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Chapter 16. Selling Your Home

Important Reminders

Qualified mortgage bonds and mortgage credit certificates. Beginning after
December 31, 1990, if you sell your main home that was purchased or improved
with federally-subsidized financing, you may have to recapture part of the
subsidy. For more information, see Recapture of Federal Subsidy, later.

Change of address. If you change your mailing address, be sure to notify the
IRS using Form 8822, Change of Address. Mail it to the Internal Revenue
Service Center for your old address (addresses for the Service Centers are
on the back of the form).

Abandonment, foreclosure, or repossession. If your home was abandoned,
foreclosed on, or repossessed, you have a sale or disposition that you should
report on Form 2119, Sale of Your Home. If the disposition resulted in a gain,
also report it on Schedule D (Form 1040).

You should receive Form 1099─A, Acquisition or Abandonment of Secured
Property, from the lender who acquired the property. This form will have the
information you need to determine whether you have a capital gain or loss,
or ordinary income from a canceled debt on the abandonment, foreclosure or
repossession. See Foreclosure, Repossession, or Abandonment in Chapter 2 of
Publication 544, Sales and Other Dispositions of Assets, for more information.

Introduction

This chapter discusses the tax treatment of the sale of your main home. It
covers the following topics:

∙  How to treat any gain or loss from selling your main home

∙  How to postpone the tax on all or part of the gain from selling your
   main home

∙  How you can exclude all or part of the gain if you are age 55 or older

∙  How to report the sale on Form 2119

In certain cases, you must postpone the tax on the gain from the sale of your
main home if you buy or build a new main home within specific time limits. You
must use Form 2119, Sale of Your Home, to report the sale of your main home,
whether or not you buy another main home.

If you exchange your home for other property, the exchange is treated as the
sale of your home. The same rules for reporting a sale apply to reporting an
exchange. See Trading homes under Old Home, later.

Worksheet. This chapter includes a Worksheet for Postponement of Gain. If you
are required to postpone tax on any gain from the sale of your home, you may
find that worksheet helpful in figuring the amount of gain to be postponed.

Related publication and forms.

This chapter refers to a publication and several tax forms that you may need.
The list of forms does not include Forms 1040, 1040A, and 1040EZ. For more
information, you may want to order any of the following:

      Publication 523, Tax Information on Selling Your Home

      Form 1040X, Amended U.S. Individual Income Tax Return

      Schedule D (Form 1040), Capital Gains and Losses

      Form 2119, Sale of Your Home

      Form 8822, Change of Address

Gain or Loss

If you sell your main home, you may be able to postpone paying tax on all or
part of the gain from the sale. If you buy a new home and the purchase price
of the new home is at least as much as the adjusted sales price of the old
home, you must postpone the tax on all the gain from the sale. If you do not
buy a new home, or if the purchase price of the new home is less than the
adjusted sales price of the old home, you will generally be subject to tax on
all or part of the gain. However, if you are age 55 or older, you may qualify
to exclude the gain as explained later.

Loss on sale. You cannot deduct a loss on the sale of your home. The loss has
no effect on the basis of your new home.

Purchase price at least as much as sales price. Your entire gain on the sale
of your home is not taxed at the time of the sale if, within 2 years before or
2 years after the sale, you buy and live in another home that costs at least
as much as  the adjusted sales price (described later) of the old home. If
you are on active duty in the Armed Forces, if you served in a combat zone,
or if your tax home is outside the United States, the 2-year period may be
suspended. See People Outside the U.S. and Members of the Armed Forces under
Time for Replacement, later.

Purchase price less than sales price. If the purchase price of your new home
is less than the adjusted sales price of your old home and you buy and live in
the new home within 2 years before or 2 years after the sale, the gain taxed
in the year of the sale is the lesser of:

1)  The gain on the sale of the old home, or

2)  The amount by which the adjusted sales price of the old home is more than
    the purchase price of the new home.

You need not use the same funds received from the sale of your old home to buy
or build your new home. For example, you can use less cash than you received,
increase the amount of your mortgage loan, and still postpone the tax on your
gain.

Recapture of Federal Subsidy

If you financed your home under a federally-subsidized program (loans from
tax-exempt qualified mortgage bonds or loans based on mortgage credit
certificates), you may have to recapture all or part of the benefit you
received from that program when you sell or otherwise dispose of your home.

Loans subject to recapture rules. The recapture of the subsidy applies to
loans that:

∙  Are provided after December 31, 1990, and

∙  Come from the proceeds of qualified mortgage bonds, or are based on
   mortgage credit certificates, issued after August 15, 1986.

The recapture also applies to assumptions of these loans.

Federal subsidy benefit. If you received a mortgage loan from the proceeds of
a tax-exempt bond, you received the benefit of a lower interest rate than was
customarily charged on other mortgage loans. If you received a mortgage credit
certificate on which you obtained your home financing, you were able to reduce
your federal income taxes by a mortgage interest tax credit.

Recapture of benefit. If you benefited from a loan subject to the recapture
rules, you may have to later recapture all or part of the benefit. You
recapture the benefit by increasing your federal income tax for the year in
which you sell or otherwise dispose of your home at a gain. For purposes of
this recapture, the postponement or exclusion of gain provisions discussed
later in this publication do not apply.

When the recapture applies. The recapture of the federal mortgage subsidy
only applies if you meet all of the following conditions.

