replaced is no longer part of your home’s adjusted basis.

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

Examples.

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

Exception.   The entire job is considered an improvement if items that would otherwise be considered repairs are done as part of an extensive remodeling or restoration of your home. For example, if you have a casualty and your home is damaged, increase your basis by the amount you spend on repairs that restore the property to its pre-casualty condition.

Recordkeeping. You should keep records to prove your home’s adjusted basis. Ordinarily, you must keep records for 3 years after the due date for filing your return for the tax year in which you sold your home. But if you sold a home before May 7, 1997, and postponed tax on any gain, the basis of that home affects the basis of the new home you bought. Keep records proving the basis of both homes as long as they are needed for tax purposes.

The records you should keep include:

• Proof of the home’s purchase price and purchase expenses,


• Receipts and other records for all improvements, additions, and other items that affect the home’s adjusted basis,


• Any worksheets you used to figure the adjusted basis of the home you sold, the gain or loss on the sale, the exclusion, and the taxable gain,


• Any Form 2119, Sale of Your Home, that you filed to postpone gain from the sale of a previous home before May 7, 1997, and


• Any worksheets you used to prepare Form 2119, such as the Adjusted Basis of Home Sold Worksheet or the Capital Improvements Worksheet from the Form 2119 instructions.

Excluding the Gain

You may qualify to exclude from your income all or part of any gain from the sale of your main home. This means that, if you qualify, you will not have to pay tax on the gain up to the limit described under Maximum Exclusion, next. To qualify, you must meet the ownership and use tests described later.

You can choose not to take the exclusion by including the gain from the sale in your gross income on your tax return for the year of the sale. This choice can be made (or revoked) at any time before the expiration of a 3-year period beginning on the due date of your return (not including extensions) for the year of the sale.

You can use Worksheet 2, shown later, to figure the amount of your exclusion and your taxable gain, if any.

If you have any amount of taxable gain from the sale of your home, you may have to increase your withholding or make estimated tax payments. See Publication 505, Tax Withholding and Estimated Tax.

Maximum Exclusion

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

• You meet the ownership test.


• You meet the use test.


• During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home.

If you and another person owned the home jointly but file separate returns, each of you can exclude up to $250,000 of gain from the sale of your interest in the home if each of you meets the three conditions just listed.

You may be able to exclude up to $500,000 of the gain on the sale of your main home if you are married and file a joint return and meet the requirements listed in the discussion of the special rules for joint returns, later, under Married Persons.

Ownership and Use Tests

To claim the exclusion, you must meet the ownership and use tests. This means that during the 5-year period ending on the date of the sale, you must have:

• Owned the home for at least 2 years (the ownership test), and


• Lived in the home as your main home for at least 2 years (the use test).

Exception.   If you owned and lived in the property as your main home for less than 2 years, you can still claim an exclusion in some cases. The maximum amount you may be able to exclude will be reduced. See Reduced Maximum Exclusion, later.

Example 1—home owned and occupied for 3 years.

Amanda bought and moved into her main home in September 2004. She sold the home at a gain on September 15, 2007. During the 5-year period ending on the date of sale (September 16, 2002 - September 15, 2007), she owned and lived in the home for 3 years. She meets the ownership and use tests.

Example 2—ownership test met but use test not met.

Dan bought a home in 2001. After living in it for 6 months, he moved out. He never lived in the home again and sold it at a gain on June 28, 2007. He owned the home during the entire 5-year period ending on the date of sale (June 29, 2002 - June 28, 2007). However, he did not live in it for the required 2 years. He meets the ownership test but not the use test. He cannot exclude any part of his gain on the sale, unless he qualified for a reduced maximum exclusion (explained later).

Period of Ownership and Use

The required 2 years of ownership and use during the 5-year period ending on the date of the sale do not have to be continuous.

You meet the tests if you can show that you owned and lived in the property as your main home for either 24 full months or 730 days (365 × 2) during the 5-year period ending on the date of sale.

Worksheet 1 Instructions.

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

Worksheet 1 Instructions.(Continued)