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1040ez online filing free Depreciation Table of Contents Introduction Special Depreciation AllowanceQualified Property Election Not To Claim the Allowance Rules for Returns Filed Before June 1, 2002 Passenger Automobiles New York Liberty Zone BenefitsSpecial Liberty Zone Depreciation Allowance Increased Section 179 Deduction Liberty Zone Leasehold Improvement Property If you depreciate business property that you acquired and placed in service after September 10, 2001, new law contains provisions that may affect your depreciation deduction for that property. 1040ez online filing free Publication 946, How To Depreciate Property, contains information on depreciation. 1040ez online filing free However, Publication 946 does not contain the new provisions because it was printed before the law was enacted. 1040ez online filing free The new provisions are in the Supplement to Publication 946, which is reprinted below. 1040ez online filing free Supplement to Publication 946 How To Depreciate Property   Introduction After Publication 946 was printed, the Job Creation and Worker Assistance Act of 2002 was signed into law by the President. 1040ez online filing free The new law made several changes in the tax rules explained in the publication. 1040ez online filing free Some of the changes apply to property placed in service during 2001. 1040ez online filing free This supplemental publication describes those changes and explains what you should do if you are affected by them. 1040ez online filing free The situations and examples in Publication 946 do not reflect any of the changes made by the Job Creation and Worker Assistance Act of 2002. 1040ez online filing free The new law contains the following provisions. 1040ez online filing free 30% depreciation deductions (special depreciation allowance and special New York Liberty Zone (Liberty Zone) depreciation allowance) for the year qualified property is placed in service after September 10, 2001. 1040ez online filing free An increased dollar limit on the section 179 deduction for qualified Liberty Zone property purchased after September 10, 2001. 1040ez online filing free A shorter recovery period for qualified Liberty Zone leasehold improvement property placed in service after September 10, 2001. 1040ez online filing free An increase in the maximum depreciation deduction for 2001 for a qualified passenger automobile placed in service after September 10, 2001. 1040ez online filing free If you believe you qualify for an increased deduction under any of these new rules, you must file the revised 2001 Form 4562 (dated March 2002) for 2001 calendar or fiscal years and 2000 fiscal years ending after September 10, 2001. 1040ez online filing free If you have already filed a tax return, this supplemental publication explains how to claim these benefits and how to elect not to claim the special depreciation allowance or special Liberty Zone depreciation allowance. 1040ez online filing free See Table 2 at the end of the supplement for an overview of the rules that apply if you filed your return before June 1, 2002. 1040ez online filing free Special Depreciation Allowance You can take a special depreciation allowance for qualified property you place in service after September 10, 2001. 1040ez online filing free The allowance is an additional deduction of 30% of the property's depreciable basis. 1040ez online filing free To figure the depreciable basis, you must first multiply the property's cost or other basis by the percentage of business/investment use and then reduce that amount by any section 179 deduction and certain other deductions and credits for the property. 1040ez online filing free See What Is the Basis for Depreciation? on page 23 in Publication 946 for more information on figuring depreciable basis. 1040ez online filing free The allowance is deductible for both regular tax and alternative minimum tax (AMT) purposes. 1040ez online filing free There is no AMT adjustment required for any depreciation figured on the remaining basis of the property. 1040ez online filing free In the year you claim the allowance (generally the year you place the property in service), you must reduce the depreciable basis of the property by the allowance before figuring your regular depreciation deduction. 1040ez online filing free Example 1. 1040ez online filing free On November 1, 2001, you bought and placed in service in your business qualified property that cost $100,000. 1040ez online filing free You did not elect to claim a section 179 deduction. 1040ez online filing free You can deduct 30% of the cost ($30,000) as a special depreciation allowance for 2001. 1040ez online filing free You use the remaining $70,000 of cost to figure your regular depreciation deduction for 2001 and later years. 1040ez online filing free Example 2. 1040ez online filing free The facts are the same as in Example 1, except that you choose to deduct $24,000 of the property's cost as a section 179 deduction. 1040ez online filing free You use the remaining $76,000 of cost to figure your special depreciation allowance of $22,800 ($76,000 × 30%). 1040ez online filing free You use the remaining $53,200 of cost to figure your regular depreciation deduction for 2001 and later years. 