Previous Page: Publication 17 - Your Federal Income Tax - Figuring Gain or Loss Next Page: Publication 17 - Your Federal Income Tax - Business Use or Rental of Home Use   to find additional instances of index items.

Taxmap/pub17/p17-081.htm#TXMP5288f719 Excluding the Gain

Sale of Home

You may qualify to exclude from your income all or part of any gain from the sale of your main home. This means that, if you qualify, you will not have to pay tax on the gain up to the limit described under Maximum Exclusion, next. To qualify, you must meet the ownership and use tests described later.

You can choose not to take the exclusion by including the gain from the sale in your gross income on your tax return for the year of the sale.

Taxmap/pub17/p17-081.htm#TXMP0dc02f9c Maximum Exclusion

Maximum Exclusion

You can exclude up to $250,000 of the gain on the sale of your main home if all of the following are true.

1. You meet the ownership test.
2. You meet the use test.
3. During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home.

You can exclude up to $500,000 of the gain on the sale of your main home if all of the following are true.

1. You are married and file a joint return for the year.
2. Either you or your spouse meets the ownership test.
3. Both you and your spouse meet the use test.
4. During the 2-year period ending on the date of the sale, neither you nor your spouse excluded gain from the sale of another home.

Taxmap/pub17/p17-081.htm#TXMP4e60fb57 Ownership and Use Tests

Ownership and Use Tests

To claim the exclusion, you must meet the ownership and use tests. This means that during the 5-year period ending on the date of the sale, you must have:

1. Owned the home for at least 2 years (the ownership test), and
2. Lived in the home as your main home for at least 2 years (the use test).

Taxmap/pub17/p17-081.htm#TXMP51e8b767 Exception.

Exception.

If you owned and lived in the property as your main home for less than 2 years, you can still claim an exclusion in some cases. The maximum amount you can claim will be reduced. See Reduced Maximum Exclusion, later.

Taxmap/pub17/p17-081.htm#TXMP234f1cf6
Example 1—home owned and occupied for 3 years.

Amanda bought and moved into her main home in September 2001. She sold the home at a gain on September 15, 2004. During the 5-year period ending on the date of sale (September 16, 1999 – September 15, 2004), she owned and lived in the home for 3 years. She meets the ownership and use tests.

Taxmap/pub17/p17-081.htm#TXMP10508336
Example 2—met ownership test but not use test.

Dan bought a home in 1998. After living in it for 6 months, he moved out. He never lived in the home again and sold it at a gain on June 28, 2004. He owned the home during the entire 5-year period ending on the date of sale (June 29, 1999 – June 28, 2004). However, he did not live in it for the required 2 years. He meets the ownership test but not the use test. He cannot exclude any part of his gain on the sale, unless he qualified for a reduced maximum exclusion (explained later).

Taxmap/pub17/p17-081.htm#TXMP2eb821a3 Period of Ownership and Use

The required 2 years of ownership and use during the 5-year period ending on the date of the sale do not have to be continuous.

You meet the tests if you can show that you owned and lived in the property as your main home for either 24 full months or 730 days (365 × 2) during the 5-year period ending on the date of sale.

Taxmap/pub17/p17-081.htm#TXMP748be0cf Temporary absence.

Temporary absence.

Short temporary absences for vacations or other seasonal absences, even if you rent out the property during the absences, are counted as periods of use.

Taxmap/pub17/p17-081.htm#TXMP60dcb270
Example.

Professor Paul Beard, who is single, bought and moved into a house on August 28, 2001. He lived in it as his main home continuously until January 5, 2003, when he went abroad for a 1-year sabbatical leave. During part of the period of leave, the house was unoccupied, and during the rest of the period, he rented it. On January 6, 2004, he sold the house at a gain.