1)  You sell or otherwise dispose of your home at a gain,

2)  Your income for the year of disposition exceeds the adjusted qualifying
    income for your family size for that year (related to the income
    requirements a person must meet to qualify for the federally
    -subsidized program), and

3)  You dispose of your home during the first 9 years after the date your
    mortgage loan was provided.

When recapture does not apply. The recapture does not apply if any of the
following situations apply to you:

∙  The mortgage was secured solely as a qualified home improvement loan
   not in excess of $15,000,

∙  The home is disposed of as a result of your death,

∙  You dispose of the home more than 9 years after the date the mortgage
   loan was provided,

∙  You transfer the home to your spouse, or to your former spouse incident
   to a divorce, where no gain or loss is included in your income,

∙  You dispose of the home at a loss, or

∙  Your home is destroyed by a casualty, and you repair it or replace it
   on its original site within 2 years after the destruction.

Sale or other disposition. The sale or other disposition of your home
includes disposition by sale, exchange, involuntary conversion, or any
other disposition.

For example, if you give away your home (other than to your spouse or former
spouse incident to divorce), you are considered to have "sold" it. You figure
your recapture tax as if you had sold your home for its fair market value
on the date you gave it away.

How to figure the recapture. The actual amount of tax you must recapture is
the lesser of:

1)  50% of your gain on the disposition of your home, regardless of whether
    you have to include that gain in your income for federal income tax
    purposes, or

2)  Your recapture amount. You determine this amount by multiplying the
    following three items.

    a)  Your federally-subsidized amount,

    b)  Your holding period percentage (based on the number of years you
        owned the home), and

    c)  Your income percentage. You determine this percentage by subtracting
        your adjusted qualifying income for the year you dispose of your
        home from your modified adjusted gross income for the year and
        dividing the excess by $5,000. If this results in a percentage
        greater than 100%, your income percentage is 100%.

Notice of amounts. At or near the time of settlement of your loan, you will
be notified of the federally-subsidized amount in (2a) above, and the adjusted
qualifying income for each year of the 9-year period beginning on the date
the loan was provided, from which you determine the adjusted qualifying income
amount for (2c) above. You will not have to make those computations.

Modified adjusted gross income. Your modified adjusted gross income in (2c)
above is your adjusted gross income:

∙  Increased by any interest income from a state or local government bond
   that is tax-exempt and is not included in your gross income for the year,
   and

∙  Decreased by any gain from the disposition of your home that is included
   in your gross income for the year.

How to report the recapture. If you are subject to recapture and are otherwise
required to file a tax return, you will need to fill out Form 8828, Recapture
of Federal Mortgage Subsidy, and attach it to your Form 1040. If you are not
required to file a tax return, you can fill out Form 8828, sign it, and mail
it to the Internal Revenue Service Center designated for your area. See the
instructions for Form 8828 for more information.

Postponement of Gain

Generally, you must postpone tax on the gain on the sale of your main home if
you buy a new main home within the replacement period and it costs at least as
much as the adjusted sales price of the old home. However, no tax applies to
the extent you can exclude the gain. In that case, you must be age 55 or older
and meet certain qualifications discussed later under Exclusion of Gain.

This section explains the time for replacement, how to determine the gain, and
how to report the sale.

The tax on the gain is postponed, not forgiven. Any gain that is not taxed in
the year you sell your old home is subtracted from the cost of your new home.
This gives you a lower basis in the new home. If you sell the new home in a
later year and again replace it, you continue to postpone tax on your gain.

Example. You sold your home in 1992 for $90,000 and had a $5,000 gain. Within
2 years, you bought another home for $103,000. The $5,000 gain will not be
taxed in 1992 (the year of sale), but you must subtract it from the $103,000.
This makes the basis of your new home $98,000. If you later sell the new home
for $110,000, and you do not buy and live in a replacement home within the
required time, you will be subject to tax on the $12,000 gain ($110,000 -
$98,000) in the sale year.

You may want to use the Worksheet for Postponement of Gain when you read the
examples in this chapter. The worksheet is shown later in this chapter.

Main Home

Usually, the home in which you live is your main home. The home you sell and
the one you buy to replace it must both qualify as your main home. Property
used partly as your home and partly for business and Home changed to rental
property are discussed later under Old Home.

Your main home can be a houseboat, a mobile home, a cooperative apartment, or
a condominium.

Fixtures (permanent parts of the property) generally are part of your main
home. Furniture, appliances, and similar items that are not fixtures generally
are not part of your main home.

Land. If you sell the land on which your main home is located, but not the
house itself, you cannot postpone tax on any gain you have from the sale of
the land.

Example. You sell the land on which your main home is located. Within the
replacement period, you buy another piece of land and move your house to it.
This sale is not considered a sale of your main home, and you cannot postpone
tax on any gain on the sale.

More than one home. If you have more than one home, only the sale of your main
home qualifies for postponing the tax. If you have two homes and live in both
of them, your main home is the one you live in most of the time.

Example. You own and live in a house in town and also own beach property,
which you use in the summer months. The town property is your main home; the
beach property is not.

If you own a house, but live in another house you rent, the rented home is
your main home. But if a house you own is your main home, you can temporarily
rent it out before its sale without changing its character as your main home.

Time for Replacement

You must buy (or build) and live in another house within 2 years before or 2
years after the date of sale of your old home to postpone the tax on the gain
from the sale.

Example. You buy and move into a new home that you use as your main home on
April 26, 1992, before you sell your old home. You have until April 26, 1994,
a period of 24 months (unless the time is suspended, as explained later under
People Outside the U.S. and Members of the Armed Forces ) to sell your old
home and postpone tax on any gain.