1040ez online filing free Qualified Property To qualify for the special depreciation allowance, your property must meet the following requirements. 1040ez online filing free It is new property of one of the following types. 1040ez online filing free Property depreciated under the modified accelerated cost recovery system (MACRS) with a recovery period of 20 years or less. 1040ez online filing free See Can You Use MACRS To Depreciate Your Property and Which Recovery Period Applies? on pages 7 and 23, respectively, in Publication 946. 1040ez online filing free Water utility property. 1040ez online filing free See 25-year property on page 22 in Publication 946. 1040ez online filing free Computer software that is not a section 197 intangible as described in Computer software on page 5 in Publication 946. 1040ez online filing free (The cost of some computer software is treated as part of the cost of hardware and is depreciated under MACRS. 1040ez online filing free ) Qualified leasehold improvement property (defined later). 1040ez online filing free It meets the following tests (explained later under Tests To Be Met). 1040ez online filing free Acquisition date test. 1040ez online filing free Placed in service date test. 1040ez online filing free Original use test. 1040ez online filing free It is not excepted property (explained later under Excepted Property). 1040ez online filing free Qualified leasehold improvement property. 1040ez online filing free    Generally, this is any improvement to an interior part of a building that is nonresidential real property, provided all of the following requirements are met. 1040ez online filing free The improvement is made under or pursuant to a lease by the lessee (or any sublessee) or the lessor of that part of the building. 1040ez online filing free That part of the building is to be occupied exclusively by the lessee (or any sublessee) of that part. 1040ez online filing free The improvement is placed in service more than 3 years after the date the building was first placed in service. 1040ez online filing free   However, a qualified leasehold improvement does not include any improvement for which the expenditure is attributable to any of the following. 1040ez online filing free The enlargement of the building. 1040ez online filing free Any elevator or escalator. 1040ez online filing free Any structural component benefiting a common area. 1040ez online filing free The internal structural framework of the building. 1040ez online filing free   Generally, a binding commitment to enter into a lease is treated as a lease and the parties to the commitment are treated as the lessor and lessee. 1040ez online filing free However, a binding commitment between related persons is not treated as a lease. 1040ez online filing free Related persons. 1040ez online filing free   For this purpose, the following are related persons. 1040ez online filing free Members of an affiliated group. 1040ez online filing free The persons listed in items (1) through (9) under Related persons on page 8 of Publication 946 (except that “80% or more” should be substituted for “more than 10%” each place it appears). 1040ez online filing free An executor and a beneficiary of the same estate. 1040ez online filing free Tests To Be Met To qualify for the special depreciation allowance, the property must meet all of the following tests. 1040ez online filing free Acquisition date test. 1040ez online filing free    Generally, you must have acquired the property either: After September 10, 2001, and before September 11, 2004, but only if no written binding contract for the acquisition was in effect before September 11, 2001, or Pursuant to a written binding contract entered into after September 10, 2001, and before September 11, 2004. 1040ez online filing free   Property you manufacture, construct, or produce for your own use meets this test if you began the manufacture, construction, or production of the property after September 10, 2001, and before September 11, 2004. 1040ez online filing free Placed in service date test. 1040ez online filing free   Generally, the property must be placed in service for use in your trade or business or for the production of income after September 10, 2001, and before January 1, 2005. 1040ez online filing free   If you sold property you placed in service after September 10, 2001, and you leased it back within 3 months after the property was originally placed in service, the property is treated as placed in service no earlier than the date it is used under the leaseback. 1040ez online filing free Original use test. 1040ez online filing free   The original use of the property must have begun with you after September 10, 2001. 1040ez online filing free “Original use” means the first use to which the property is put, whether or not by you. 1040ez online filing free Additional capital expenditures you incurred after September 10, 2001, to recondition or rebuild your property meet the original use test. 1040ez online filing free Excepted Property The following property does not qualify for the special depreciation allowance. 1040ez online filing free Property used by any person before September 11, 2001. 1040ez online filing free Property required to be depreciated using ADS. 1040ez online filing free This includes listed property used 50% or less in a qualified business use. 1040ez online filing free Qualified New York Liberty Zone leasehold improvement property (defined next). 