Because his leave was not a short temporary absence, he cannot include the period of leave to meet the 2-year use test. He cannot exclude any part of his gain, unless he qualifies for a reduced maximum exclusion (explained later). Even if he does qualify for a reduced maximum exclusion, he cannot exclude the part of the gain equal to the depreciation he claimed while renting the house. See Depreciation after May 6, 1997, later.

Taxmap/pub17/p17-081.htm#TXMP7ab664f3 Ownership and use tests met at different times.

Ownership and use tests met at different times.

You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale.

Taxmap/pub17/p17-081.htm#TXMP217aef8d
Example.

In 1995, Helen Jones lived in a rented apartment. The apartment building was later changed to a condominium, and she bought her apartment on December 3, 2001. In 2002, Helen became ill and on April 14 of that year she moved to her daughter's home. On July 12, 2004, while still living in her daughter's home, she sold her apartment.

Helen can exclude gain on the sale of her apartment because she met the ownership and use tests. Her 5-year period is from July 13, 1999, to July 12, 2004, the date she sold the apartment. She owned her apartment from December 3, 2001, to July 12, 2004 (more than 2 years). She lived in the apartment from July 13, 1999 (the beginning of the 5-year period), to April 14, 2002 (more than 2 years).

Taxmap/pub17/p17-081.htm#TXMP47663c60 Cooperative apartment.

Cooperative apartment.

If you sold stock in a cooperative housing corporation, the ownership and use tests are met if, during the 5-year period ending on the date of sale, you:

1. Owned the stock for at least 2 years, and
2. Lived in the house or apartment that the stock entitles you to occupy as your main home for at least 2 years.

Taxmap/pub17/p17-081.htm#TXMP4d32badd Members of the uniformed services or Foreign Service.

Members of the uniformed services or Foreign Service.

You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve on "qualified official extended duty" as a member of the uniformed services or Foreign Service of the United States. This means that you may be able to meet the 2-year use test even if, because of your service, you did not actually live in your home for at least the required 2 years during the 5-year period ending on the date of sale.

If this helps you qualify to exclude gain, you can choose to have the 5-year test period suspended by filing a return for the year of sale that does not include the gain.

Taxmap/pub17/p17-081.htm#TXMP602871a3
Example.

David bought and moved into a home in 1996. He lived in it as his main home for 21/2 years. For the next 6 years, he did not live in it because he was on qualified official extended duty with the Army. He then sold the home at a gain in 2004. To meet the use test, David chooses to suspend the 5-year test period for the 6 years he was on qualifying official extended duty. This means he can disregard those 6 years. Therefore, David's 5-year test period consists of the 5 years before he went on qualifying official extended duty. He meets the ownership and use tests because he owned and lived in the home for 21/2 years during this test period.

Taxmap/pub17/p17-081.htm#TXMP3774bcdb Period of suspension.

The period of suspension cannot last more than 10 years. You cannot suspend the 5-year period for more than one property at a time. You can revoke your choice to suspend the 5-year period at any time.

For more information about the suspension of the 5-year test period, see Members of the uniformed services or Foreign Service in Publication 523.

Taxmap/pub17/p17-081.htm#TXMP05ac8b8c Exception for individuals with a disability.

Exception for individuals with a disability.

There is an exception to the use test if during the 5-year period before the sale of your home:

1. You become physically or mentally unable to care for yourself, and
2. You owned and lived in your home as your main home for a total of at least 1 year.

Under this exception, you are considered to live in your home during any time that you own the home and live in a facility (including a nursing home) that is licensed by a state or political subdivision to care for persons in your condition.

If you meet this exception to the use test, you still have to meet the 2-out-of-5-year ownership test to claim the exclusion.

Taxmap/pub17/p17-081.htm#TXMP19ce2878 Previous home destroyed or condemned.

Previous home destroyed or condemned.

For the ownership and use tests, you add the time you owned and lived in a previous home that was destroyed or condemned to the time you owned and lived in the home on which you wish to exclude gain. This rule applies if any part of the basis of the home you sold depended on the basis of the destroyed or condemned home. Otherwise, you must have owned and lived in the same home for 2 of the 5 years before the sale to qualify for the exclusion.

