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IRS.gov Website
Publication 523
taxmap/pubs/p523-003.htm#en_us_publink100011707

How Much Is Taxable(p14)

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If you do qualify for an exclusion on your home sale, it is possible that all of your gain will be tax-free. However, some of it may be taxable, particularly if you sold your home at a significant profit or if you only qualify for reduced benefits. This section contains step-by-step instructions for figuring out how much of your gain is taxable. See How to Figure Your Taxable Gain or Loss Worksheet, later, for assistance in determining your taxable gain.
If you determined in Does Your Home Sale Qualify for Maximum Exclusion, earlier, that your home sale doesn't qualify for any exclusion (either full or partial), then your entire gain is taxable. If you do not have a gain, you owe no tax on the sale. In either case, you do not need to work through the How to Figure Your Taxable Gain or Loss Worksheet and you can skip to Reporting Your Home Sale, later.
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How to Figure Your Taxable Gain or Loss Worksheet

If you completed "Business" and "Home" versions of your gain/loss worksheet as described in Business or Rental Use of Home, earlier, complete a version of the following worksheet for each, keeping in mind these additional points.
  • When the worksheet below talks about "your home," this means only the part of the property that you're covering in that worksheet, whether it is the "Home" worksheet or the "Business or Rental" worksheet.
  • Figure your tax benefit limit on the whole property and then divide it between Home and Business based on the residence portion and business portion percentages you calculated earlier.


1.Start.
 a.Enter your gain from line 7c, under How to Figure Your Gain or Loss Worksheet, earlier a.
2.Read the following tests carefully.
  
  • First test: You did not use any part of your home for business or rental after May 6, 1997.
  • Second test: You, your spouse, or your former spouse used your home as a main residence continuously from January 1, 2009 until the date of sale—or if that is not the case, one of these situations applies;
    1. You had moved out permanently and did not live in your home again before it was sold.
    2. You had a change in employment, a health condition, or other "unforeseen circumstance" described in Does Your Home Qualify—Details and Exceptions, earlier, and you moved out of your home for not more than 2 years in total.
    3. You or your spouse qualifies for the "stop the clock" exception for certain military, intelligence, and Peace Corps personnel described in Service, Intelligence, and Peace Corps Personnel, earlier.
 
  If you do not meet BOTH tests, continue to line 3.   
  If you do meet BOTH tests, skip to line 4.   
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How to Figure Your Taxable Gain or Loss Worksheet—Continued pg 2

3.Determine any taxable gain.
a.Because you did not meet both tests in line 2, read the following tests carefully. Part of your gain is not eligible for exclusion.
  • Did you qualify for depreciation? If you used all or part of your home for business or rental between May 6, 1997 and the date of sale, total all the depreciation deductions you could have taken because of that use, whether or not you took them. If you have good records to show the IRS did not allow you to take that much depreciation, total the amount you were actually allowed to take. Keep in mind depreciation related to business or rental use of your home before May 6, 1997 doesn't count.
 
Your total depreciationa.
b.Subtract line 3a from line 1a. If the result is less than zero, enter -0-b.
c.Did you have non-residence gain? If there were times after 2008 when neither you nor your spouse (or a former spouse) used your home as a main residence, do the following calculation:  
 (1) Enter the total number of days after 2008 when neither you nor your spouse (or former spouse) used the home as a main residence. This is the non-use days
 (2) Enter the total number of days you owned your home (counting all days, not just days after 2008). This is the days owned 
 (3) Divide the non-use days by the days owned. Calculate to 3 decimal places. This is your non-residence factor 
 Multiply line 3b by your non-residence factor. This is your non-residence gainc.
 For example, if you owned your home for 10 years (3,650 days), did not use it as your main residence for 500 days after 2008, and had a $20,000 gain, your calculation would look like this.
  • Calculation of non-residence factor: 500 ÷ 3,650 = 0.137
  • Calculation of non-residence gain: $20,000 × 0.137 = $2,740
 
d.Add your total depreciation (line 3a) to your non-residence gain (line 3c). You might have one but not the other. See also Recapturing Depreciation.
This is your ineligible gaind.
4.Determine gain eligible for exclusion.
a.Enter your gain (from line 3b) a.
b.Subtract your non-residence gain (line 3c) b.
c.This is your gain eligible for exclusionc.
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How to Figure Your Taxable Gain or Loss Worksheet—Continued pg 3