1040ez online filing free Qualified New York Liberty Zone leasehold improvement property. 1040ez online filing free   This is any qualified leasehold improvement property (as defined earlier) if all of the following requirements are met. 1040ez online filing free The improvement is to a building located in the New York Liberty Zone (defined later under New York Liberty Zone Benefits). 1040ez online filing free The improvement is placed in service after September 10, 2001, and before January 1, 2007. 1040ez online filing free No written binding contract for the improvement was in effect before September 11, 2001. 1040ez online filing free Election Not To Claim the Allowance You can elect not to claim the special depreciation allowance for qualified property. 1040ez online filing free If you make this election for any property, it applies to all property in the same property class placed in service during the year. 1040ez online filing free To make this election, attach a statement to your return indicating you elect not to claim the allowance and the class of property for which you are making the election. 1040ez online filing free When to make election. 1040ez online filing free   Generally, you must make the election on a timely filed tax return (including extensions) for the year in which you place the property in service. 1040ez online filing free   However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the original return (not including extensions). 1040ez online filing free Attach the election statement to the amended return. 1040ez online filing free At the top of the election statement, write “Filed pursuant to section 301. 1040ez online filing free 9100–2. 1040ez online filing free ” Revoking an election. 1040ez online filing free   Once you elect not to deduct the special depreciation allowance for a class of property, you cannot revoke the election without IRS consent. 1040ez online filing free A request to revoke the election is subject to a user fee. 1040ez online filing free Rules for Returns Filed Before June 1, 2002 The following rules apply if you placed qualified property in service after September 10, 2001, and filed your return before June 1, 2002. 1040ez online filing free The rules apply to returns for the following years. 1040ez online filing free 2000 fiscal years that end after September 10, 2001. 1040ez online filing free 2001 calendar and fiscal years. 1040ez online filing free Claiming the allowance. 1040ez online filing free   If you did not claim the allowance on your return and did not make the election not to claim the allowance, you can do either of the following to claim the allowance. 1040ez online filing free File an amended return by the due date (not including extensions) of your return for the year following the year the property was placed in service. 1040ez online filing free Write “Filed Pursuant to Rev. 1040ez online filing free Proc. 1040ez online filing free 2002–33” at the top of the amended return. 1040ez online filing free File Form 3115, Application for Change in Accounting Method, with your return for the year following the year the property was placed in service. 1040ez online filing free Your return must be filed by the due date (including extensions). 1040ez online filing free Write “Automatic Change Filed Under Rev. 1040ez online filing free Proc. 1040ez online filing free 2002–33” on the appropriate line of Form 3115. 1040ez online filing free You must also file a copy (with signature) of the completed Form 3115 with the IRS National Office no later than when you file the original with your return. 1040ez online filing free For more information about filing Form 3115, including the address to send it to, see Revenue Procedure 2002–9, Revenue Procedure 2002–19, and Revenue Procedure 2002–33. 1040ez online filing free Example 1. 1040ez online filing free You are an individual and you use the calendar year. 1040ez online filing free You placed qualified property in service for your business in December 2001. 1040ez online filing free You filed your 2001 income tax return before April 15, 2002. 1040ez online filing free You did not claim the special depreciation allowance for the property and did not make the election not to claim the allowance. 1040ez online filing free You can claim the special allowance by filing an amended 2001 return by April 15, 2003, with “Filed Pursuant to Rev. 1040ez online filing free Proc. 1040ez online filing free 2002–33” at the top of the amended return. 1040ez online filing free You must file an amended return by April 15, 2003, even if you get an extension of time to file your 2002 tax return. 1040ez online filing free Example 2. 1040ez online filing free The facts concerning your 2001 return are the same as in Example 1. 1040ez online filing free In addition, you got an automatic 4-month extension of time (to August 15, 2003) to file your 2002 return. 1040ez online filing free You can claim the special allowance by filing a Form 3115 (with “Filed Pursuant to Rev. 1040ez online filing free Proc. 1040ez online filing free 2002–33” on the appropriate line) with your 2002 return by August 15, 2003. 