Occupancy test. You must physically live in the replacement home as your main
home within the required period. If you move furniture or other personal
belongings into the new home but do not actually live in it, you have not
met the occupancy test.

No added time beyond the specified period is allowed. If you had a gain on
the sale of your home, you must replace the old home and occupy the new home
within the specified period. No additional time is allowed, even if conditions
beyond your control keep you from doing it. For example, destruction of the
new home while it was being built would not extend the replacement period.
However, there may be a suspension of time, discussed later, for people
outside the U.S. or members of the Armed Forces.

If you do not replace the home in time and you had postponed gain in the year
of sale, you must file an amended return for the year of sale and report the
entire gain on the sale of your old home. Also, if you began building your new
home within the specified period, but for any reason were unable to live in
it within 2 years, no more time for occupancy is allowed. You must report your
entire gain on an amended return for the year of the sale. See Amended Return,
later.

People Outside the U.S.

The replacement period is suspended while you have your tax home (place where
you live and work) outside the United States. This suspension applies only if
your stay abroad begins before the end of the 2-year replacement period. The
replacement period, plus the period of suspension, is limited to 4 years from
the date of sale of your old home.

Nonmilitary service in a combat zone in support of the Armed Forces. The
running of the 2-year replacement period, or the 4-year replacement period (if
you live and work outside the U.S.), is suspended for any period you served
in the Persian Gulf Area combat zone in support of the Armed Forces, plus 180
days, even though you were not a member of those forces. This includes Red
Cross personnel, accredited correspondents, and civilians under the direction
of the Armed Forces in support of those forces.

The rules for suspending the running of the replacement period and for
applying that suspension to your spouse are the same as the suspension
rules explained later under Members of the Armed Forces and its discussion,
Military service in a combat zone.

For more information, see People Outside the U.S. in Publication 523. For
a discussion of tax home, see Chapter 28.

Members of the Armed Forces

The replacement period after the sale of your old home is suspended while you
serve on extended active duty in the Armed Forces. Extended active duty is
defined as serving under a call or order for more than 90 days or for an
indefinite period. The suspension applies only if your service begins before
the end of the 2-year period. This time plus any period of suspension is
limited to 4 years from the date you sold your old home. For more information,
see Members of the Armed Forces in Publication 523.

Overseas military assignment. The replacement period is suspended while you
are stationed outside the United States. The replacement period may also be
suspended while you are required to live in on-base quarters following your
return from a tour of duty outside the United States. In this case, it will
be suspended if you are required to live on base because you are stationed at
a remote site where the Secretary of Defense has determined adequate off-base
housing is not available. If you sold your house after July 18, 1984, the
replacement period will not expire until one year after the last day you
are stationed outside the United States, or the last day you are required to
reside in government quarters on base. The replacement period, plus any period
of suspension, is limited to 8 years after the date of the sale of your old
home.

If you qualify for the time suspension for members of the Armed Forces and
have already filed an income tax return reporting gain from the sale of a
home that can be further postponed, you can file Form 1040X, Amended U.S.
Individual Income Tax Return, to claim a refund. See Amended Return, later.

Military service in a combat zone. The running of the 4-year replacement
period for extended active duty in the U.S., or the 8-year replacement period
for extended active duty overseas, is suspended for any period you served in
the Persian Gulf Area combat zone. For this suspension, the area designated
as a combat zone is effective August 2, 1990.

If you performed military service in an area outside the combat zone that was
in direct support of military operations in the combat zone and you received
special pay for duty subject to hostile fire or imminent danger, you are
treated as if you served in the combat zone.

The suspended replacement period starts again 180 days after the later of:

1)  The last day you were in the combat zone (or, if earlier, the last day
    the area qualified as a combat zone), or

2)  The last day of any continuous hospitalization (limited to 5 years if
    hospitalized in the U.S.) for an injury sustained while serving in the
    combat zone.

For more information on extension of the replacement period, see Military
service in a combat zone in Publication 523.

Amended Return

If you sell your old home and do not plan to replace it, you must include the
gain in income for the year of sale. If you later change your mind, buy and
live in another home within the replacement period, and meet the requirements
to postpone gain, you will have to file an amended return (Form 1040X) for the
year of sale to claim a refund. For information on the time allowed for filing
an amended return, see Chapter 1.

Caution. If you have an extended replacement period because you have your tax
home outside the U.S. or you are a member of the Armed Forces, the replacement
period may go beyond the last date you can file an amended return claiming
a refund for the year of sale. If there is a possibility you may change your
mind and buy another home during the extended replacement period, you should
file a protective claim for refund at the time you file the return or within
the period covered by the statute of limitations for that return.

Basis

Basis is the amount of your investment (equity) in property for tax purposes.
Whether you bought your home, hired a contractor to build it for you, built
it yourself, or received it in another way, it is important that you know its
basis.

The basis of property you buy is usually the cost or purchase price. While you
own the property, you may make adjustments (increases or decreases) to the
basis. If you change the original basis, you have adjusted the basis.

This adjusted basis is used to figure gain or loss when you sell or otherwise
dispose of the property. You also must know the adjusted basis at the time of
a casualty to determine your deductible loss from the casualty. If you change
your home to rental or business use, your depreciation is based on the fair
market value of the home or its adjusted basis at the time of the change,
whichever is less.

You can find more information on basis and adjusted basis in Chapter 14.

Adjusted Basis

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

Increases to basis include:

1)  Improvements.

2)  Additions.

3)  Other capital expenses.