5.Determine your exclusion limit.
a.If you qualify for an exclusion (based on the Eligibility Test, earlier), there are fixed dollar limits on the amount of gain that can be excluded from taxes. If you only qualify for partial exclusion, the limit will be lower, and will depend on your situation.  
 If you met the Eligibility Test, earlier, follow these steps to determine your exclusion limit.
 (1) If you are not married (or are married but filing a separate return), your exclusion limit is $250,000.
 (2) If you own your home jointly with another person who is not your spouse, you and the other person each have an exclusion limit of $250,000. To qualify for this amount, you must each independently meet all parts of the Eligibility Test, earlier, except for the ownership requirement. See Determine whether you meet the ownership requirement, earlier. (Only one of you needs to meet the ownership test.)
 (3) If you are married and filing jointly, the exclusion limit is usually $500,000. To qualify for this full amount, you must each independently meet all parts of the Eligibility Test, earlier, except for the ownership requirement. See Determine whether you meet the ownership requirement, earlier. (Only one of you needs to meet the ownership test.) If this is not the case, you will need to determine each spouse's individual limit (as if you were not married) and add them together to get your total exclusion as a couple. Generally, this situation will arise only if one person has lived in the home longer than the other, or if one spouse took an exclusion on a different home within the past 2 years.
 If you owned your home jointly with your spouse and your spouse has died, your exclusion limit is $500,000, if ALL of the following are true.
 
  • Your spouse died no more than 2 years before the date of sale.
  • Neither you nor your spouse claimed an exclusion on another home during the 2 years before your spouse died.
  • You meet the 2-year residence requirement independently of your spouse.
  • You meet the 2-year ownership requirement (counting your spouse's ownership if you need to).
  • You have not remarried at the time of sale.
 If ANY of these are NOT true, your exclusion limit is $250,000.
 This is your exclusion limita.
b.If you did not meet the Eligibility Test, earlier, but DO qualify for a partial exclusion, take the smallest of:  
 
  • The number of days (or months, it you prefer) your home was your residence during the 5-year period leading up to the sale.
  • The number of days (or months) you owned the home leading up to the sale. (If you are married and filing jointly and your spouse owned the home longer than you did, use your spouse's ownership period.)
  • If you claimed an exclusion on another home within the last 2 years, the number of days (or months between the date when you sold the home and the date for which you now want to claim an exclusion).
 
  • Enter the smallest from above
 
  • Divide by 730 days (or 24 months); calculate to 3 decimal places. If the result is less than 1, enter the result. If the result is greater than 1, enter "1"
 
 
  • Multiply by $250,000
 x 250,000
 If you are not married and filing jointly, this is your exclusion limitb.
 
  • If you are married and filing jointly, repeat the entire calculation for your spouse, again using $250,000 as your spouse's reduced exclusion limit. Then add your spouse's reduced exclusion limit to your own.
 
c.If you are married and filing jointly, this is your exclusion limitc.
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How to Figure Your Taxable Gain or Loss Worksheet—Continued pg 4

6.Determine your amount of exclusion.
a.Your gain eligible for exclusion (line 4c, or line 1a if you met both tests in line 2) a.
b.Your exclusion limit (line 5a, 5b, or 5c) b.
c.Your exclusion is the smaller of line 6a or 6b c.
taxmap/pubs/p523-003.htm#en_us_publink100026233

Recapturing Depreciation(p14)

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If you used all or part of your home for business or rental after May 6, 1997, you may need to pay back ("recapture") some or all of the depreciation you were entitled to take on your property. "Recapturing" depreciation means you must include it as ordinary income on your tax return.
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Determine any depreciation amounts you may need to recapture

1.Enter your taxable gain from line 3d under How to Figure Your Taxable Gain or Loss Worksheet1.
2.Enter your total depreciation from line 3a under How to Figure Your Taxable Gain or Loss Worksheet2.
3.Enter the SMALLER of line 1 and line 2 here and on line 12 of the "Unrecaptured Section 1250 Gain Worksheet" in the instructions to Schedule D (Form 1040). Follow the Schedule D instructions to complete the process3.