1040ez online filing free You must also file a copy of this Form 3115 with the IRS National Office no later than when you file your 2002 return. 1040ez online filing free Electing not to claim the allowance. 1040ez online filing free   Generally, you have elected not to claim the special depreciation allowance for a class of property if you: Filed your return timely (including extensions) for the year you placed qualified property in service and indicated on a statement with the return that you are not claiming the allowance, or Filed your return timely and filed an amended return within 6 months of the due date of the original return (not including extensions) and indicated on a statement with the amended return that you are not claiming the allowance. 1040ez online filing free The statement must indicate that you are not deducting the special depreciation allowance and the class of property to which the election applies. 1040ez online filing free The statement can be either attached to or written on the return. 1040ez online filing free You can, for example, write “not deducting 30%” on Form 4562. 1040ez online filing free Deemed election. 1040ez online filing free   If you have not followed either of the procedures described above to elect not to claim the allowance, you may still be treated as making the election. 1040ez online filing free You will be treated as making the election if you meet both of the following conditions. 1040ez online filing free You filed your return for the year you placed the property in service and claimed depreciation, but not the special allowance, for any class of property. 1040ez online filing free You do not file an amended return or a Form 3115 within the time prescribed for claiming the special allowance. 1040ez online filing free See Claiming the allowance, earlier. 1040ez online filing free Passenger Automobiles The limit on your depreciation deduction (including any section 179 deduction) for any passenger automobile that is qualified property (defined earlier) placed in service after September 10, 2001, and for which you claim the special depreciation allowance is increased. 1040ez online filing free Generally, the limit is increased from $3,060 to $7,660. 1040ez online filing free However, if the automobile is a qualified electric car, the limit is increased from $9,280 to $23,080 ($22,980 if placed in service in 2002). 1040ez online filing free Table 1 shows the maximum deduction amounts for 2001. 1040ez online filing free Table 1. 1040ez online filing free Maximum Deduction for 2001 Qualified Vehicle Placed in Service Before Sept. 1040ez online filing free 11 Placed in Service After Sept. 1040ez online filing free 10 Passenger automobile $3,060 $7,660 Electric car 9,280 23,080 1 1$22,980 if you place an electric car in service in 2002. 1040ez online filing free Election not to claim the allowance. 1040ez online filing free   The increased maximum depreciation deduction does not apply if you elected not to claim the special depreciation allowance as explained earlier under Election Not To Claim the Allowance and Rules for Returns Filed Before June 1, 2002. 1040ez online filing free New York Liberty Zone Benefits Several benefits are available for property you place in service in the New York Liberty Zone (Liberty Zone). 1040ez online filing free They include a special depreciation allowance for the year you place the property in service, an increased section 179 deduction, and the classification of certain leasehold improvement property as 5-year property. 1040ez online filing free Area defined. 1040ez online filing free   The New York Liberty Zone is the area located on or south of Canal Street, East Broadway (east of its intersection with Canal Street), or Grand Street (east of its intersection with East Broadway) in the Borough of Manhattan in the City of New York, New York. 1040ez online filing free Special Liberty Zone Depreciation Allowance You can take a special depreciation allowance for qualified Liberty Zone property you place in service after September 10, 2001. 1040ez online filing free The allowance is an additional deduction of 30% of the property's depreciable basis. 1040ez online filing free To figure the depreciable basis, you must first multiply the property's cost or other basis by the percentage of business/investment use and then reduce that amount by any section 179 deduction and certain other deductions and credits for the property. 1040ez online filing free See What Is the Basis for Depreciation? on page 23 in Publication 946 for more information on figuring depreciable basis. 1040ez online filing free The allowance is deductible for both regular tax and alternative minimum tax (AMT) purposes. 1040ez online filing free There is no AMT adjustment required for any depreciation figured on the remaining basis of the property. 1040ez online filing free In the year you claim the allowance (generally the year you place the property in service), you must reduce the depreciable basis of the property by the allowance before figuring your regular depreciation deduction. 1040ez online filing free You cannot claim the special Liberty Zone depreciation allowance for property eligible for the special depreciation allowance explained earlier in Qualified Property under Special Depreciation Allowance. 1040ez online filing free Qualified property is eligible for only one special depreciation allowance. 