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 2 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 if owned and used 1 out of 5 years.
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.
e. If previous house was destroyed or condemned you can add time you lived in that home.
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. If more than one home sold in 24 months, only can exclude sale of main house.
c. Joint owners who aren't married have to figure gain for each separately according to each ownership interest.
d. Usually don’t have to report sale unless you receive a 1099.
e. 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 "Home Sale & Section 121 exclusion".
f. 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 years home was rented, a secondary home 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
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 or no longer used as principal residence 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.
d. The IRS has a web site that shows original credit, annual repayment amounts,
total repaid and remaining balance.
Need Social Security Number, Date of Birth, and Address.
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.
(1) If that relative resells in 2 years you are taxed on additional gain they have. Exceptions.
(2) Installment sale method not allowed on sales of depreciable property to
controlled corp. or partner.
d. When property subject to depreciation is sold, the entire recaptured depreciation must be
claimed in year of sale.
e. If interest charged is too low, you may have to compute minimum interest.
Foreclosures & Abandonments
1. Foreclosures & Abandonments are are reported by bank on either a 1099A or 1099C.
2. How to treat if reported on 1099A: If 1099C, see cancelled debt. Report fair market
value listed on 1099A as sales price on Schedule D. Use home sale rules.
Do not report as cancellation of debt.
3. Watch for 1099C you may receive next year. Be sure to notify bank of new address
to be sure you receive it (to avoid penalties).
Give us a call if you have questions or we can be of help, 765-452-8000. Killingbeck Insurance & Tax Preparation, Kokomo, Indiana.