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

How Much Is Taxable(p14)

rule
taxmap/pubs/p523-003.htm#en_us_publink100052792
Determine if your home sale qualifies for the maximum exclusion
Generally, your home sale qualifies for the maximum exclusion, if all of the following conditions are true.
  • You didn’t acquire the property through a like-kind exchange in the past 5 years.
  • You aren’t subject to the expatriate tax.
  • You owned the home for 2 of the last 5 years and lived in the home for 2 (1 if you are disabled) of the last 5 years leading up to the date of the sale.*
  • You didn’t declare gain from selling a home on your tax returns for the 2 years before the sale and don’t intend to amend these returns to declare this gain.
  • The sale doesn’t involve the transfer of vacant land or a remainder interest.**
* If this condition isn’t met, your home sale may qualify for a partial exclusion. The sale must involve one of the following events experienced by you, your spouse, or a co-owner: a work-related move, a health-related move, a death, a divorce, a pregnancy with multiple children, a change in employment status, a change in unemployment compensation eligibility, or other unusual event.
**The transfer of vacant land or of a remainder interest may qualify for the maximum exclusion, but special rules apply in those situations.
For a step-by-step guide to determining whether your home sale qualifies for the maximum exclusion, see Does Your Home Sale Qualify for Maximum Exclusion, above.
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 don’t have a gain, you owe no tax on the sale. In either case, you don’t need to work through the How To Figure Your Taxable Gain or Loss Worksheet and you can skip to Reporting Your Home Sale, later.
taxmap/pubs/p523-003.htm#en_us_publink100011708
PencilHow 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 didn’t 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 isn’t the case, and there was a period of non-residence use, one of these situations applies.
    1. Any portion of the 5-year period ending on the date of sale or exchange after the last date you use the property as a main home (meaning you owned and lived in the house for at least 2 years from the 5-year period ending on the date of the sale).
    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 don’t meet BOTH tests, continue to line 3.   
  If you do meet BOTH tests, skip to line 4.   
taxmap/pubs/p523-003.htm#en_us_publink100012035
PencilHow To Figure Your Taxable Gain or Loss Worksheet—Continued p. 2
3.Determine any taxable gain.
a.Because you didn’t meet both tests in line 2, read the following tests carefully. Part of your gain isn’t 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 didn’t 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, and didn’t meet the situations under the Second test, above, 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), didn’t 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.
taxmap/pubs/p523-003.htm#en_us_publink100012036
PencilHow To Figure Your Taxable Gain or Loss Worksheet—Continued p. 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 aren’t 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 isn’t 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 isn’t the case, you will need to determine each spouse's individual limit (as if you weren’t 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 haven’t remarried at the time of sale.
 If ANY of these AREN’T true, your exclusion limit is $250,000.
 This is your exclusion limita.
b.If you didn’t meet the Eligibility Test, earlier, but DO qualify for a partial exclusion, take the smallest of:  
 
  • The number of days (or months, if 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 aren’t 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 exclusion limit. Then add your spouse's partial exclusion limit to your own.
 
c.If you are married and filing jointly, this is your exclusion limitc.
taxmap/pubs/p523-003.htm#en_us_publink100012038
PencilHow To Figure Your Taxable Gain or Loss Worksheet—Continued p. 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)

rule
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.
taxmap/pubs/p523-003.htm#en_us_publink100026234
PencilDetermine 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.