1040ez online filing free Example 1. 1040ez online filing free On November 1, 2001, you bought and placed in service in your business, which is in the Liberty Zone, qualified Liberty Zone property that cost $200,000. 1040ez online filing free You did not elect to claim a section 179 deduction. 1040ez online filing free You can deduct 30% of the cost ($60,000) as a special Liberty Zone depreciation allowance for 2001. 1040ez online filing free You use the remaining $140,000 of cost to figure your regular depreciation deduction for 2001 and later years. 1040ez online filing free Example 2. 1040ez online filing free The facts are the same as in Example 1, except that you choose to deduct $59,000 of the property's cost as a section 179 deduction. 1040ez online filing free (See Increased Section 179 Deduction, later, for information concerning how this section 179 deduction amount is figured). 1040ez online filing free You use the remaining $141,000 of cost to figure your special Liberty Zone depreciation allowance of $42,300 ($141,000 × 30%). 1040ez online filing free You use the remaining $98,700 of cost to figure your regular depreciation deduction for 2001 and later years. 1040ez online filing free Qualified Liberty Zone Property For a 2001 calendar or fiscal year and a 2000 fiscal year that ends after September 10, 2001, property qualifies for the special Liberty Zone depreciation allowance if it meets the following requirements. 1040ez online filing free It is one of the following types of property. 1040ez online filing free Used property depreciated under MACRS with a recovery period of 20 years or less. 1040ez online filing free See Can You Use MACRS To Depreciate Your Property and Which Recovery Period Applies? on pages 7 and 23, respectively, in Publication 946. 1040ez online filing free Used water utility property. 1040ez online filing free See 25-year property on page 22 in Publication 946. 1040ez online filing free Used computer software that is not a section 197 intangible as described in Computer software on page 5 in Publication 946. 1040ez online filing free (The cost of some computer software is treated as part of the cost of hardware and is depreciated under MACRS. 1040ez online filing free ) Certain nonresidential real property and residential rental property (defined later). 1040ez online filing free It meets the following tests (explained later under Tests to be met). 1040ez online filing free Acquisition date test. 1040ez online filing free Placed in service date test. 1040ez online filing free Substantial use test. 1040ez online filing free Original use test. 1040ez online filing free It is not excepted property (explained later under Excepted property). 1040ez online filing free Nonresidential real property and residential rental property. 1040ez online filing free   This property is qualifying property only to the extent it rehabilitates real property damaged, or replaces real property destroyed or condemned, as a result of the terrorist attack of September 11, 2001. 1040ez online filing free Property is treated as replacing destroyed or condemned property if, as part of an integrated plan, such property replaces real property included in a continuous area that includes real property destroyed or condemned. 1040ez online filing free   For these purposes, real property is considered destroyed (or condemned) only if an entire building or structure was destroyed (or condemned) as a result of the terrorist attack. 1040ez online filing free Otherwise, the property is considered damaged real property. 1040ez online filing free For example, if certain structural components of a building (such as walls, floors, or plumbing fixtures) are damaged or destroyed as a result of the terrorist attack, but the building is not destroyed (or condemned), then only costs related to replacing the damaged or destroyed structural components qualify for the special Liberty Zone depreciation allowance. 1040ez online filing free Tests to be met. 1040ez online filing free   To qualify for the special Liberty Zone depreciation allowance, your property must meet all of the following tests. 1040ez online filing free Acquisition date test. 1040ez online filing free   You must have acquired the property by purchase after September 10, 2001, and there must not have been a binding written contract for the acquisition in effect before September 11, 2001. 1040ez online filing free   For information on the acquisition of property by purchase, see Property Acquired by Purchase on page 15 of Publication 946. 1040ez online filing free   Property you manufacture, construct, or produce for your own use meets this test if you began the manufacture, construction, or production of the property after September 10, 2001. 1040ez online filing free Placed in service date test. 1040ez online filing free   Generally, the property must be placed in service for use in your trade or business or for the production of income before January 1, 2007 (January 1, 2010, in the case of qualifying nonresidential real property and residential rental property). 1040ez online filing free   If you sold property you placed in service after September 10, 2001, and you leased it back within 3 months after the property was originally placed in service, the property is treated as placed in service no earlier than the date it is used under the leaseback. 