4)  Special assessments for local improvements.

5)  Amounts spent to restore damaged property.

Decreases to basis include:

1)  Gain from sale of old home on which tax was postponed.

2)  Insurance reimbursements for casualty losses.

3)  Deductible casualty losses not covered by insurance.

4)  Payments received for easement or right-of-way granted.

5)  Depreciation allowed or allowable if you used your home for business
    or rental purposes.

No effect on basis. Items that you cannot deduct from, or add to, your basis
include:

1)  Certain settlement fees or closing costs. These include:

    ∙  "Points" or loan origination fees not deductible as interest.

    ∙  Fire insurance premiums.

    ∙  FHA mortgage insurance premiums.

    ∙  Rent for occupancy of the house before closing.

    ∙  Charges for utilities or other services relating to occupancy of the
       house before closing.

2)  The cost of repairs.

3)  Any item that you deducted as a moving expense. See Home-Related Expenses
    in Chapter 27.

Improvements. These are costs that add to the value of your home, prolong its
useful life, or adapt it to new uses. Improvements are added to the basis of
your property.

Examples. Putting a recreation room in your unfinished basement, adding
another bathroom or bedroom, putting up a fence, putting in new plumbing or
wiring, putting on a new roof, or paving your driveway are improvements you
add to basis.

Repairs. These are costs that maintain your home in good condition. They do
not add to its value or prolong its life and are not added 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.

Recordkeeping. You should save receipts and other records for all improvements,
additions, and other items that affect the basis of your home. Ordinarily, you
must keep records for 3 years after the due date for filing your return for
the tax year in which you sold, or otherwise disposed of, your home. But if
you use the basis of your old home in figuring the basis of your new one, such
as when you sell your old home and postpone tax on any gain, you should keep
those records as long as they are needed for tax purposes.

Old Home

To figure the gain on the sale of your old home, you must know the selling
price and the amount realized.

Gain. Your gain on the sale is the amount realized minus the adjusted basis of
the home.

Amount realized. The amount realized is the selling price minus selling
expenses.

Selling price. The selling price is the total amount you receive for the
property, including money, all notes, mortgages, or other debts that are
part of the sale, and the fair market value of other property you receive.

Employer reimbursement. If you have to sell your home because of a job
transfer and your employer pays you for a loss in the value of your home, do
not include the payment (reimbursement) as part of the selling price. Include
it in your gross income as compensation for services on line 7 of Form 1040.

Selling expenses. Selling expenses include commissions, advertising, and
legal fees. Loan charges paid by the seller, such as loan placement fees or
"points," are usually a selling expense.

Moving expenses. You can deduct some expenses of selling your home as moving
expenses. However, you cannot decrease the amount realized on the sale of your
home by the real estate commission or other expenses you deduct as a moving
expense. See Chapter 27.

Adjusted sales price. The adjusted sales price of the old home is used to
figure the part of the gain on which tax is postponed. The adjusted sales
price is the amount realized minus any fixing-up expenses you might have.
Compare the adjusted sales price with the cost of the new home to find the
gain on which tax is postponed.

Fixing-up expenses. Fixing-up expenses are decorating and repair costs that
you paid to sell the old home. For example, the costs of painting the home,
planting flowers, and replacing broken windows are fixing-up expenses. These
expenses must:

1)  Be for work done during the 90-day period ending on the day you sign the
    contract to sell.

2)  Be paid within 30 days after the sale.

3)  Not be deductible in arriving at your taxable income.

4)  Not be used in figuring the amount realized.

5)  Not be capital expenses or improvements.

Note. You consider fixing-up expenses only in figuring the part of the gain
which is taxed in the year of sale. You cannot deduct them in figuring the
actual gain on the sale of the old home.

Example. Your old home had a basis of $55,000. You signed a contract to sell
it on December 16, 1991. On January 6, 1992, you sold it for $71,400. Selling
expenses were $5,000. During the 90-day period ending December 16, 1991, you
had the following work done. You paid for the work on February 1, 1992 - within
30 days after the sale.

        Inside and outside painting ...................     $800
        New venetian blinds and new water heater ......     $900

Within the required time, you bought and lived in a new home that cost
$64,600. The amount of gain on which tax is postponed, is not postponed,
and the basis of your new home are as follows:

       Gain Realized

       a) Selling price of old home ........  $71,400
       b) Minus: Selling expenses ..........    5,000
                                             __________
       c) Amount realized on sale ..........            $66,400
       d) Basis of old home ................. $55,000
       e) Add: Improvements (blinds
          and heater) ........................    900
                                             __________
       f) Adjusted basis of old home .................    55,900
       g) Gain realized ...............................  $10,500
                                                       ==========

       Gain Taxed in 1992

       h) Amount realized on sale .........   $66,400
       i) Minus: Fixing-up expenses
          (painting) ......................       800
                                            __________
       j) Adjusted sales price .......................   $65,600
       k) Minus: Cost of new home ....................    64,600
       l) Excess of adjusted sales price over
          cost of new home ...........................    $1,000
                                                       __________
       m) Gain taxed in 1992 .........................    $1,000
                                                       ==========

       Gain Not Taxed in 1992

       n) Gain realized ....................   $10,500
       o) Minus: Gain taxed in 1992 ........     1,000
                                             __________
       p) Gain not taxed in 1992 .....................    $9,500
                                                       ==========

       Adjusted Basis of New Home

       q) Cost of new home .................   $64,600
       r) Minus: Gain not taxed in 1992 ....     9,500
                                             __________
       s) Adjusted basis of new home .................   $55,100
                                                       ==========


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

Example. You owned and lived in a home that had a basis of $41,000. A real
estate dealer accepted your old home as a trade-in and allowed you $50,000
toward a new house priced at $80,000. You are considered to have sold your old
home for $50,000 and to have had a gain of $9,000 ($50,000 - $41,000). Because
you replaced it with a new home costing more than the sales price of the
old one, you must postpone the tax on the gain. The basis of your new home
is $71,000 ($80,000 cost minus $9,000 gain that is not currently taxed).

