Sale of Personal Residence

If you are purchasing a primary or secondary residence, there may be deductions available to you for points and mortgage interest, as well as real estate taxes covering your period of ownership. For specifics, refer to the FAQs related to those deductions.

You need to keep track of the "tax basis" of your home, from its purchase to its sale. In general, the tax basis of your home will be it's initial cost, plus improvements you add to the house or grounds during the time you own the house, less (in the case of a primary residence) any gain you deferred from a previous home sold before 1998 when you bought this one. This is explained in detail in IRS Publication 523. Likewise refer to that publication if you sold your home before 8/5/97.

For sales after 8/5/97 (and optional for sales between 5/7/97 and that date), current tax law greatly simplifies the reporting of the sale of your principal residence. If, on the date of the sale, you have both owned the house AND used it as your principal residence for NO LESS THAN two of the five years ended on the date of the sale, a gain up to $250,000 is excluded from tax. If you are married, filing jointly, and both of you meet the "use" test above, up to $500,000 can be excluded from tax. You can claim this exclusion no more often than once every two years.

For sales after 1997, if the title company (or other settlement agent who closed the sale) certifies that the sale proceeds are less than the amount you were allowed to exclude, you do not have to report the sale on your return. If you do not receive that certification, you report the sale on Schedule D, following the instructions for that schedule and in Publication 523.

If you do not meet the ownership/use test for the full two years out of five, there are two exceptions that could apply:

  1. If your home sale was due to a forced relocation due to a change in employment, or related to a medical condition that required the move. OR
  2. ANY sale if you owned the property as of 8/5/97, and sold the house no later than two years after that date.
See IRS Publication 523 for the worksheet and necessary computations.

Sale of Second or Vacation Home

If you sell your second residence, the transaction is reported on Schedule D. A loss is not deductible, but there is no similar provision to exclude the gain from such a sale.

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