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:
- 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
- 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.