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

Property used partly as your home and partly for business. You may use part of
your property as your home and part of it for business or to produce income.
Examples are a working farm on which your house is located, an apartment
building in which you live in one unit and rent out the others, or a store
building with an upstairs apartment in which you live. If you sell the
whole property, you postpone only the tax on the part used as your home. This
includes the land and outbuildings, such as a garage for the home, but not
those for the business or the production of income. For more information, see
Property used partly as your home and partly for business in Publication 523.

Business use of your home. If, in the year of sale, you deduct expenses for
the business use of your home, you cannot postpone the tax on the gain on the
part of the home used for business. In figuring the amount of gain you can
postpone, you must make an allocation for the business-use part of the home.
For information on how to make the allocation, see Publication 587, Business
Use of Your Home.

Home changed to rental property. You cannot postpone tax on the gain on rental
property, even if it was once used as your home. The rules explained in this
chapter generally will not apply to its sale. Gains are taxable and losses
are eductible as explained in Chapter 15. The basis of the property is
determined as explained under Property Changed to Business or Rental Use
in Chapter 14.

You have not changed your home to rental property if you temporarily rent out
your old home before selling it, or your new home before living in it, as a
matter of convenience or for another nonbusiness purpose. You can postpone the
tax on the gain from the sale if you meet the requirements explained under
Postponement of Gain. For information on how to treat the rental income you
receive, see Chapter 10.

If you place your home with a real estate agent for rent or sale and it is not
rented, it will not be considered business property or property held for the
production of income. The rules explained in this chapter apply to the sale of
the home.

Condemnation. If your home is condemned for public use and you have a gain,
you can postpone the tax on the gain in one of two ways. You can postpone the
tax under the rules explained in this chapter or under  those discussed under
Involuntary Conversions in Publication 544, Sales and Other Dispositions of
Assets.

Gain on casualty. The tax on a gain from a fire, storm, or other casualty
cannot be postponed under the rules explained in this chapter, but may be
postponed under the rules explained in Publication 547, Nonbusiness
Disasters, Casualties, and Thefts.

New Home

The purchase price of your replacement home is used to figure the gain taxed
and the gain on which tax is postponed on the sale of your old home. Purchase
price includes costs incurred within the replacement period (beginning 2 years
before and ending 2 years after the date of sale) for the following items:

1)  Buying or building the home.

2)  Rebuilding the home.

3)  Capital improvements or additions.

You cannot consider any costs incurred before or after the replacement period.
However, if you are a person outside the U.S. or a member of the Armed Forces,
you can include in the purchase price any costs incurred during the suspension
period.

Debts on the new property. The price of a new home includes the debts it is
subject to when you buy it (purchase-money mortgage or deed of trust) and
the face amount of notes or other liabilities you give for it.

Temporary housing. If a builder gives you temporary housing while your new
home is being finished, you must subtract the rental value of the temporary
housing from the total contract price to arrive at the cost of the new home.

Settlement fees or closing costs. When buying your home, you may have to pay
settlement fees or closing costs in addition to the contract price of the
property. Several expenses connected with the purchase are not included in
the purchase price of the home, but are divided between the buyer and seller,
according to the sales contract, local custom, or understanding of the
parties.

If you itemize your deductions in the year you buy the house, you can include
real estate taxes, mortgage interest, and "points" deductible as interest.
See Chapters 23 and 24. You add other costs, such as attorneys' fees and
transfer taxes, to the basis of your home. See Chapter 14.

You cannot deduct, or add to your basis, certain settlement fees or closing
costs. These include "points" or loan origination fees not deductible as
interest, fire insurance premiums, FHA mortgage insurance premiums, charges
for the use of utilities, rent for occupancy before closing, and other fees
or charges for services concerning occupancy of the house.

Investment in retirement home. You have not purchased a replacement home if
you sell your home and invest the proceeds in a retirement home project that
gives you living quarters and personal care, but does not give you any legal
interest in the property. Therefore, you must include in income any gain on
the sale of your home. However, if you are 55 or older, see Exclusion of Gain,
later in this chapter.

Allocation between you and your spouse. You or your spouse may have owned the
old home separately, but title to the new one is in both your names as joint
tenants. Or, you and your spouse may have owned the old home as joint tenants,
and either you or your spouse owns the new home separately. In these cases the
gain from the sale of the old home can be postponed. The postponed gain, which
reduces the basis of the new home, can be divided between you and your spouse
if both of you meet the following requirements:

1)  You used the old home as your main home and you use the new home as your
    main home.

2)  You sign a statement that says: "We agree to reduce the basis of the new
    home by the gain from selling the old home."

Both of you must sign the statement. The statement can be made in the bottom
margin of Form 2119 or on a sheet attached to your tax return. If both of you
do not sign the statement, you must report the gain in the regular way without
allocation.