Taxmap/pub17/p17-081.htm#TXMP15bafc48 Married Persons

Married

If you and your spouse file a joint return for the year of sale, you can exclude gain if either spouse meets the ownership and use tests. (But see Maximum Exclusion, earlier.)

Taxmap/pub17/p17-081.htm#TXMP30efcb7e
Example 1 – one spouse sells a home.

Emily sells her home in June 2004. She marries Jamie later in the year. She meets the ownership and use tests, but Jamie does not. She can exclude up to $250,000 of gain on a separate or joint return for 2004.

Taxmap/pub17/p17-081.htm#TXMP4558a7d2
Example 2 – each spouse sells a home.

The facts are the same as in Example 1 except that Jamie also sells a home in 2004. He meets the ownership and use tests on his home. Emily and Jamie can each exclude up to $250,000 of gain.

Taxmap/pub17/p17-081.htm#TXMP5b7b51d3 Death of spouse before sale.

Death of spouse before sale.

If your spouse died and you did not remarry before the date of sale, you are considered to have owned and lived in the property as your main home during any period of time when your spouse owned and lived in it as a main home.

Taxmap/pub17/p17-081.htm#TXMP69eafc9d Home transferred from spouse.

Home transferred from spouse

If your home was transferred to you by your spouse (or former spouse if the transfer was incident to divorce), you are considered to have owned it during any period of time when your spouse owned it.

Taxmap/pub17/p17-081.htm#TXMP051b4cd6 Use of home after divorce.

Use of home after divorce

You are considered to have used property as your main home during any period when:

1. You owned it, and
2. Your spouse or former spouse is allowed to live in it under a divorce or separation instrument and uses it as his or her main home.

Taxmap/pub17/p17-081.htm#TXMP5e82e9d4 Reduced Maximum Exclusion

Reduced Maximum Exclusion

You can claim an exclusion, but the maximum amount of gain you can exclude will be reduced, if either of the following is true.

1. You did not meet the ownership and use tests, but the reason you sold the home was:
   1. A change in place of employment,
   2. Health, or
   3. Unforeseen circumstances (as defined later).
2. Your exclusion would have been disallowed because of the rule described in More Than One Home Sold During 2-Year Period, later, except that the reason you sold the home was:
   1. A change in place of employment,
   2. Health, or
   3. Unforeseen circumstances (as defined next).

Use Worksheet 3 in Publication 523 to figure your reduced maximum exclusion.

Taxmap/pub17/p17-081.htm#TXMP2d51ad3d Unforeseen circumstances.

The sale of your main home is because of an unforeseen circumstance if your primary reason for the sale is the occurrence of an event that you could not reasonably have anticipated before buying and occupying your main home. For more information on unforeseen circumstances, see Publication 523.

Taxmap/pub17/p17-081.htm#TXMP6489270b More Than One Home Sold During 2-Year Period

Home, Sale, More Than One Home During 2-Year Period

You cannot exclude gain on the sale of your home if, during the 2-year period ending on the date of the sale, you sold another home at a gain and excluded all or part of that gain. If you cannot exclude the gain, you must include it in your income.

Taxmap/pub17/p17-081.htm#TXMP0497077d Exception.

Exception.

You still can claim an exclusion, but the maximum amount of gain you can exclude will be reduced, if the reason you sold the home was:

1. A change in place of employment,
2. Health, or
3. Unforeseen circumstances (as defined earlier).

For more information about this exception, see More Than One Home Sold During 2-Year Period in Publication 523.

Previous Page:  Publication 17 - Your Federal Income Tax - Figuring Gain or Loss Next Page:  Publication 17 - Your Federal Income Tax - Business Use or Rental of Home Use     to find additional instances of index items.