As tax law is very complicated, this article is intended only for educational or illustrative purposes and should not be construed to communicate legal or professional advise. You should contact us with any specific questions so we can properly interpret how the tax laws applies to your situation. Killingbeck Tax Preparation, Kokomo, Indiana. 765-452-8000.
The Rules on Home Sales and Repossession are rather complex. First we will go over the rules for home sales. The rules for repossessions are listed under its own heading further down this page.
The Gain on a Sale of Personal Residence is Generally*
Not Taxable Up to $250,000 Per Spouse if Meets these Rules:
(*See the exceptions to these general rules in the Other Rules for Home Sales in Income section.)
1. Seller has owned and used property as principle residence two of the last 5 years.
a. The 5 year period is suspended up to 10 yrs. for time in military or for
employees in peace corp, intelligence community.
b. Time in a nursing home counts as principle residence
c. If spouse dies, other spouse can count time deceased spouse lived in it as
their own time.
d. To claim $500,000 both spouses must live there 2 years (or spouse died within
2 years of sale.) (250,000 1 spouse.) Only 1 spouse needs to meet owned rule.
2. Seller hasn’t sold another principle residence in last 2 years.
a. Exception: If less than 24 months & move is caused by employment change over 50 miles,
health or unforeseen circumstance including financial ability, suitability of home, divorce, or
death, prorate exclusion using the number of months they lived in home divided by 24.
b. Usually don’t have to report sale unless you receive a 1099.
c. If 1099 received and you qualify for above rules, show total on Sch. D On a separate
line enter the excludable amount as basis & label Section 121 exclusion.
d. Sale of adjacent land used as a personal residence within 2 years of sale of home is
considered sale of home. If sold prior to home sale, report as capital gain and amend
when home is sold.
Other Rules for Home Sales
1. If you received 1099 and don't qualify for above rules, the gain on the sale of your home
has to be reported on your tax return. In determining how much the gain is we get to
deduct what you originally paid for the home, improvements made to the home and also
some of the closing costs. Then the gain is taxed at a lower capital gains tax rate.
2. When a property subject to depreciation (part of home is a rental) is sold, the entire
recaptured depreciation must be claimed in year of sale.
3. If in last 5 yrs home was rented or used as vacation home BEFORE being used as a
personal residence (not after), you must pay tax on portion of gain attributed to rental use
after 1/1/09. EXCEPTION: Don’t count time in military, work, or medical temporary absence.
Rental use after being used as a home is only taxed on gain attributed to depreciation.
4. Sale of Business in Home(Office in home, daycare…)
a. If gain on sale, have to add back depreciation since 5/6/97
b. Otherwise, the sale of the home is considered 100% the sale of a personal residence.
No longer have to treat as sale of 2 assets.
c. The sale of a rental taxpayer lived in 2 of the last 5 years is considered the sale of
personal residence.
d. The sale of a farm and home or home with a separate rental unit, are still treated
as a sale of 2 assets, business and personal. A possible exception might be if taxpayer
hadn’t used as farm for many years.
e. If business was in separate structure, treat as 2 separate sales.
5. Repayment of First Time Homebuyers credit.
a. Taxpayers who claimed first time homebuyers credit in 2008 must repay the
credit over 15 years. Report repayment in other income section of 1040.
1. If sold before 15 years, must recapture rest of credit as tax in year of sale.
2.. If spouse dies, only report surviving spouses share.
b. For credits claimed in 2009 or 2010 and sold within 3 years or no longer used
as principle residence must repay lesser
1. the gain on the home (be sure to reduce basis for credit)
2. or the credit claimed.
c. Exceptions to recapture are taxpayer’s death, involuntary conversion, military,
and transfer between spouses.
6. Use form 6252 to report Contract Sales if the House was sold on contract & the gain
is taxable. Be sure to separate the interest portion to Sch. B.
a. Also use this form for partial sale of interest in a home.
b. Do have election to report all income in year of sale. Could help if have losses to offset.
c. Can’t use installment sale if to certain relatives.
Foreclosures & Abandonment
are reported by bank on either a 1099A or 1099C. Use the following steps to determine
how much is taxable.
Step 1. Report any fair market value listed on 1099A or 1099C as the sales price on Sch. D.
Use home sale rules above to determine taxability.
Step 2 - For 1099A: If box 2, outstanding principle, is greater than box 4 and box 5 is checked,
seller must claim the difference between box 2 and box 4 as other income unless they qualify for
exclusions in step 4.
Step 3 - For 1099C: Report amount in box 2 as other income unless they qualify for exclusions
in step 4.
Step 4 – If taxpayer qualifies for one of the exclusions listed below,
A. List the exclusion amount on line 2 of form 982 and check on of the appropriate box on
line 1. Only have to do line 10B if still have home.
B. If not able to exclude full amount, list any remaining amount as other income on
front of 1040.
C. Exclusions:
The State only allows exclusion for bankruptcy. Must add back other exclusion as
income on add back page of State return.
1. If taxpayer filed bankruptcy they can exclude cancelled debt.
2. Principle residence indebtedness is excludable up to $2 million ($1 million Married filing separately).
The cancelled debt must be from acquiring, constructing, or improving taxpayer’s
principal residence.
Home debt used for other personal purposes is not excludable.
A. For example, if taxpayer refinanced to get extra money to pay off other bills, they
cannot exclude that extra amount borrowed
3. Debts discharged while you are insolvent: Use the insolvency worksheet .
If your debt is cancelled while you are insolvent, the cancellation does not result in
taxable income to the extent of the insolvency.
To exclude, make a list taxpayer’s assets and liabilities. The amount you can exclude
is limited by the amount liabilities exceed assets. Send form with tax return.
Give us a call if you have questions or we can be of help, 765-452-8000. Killingbeck Insurance & Tax Preparation, Kokomo, Indiana.