Example 1. You sell your home that is owned separately by you, but both you
and your spouse use it as your main home. The adjusted sales price is $68,000,
the adjusted basis is $56,000, and the gain on the sale is $12,000. Within 2
years you and your spouse buy a new home for $70,000. You each contribute
$35,000 from your separate funds and the title is held jointly. If you both
sign the statement to reduce the basis of the new home, the tax on the gain
on the sale will be postponed as if you had owned both the old and new homes
jointly. You and your spouse will each have an adjusted basis of $29,000
($35,000 cost minus $6,000 postponed gain) in the new home.

If you both do not sign the statement, your entire gain of $12,000 will be
currently taxed because the adjusted sales price of the old home ($68,000)
is greater than your part of the cost of the new home ($35,000). You and
your spouse will each have a basis of $35,000 in the new home.

Example 2. Assume in Example 1 that you and your spouse owned the old home
jointly, and your spouse buys the new home with separate funds and takes title
individually. If you both sign the statement, the $12,000 gain from the sale
of the old home will be postponed and your spouse will have an adjusted basis
of $58,000 ($70,000 cost minus $12,000 postponed gain) in the new home.

If you both do not sign the statement, you will be taxed on your share of the
gain on the old home, but your spouse will postpone tax on his or her share of
the gain because it was reinvested in the new home. Your spouse's basis in the
new home will be $64,000 ($70,000 cost minus $6,000 postponed gain).

Example 3. Assume in Example 1 that you own the old home individually and your
spouse owns the new home individually. If you both sign the statement, the
gain of $12,000 from the sale of the old home will be postponed and your
spouse will have an adjusted basis in the new home of $58,000.

If you both do not sign the statement, your entire gain will be taxed and
your spouse's basis in the new home will be $70,000.

Deceased spouse. For sales after 1984, if your spouse dies after you sell your
old home and before a new home is purchased, the tax on the gain from the sale
of the old home can be postponed if the basic requirements are met, and:

1)  You were married on the date your spouse died, and

2)  You use the new home as your main home.

This applies whether the title of the old home is in one spouse's name or
held jointly.

If you sold your home and did not postpone the entire gain on the sale because
of the death of your spouse (but otherwise qualified to do so under the rules
explained in this chapter), you can file an amended return (Form 1040X) to
postpone the entire gain. See Chapter 1 for the time allowed to file an
amended return.

Separate homes replaced by single home. If you and your spouse had two
separate gains from the sales of homes that had been your separate main homes
before your marriage, you can postpone the tax on both gains. You must jointly
purchase a new replacement home, and one-half the amount of the cost of the
new home must be at least as much as the adjusted selling price of each of
your old homes.

Each spouse must individually satisfy the requirements for postponing gain.
Each spouse's share of the cost of the new home must be equal to or greater
than the adjusted sales price of his or her old home.

Example. You sold your old home in April 1992, for an adjusted sales price of
$90,000. Your spouse sold her old home in June of that year for an adjusted
sales price of $110,000. You each realized a gain from your sale. Before
the end of 1992, you jointly purchased a new replacement home at a cost of
$200,000. Tax on your gain is postponed, since you are treated as purchasing
a replacement home for $100,000 (-1/2 of $200,000).

There is tax on $10,000 of your spouse's gain at the time of the sale, the
amount by which the adjusted sales price of her former home is more than her
$100,000 share of the cost of the replacement home.

Report the sales of the old homes on separate Forms 2119.

Title to new home not held by either you or your spouse. You cannot postpone
the tax on the gain from the sale of your old home if you reinvest the
proceeds from the sale in a new home in which neither you nor your spouse
holds any legal interest. For example, if the title to the new home is held by
someone else, such as your child, you cannot postpone the tax on the gain from
the sale.

Home replaced by two homes of spouses living apart. If you and your spouse
have agreed to live apart, and you each buy and live in separate replacement
homes, the postponement provisions apply separately to your gain and to your
spouse's gain.

Example. You and your spouse bought a home in 1985. You owned the property as
tenants by the entirety and used it as your main home. In 1992, you agreed to
live apart, and sold the home for $60,000. The gain on the sale was $20,000.
Under state law, each of you is entitled to half of the proceeds of the sale.
Therefore, each of you had a $10,000 gain from the sale of your home.

Before the end of 1992, you and your spouse individually bought and lived in
separate homes. The cost of each new home, $52,000 and $56,000 respectively,
was more than your respective shares of the adjusted sales price of the old
home. You and your spouse must postpone the tax on the $20,000 gain on the
old home.

Your new home has an adjusted basis of $42,000 ($52,000 minus half of the
$20,000 gain postponed). Your spouse's new home has an adjusted basis of
$46,000 ($56,000 minus half of the $20,000 gain postponed).

You report the sale of your home on two Forms 2119 as if two separate
properties were sold. You each report half of the sales price. See Divorce
after sale, later.

Inheritance or gift. If you receive any part of your new home as a gift or an
inheritance, you cannot include the value of that part in the cost of the new
home when figuring the gain taxed in the year of sale and the gain on which
tax is postponed. However, you include the basis of that part in your adjusted
basis to determine any gain when you sell the new home.

Example. Your father died in 1992 and you inherited his home. Its basis to you
is $42,000. You spent $14,000 to modernize the home, resulting in a basis to
you of $56,000. Assume that within 2 years of inheriting your father's home
you sell your old home for $45,000, at a gain of $5,000. You have fixing-up
expenses of $200 on your old home.

To find the gain taxed in the year of the sale, you compare the adjusted sales
price of the old home, $44,800 ($45,000 - $200), with the $14,000 you invested
in your new home. The $5,000 gain is fully taxed because the adjusted sales
price of the old home is more than the amount you paid to rebuild your new
home. You do not include the value of the inherited part of your property
($42,000) in the cost of your new home.

Moving expenses. You cannot increase the basis of your new home by attorneys'
fees or other expenses you deduct as moving expenses. For more information,
see Chapter 27.

Holding period. If you postpone tax on any part of the gain from the sale of
your old home, you will be considered to have owned your new home for the
combined period you owned both the old and the new homes. See Chapter 15 for
more information on holding periods.

Second sale during replacement period. If you sell your new home within 2
years after the sale of your old home and the tax on the sale of the old home
was postponed, you generally cannot postpone tax again when you sell the new
home.

Example. You sold your main home in March 1991 at a gain. You postponed tax on
the gain because you bought a new home in April 1991 for at least as much as
the adjusted sales price of the old home. You then sell your new main home in
June 1992. Even if you buy or build another new main home within 2 years, you
cannot postpone tax on the June 1992 sale because it is within 2 years of the
March 1991 sale.

Exception. This rule does not apply if you sell your main home because of a
work-related move. A "work-related move" is one for which you are allowed a
deduction for moving expenses. To qualify for the deduction, the move must be
closely related to the start of work, and you must meet the time and distance
requirements explained in Chapter 27.

If the exception applies, treat each sale as though the 2-year rule did not
apply.

Example. You buy more than one new home within the 2-year replacement period
as shown below:

       January 1992          You sell your house in
                             Chicago at a gain.

       February 1992         You buy a more expensive
                             house in Memphis.

       March 1993            You sell your house in
                             Memphis due to a transfer
                             required by your employer.

       March 1993            You buy a more expensive
                             house in New York City. The
                             move meets the requirements for
                             a moving expense deduction.

When you complete the 1992 Form 2119 for the sale of your house in Chicago,
compare the cost of the home bought in Memphis with the adjusted sales price
of the house in Chicago, even though you bought another new main home within
2 years (New York City in March 1993).

Your 1993 Form 2119 will compare the adjusted sales price of the house
in Memphis (sold March 1993) with the cost of the house in New York City.

More than one new main home. If you buy or build more than one main home
during the replacement period, only the last one bought or built in the period
can be treated as the new main home to determine whether you can postpone the
tax on the gain from the sale of the old home.

Example. You sold your old main home on March 15, 1991, at a gain. You bought
a new main home on June 3, 1991. On February 3, 1992, you bought another new
main home and converted the home bought June 3, 1991, to rental property. In
figuring whether you can postpone tax on the gain on your old home, compare
the cost of the new home you bought on February 3, 1992, with the adjusted
sales price of the old home sold on March 15, 1991.

Exception. If you buy more than one new main home within the replacement
period because of a work-related move, this rule does not apply. See
Exception, under Second sale during replacement period, earlier.

Continue to postpone gain. If you bought your present home and postponed
tax on gain from a prior sale under the postponement-of-gain rules discussed
earlier, you continue to postpone the tax if you replace your present home
under those rules.

Example. In 1975 you sold your home, which you had owned since 1965, and
bought a new one. The tax on the gain was postponed and the basis of the home
you bought in 1975 was reduced by the gain you postponed. This year you sold
the home you bought in 1975 and bought a more expensive one. You can postpone
tax on the gain from selling the home you bought in 1975.

Worksheet

If you must postpone tax on gain from the sale of your main home under the
rules discussed earlier, you can use the Worksheet for Postponement of Gain
shown below to help you figure the gain realized, gain taxed in the year of
sale, and gain postponed.

                    Worksheet for Postponement of Gain

      A. GAIN REALIZED
        1. Enter selling price of old home .........  1.__________
        2. Enter selling expenses ..................  2.__________
        3. Subtract line 2 from line 1. This is the
           amount realized on sale. Enter here and
           on line 6 ...............................  3.__________
        4. Enter adjusted basis of old home ........  4.__________
        5. Subtract line 4 from line 3. This is the
           gain realized. Enter here and on line 12   5.__________

      B. GAIN TAXED IN YEAR OF SALE
        6. Enter amount realized on sale from
           line 3 ..................................  6.__________
        7. Enter fixing-up expenses ................  7.__________
        8. Subtract line 7 from line 6. This is
           the adjusted sales price ................  8.__________
        9. Enter cost of new home ..................  9.__________
       10. Subtract line 9 from line 8. If line 9
           is more than line 8, enter zero ......... 10.__________
       11. Enter the lesser of line 5 or line 10.
           This is the gain taxed in year of sale .. 11.__________

      C. GAIN POSTPONED
       12. Enter gain realized from line 5 ......... 12.__________
       13. Enter gain taxed in year of sale from
           line 11 ................................. 13.__________
       14. Subtract line 13 from line 12. This is
           the gain to be postponed. Enter here and
           on line 16 .............................. 14.__________

      D. ADJUSTED BASIS OF NEW HOME
       15. Enter cost of new home .................. 15.__________
       16. Enter gain to be postponed from line 14 . 16.__________
       17. Subtract line 16 from line 15. This is
           the adjusted basis of new home .......... 17.__________

How and When to Report

If you sold your home during the year, report the details of the sale as
explained in this section. Report the sale even if the tax is postponed on
the entire gain or you have not purchased a new home.

Form 2119. Use Form 2119, Sale of Your Home, to report the sale of your old
home and any purchase of a new one. File Form 2119 for the year you sold
your old home.

Keep a copy of Form 2119 with your tax records for the year. Form 2119 is a
supporting document which shows an adjustment to your basis in the replacement
home.

New home purchased before return filed. If you buy a new home before you file
a return for the year of sale of your old home, complete Form 2119 and attach
it to your return. Show the price of the new home, the date you first lived in
it, how you figured the gain on which tax is postponed, and the adjusted basis
of your new home.

If your new home costs as much as or more than the adjusted sales price of
your old home, you postpone the tax on the entire gain. You do not need to
report the sale on Schedule D (Form 1040).

If the new home costs less than the adjusted sales price of the old home, the
gain is taxed to the extent of the difference. Report the taxable gain on
Schedule D (Form 1040) for the year of the sale.

New home not yet purchased. If you plan to replace your home but have not done
so by the time your return for the year of sale is due, you must report the
sale on Form 2119 and attach it to that return. Complete Part I and Part II
only.

New home purchased after return filed. If you buy and live in a new home after
you file your return but within the replacement period, and it costs as much
or more than the adjusted sales price of the old home, you should notify the
IRS by filing a second Form 2119 giving the date you first lived in the new
home and its cost.

You can file this Form 2119 as soon as you purchase the new home, or you can
file it at the same time you file your tax return for the year in which you
purchase the new home.

Your address, signature, and the date are required on this Form 2119 if you do
not file the form with a tax return. File it with the Director of the Internal
Revenue Service Center where you would file your next tax return.

If a joint return was filed for the year of sale, both you and your spouse
must sign the Form 2119.

New home costs less. If the new home costs less than the adjusted sales price
of the old home, and you buy and live in the house within the replacement
period, you must file an amended return (Form 1040X) for the year of the sale.
Attach a second completed Form 2119 and Schedule D (Form 1040) showing the
gain you must report. You will have to pay interest on any additional tax due
on the amended return. The interest is generally figured from the due date
of the return for the year of sale.

Old home not replaced or new home not purchased within replacement period.
If you do not plan to replace your old home, you must complete Form 2119 and
Schedule D (Form 1040) to report any gain. Attach them to your tax return for
the year of the sale. The entire gain is taxable unless you are eligible to
exclude all or part of the gain. See Exclusion of Gain, later.

If you postponed tax on the gain on the sale of your old home and do not buy
or build and live in a new home within the replacement period, you must file a
second Form 2119 and an amended return (Form 1040X) for the year of the sale.
Include a Schedule D (Form 1040) to report your gain and any other appropriate
schedule. For example, you would have to include Form 6252 to report an
installment sale. You will have to pay interest on the additional tax due on
your amended return. The interest is generally figured from the due date of
the return for the year of sale.

Divorce after sale. If you are divorced after filing a joint return on which
you postponed tax on the gain on the sale of your home, but you do not use
your share of the proceeds to buy or build a new home (and your former spouse
does), you must file an amended joint return to report the tax on your share
of the gain. If your former spouse refuses to sign the amended joint return,
attach a letter explaining why your former spouse's signature is missing.

Home replaced after tax paid on gain. If you paid tax on the gain from the
sale of your old home, and you buy or build and live in a new home within the
replacement period, you should file an amended return (Form 1040X) for the
year of sale of your old home. Complete a new Form 2119, and include it with
your amended return. Report on Schedule D (Form 1040) any gain on which you
cannot postpone the tax, and claim a refund of the rest of the tax.

Installment sale. You can report on the installment basis the part of the
gain you cannot postpone if the sale qualifies as an installment sale. See
Publication 537.

Statute of limitations. The 3-year limit for assessing tax on the gain from
the sale of your home begins when you notify the IRS that you replaced the
home, you do not intend to replace the home, or you did not replace the home
in time to postpone the tax on the gain. This information may be on the Form
2119 attached to your tax return for the year of the sale, or, if not, you
must file a second Form 2119 to show one of the following:

1)  You replaced your old home, and how much the replacement home cost.

2)  You do not plan to buy a new home within the replacement period.

3)  You did not buy a new home within the replacement period.

File the second Form 2119 with the Service Center where you will file your
next tax return. If needed, send an amended return for the year of the sale
to include in income the gain on which tax cannot be postponed.

Real Estate Transactions

The law requires that transactions involving the sale of most residential real
estate property be reported to the IRS on Form 1099─S, Proceeds From Real
Estate Transactions. Real estate brokers are prohibited from charging any
customer separately for preparing Form 1099─S.

Exclusion of Gain

This section discusses how to exclude from gross income all or part of the
gain from the sale of your main home if you meet certain age, ownership, and
use tests at the time of the sale. This is a one-time exclusion of gain for
sales after July 26, 1978.

The decision of when to take the exclusion depends on many factors. You will
want to consider your personal tax and financial situation before deciding on
when to make the choice.

If you change your mind after you file the return for the year of sale, you
can make or revoke the choice by filing an amended return for that year within
certain time limits. See Making and Revoking a Choice to Exclude Gain in
Publication 523.

Age, Ownership, and Use

You can choose to exclude from income $125,000 of gain on the sale of your
main home ($62,500 if you are married on the date of sale and file separate
returns) if you meet all the following requirements:

1)  You were 55 or older on the date of the sale.

2)  You owned and lived in your main home for at least 3 years out of the
    5-year period ending on the date of the sale.

3)  Neither you nor your spouse has excluded gain on the sale of a home
    since July 26, 1978.

For more information and examples, see Exclusion of Gain in Publication 523.