1040ez online filing free Substantial use test. 1040ez online filing free   Substantially all use of the property must be in the Liberty Zone and in the active conduct of your trade or business in the Liberty Zone. 1040ez online filing free Original use test. 1040ez online filing free   The original use of the property in the Liberty Zone must have begun with you after September 10, 2001. 1040ez online filing free   Used property can be qualified Liberty Zone property if it has not previously been used within the Liberty Zone. 1040ez online filing free Also, additional capital expenditures you incurred after September 10, 2001, to recondition or rebuild your property meet the original use test if the original use of the property in the Liberty Zone began with you. 1040ez online filing free Excepted property. 1040ez online filing free   The following property does not qualify for the special Liberty Zone depreciation allowance. 1040ez online filing free Property eligible for the special depreciation allowance explained earlier in Qualified Property under Special Depreciation Allowance. 1040ez online filing free Property required to be depreciated using ADS. 1040ez online filing free This includes listed property used 50% or less in a qualified business use. 1040ez online filing free Qualified New York Liberty Zone leasehold improvement property (defined earlier in Excepted Property under Special Depreciation Allowance). 1040ez online filing free Example. 1040ez online filing free In December 2001, you bought and placed in service in your business in the Liberty Zone the following property. 1040ez online filing free New office furniture with a MACRS recovery period of 7 years. 1040ez online filing free A used computer with a MACRS recovery period of 5 years. 1040ez online filing free The computer had not previously been used within the Liberty Zone. 1040ez online filing free Because the office furniture is new property, it qualifies for the special depreciation allowance, but not the special Liberty Zone depreciation allowance. 1040ez online filing free Because the computer is used property that had not previously been used in the Liberty Zone, it qualifies for the special Liberty Zone depreciation allowance, but not the special depreciation allowance. 1040ez online filing free Election Not To Claim the Liberty Zone Allowance You can elect not to claim the special Liberty Zone depreciation allowance for qualified property. 1040ez online filing free If you make this election for any property, it applies to all property in the same property class placed in service during the year. 1040ez online filing free To make this election, attach a statement to your return indicating you elect not to claim the allowance and the class of property for which you are making the election. 1040ez online filing free When to make the election. 1040ez online filing free   Generally, you must make the election on a timely filed tax return (including extensions) for the year in which you place the property in service. 1040ez online filing free   However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the original return (not including extensions). 1040ez online filing free Attach the election statement to the amended return. 1040ez online filing free At the top of the election statement, write “Filed pursuant to section 301. 1040ez online filing free 9100–2. 1040ez online filing free ” Revoking an election. 1040ez online filing free   Once you elect not to deduct the special Liberty Zone depreciation allowance for a class of property, you cannot revoke the election without IRS consent. 1040ez online filing free A request to revoke the election is subject to a user fee. 1040ez online filing free Returns filed before June 1, 2002. 1040ez online filing free   The rules that apply to the special depreciation allowance discussed earlier in Rules for Returns Filed Before June 1, 2002 under Special Depreciation Allowance also apply to the special Liberty Zone depreciation allowance. 1040ez online filing free Increased Section 179 Deduction Under section 179 of the Internal Revenue Code, you can choose to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. 1040ez online filing free For tax years beginning in 2000, that limit was $20,000. 1040ez online filing free For tax years beginning in 2001 and 2002, that limit is generally $24,000. 1040ez online filing free If the cost of qualifying section 179 property placed in service in a year is over $200,000, you must reduce the dollar limit (but not below zero) by the amount of the cost over $200,000. 1040ez online filing free Increased Dollar Limit The dollar limit on the section 179 deduction is increased for certain property placed in service in the Liberty Zone. 1040ez online filing free The increase is the smaller of the following amounts. 1040ez online filing free $35,000. 1040ez online filing free The cost of section 179 property that is qualified Liberty Zone property placed in service during the year. 1040ez online filing free If you use the revised 2001 Form 4562 (dated March 2002) for a tax year beginning in 2000, you must reduce the section 179 dollar limit to $20,000 before adding the additional amount for qualified property. 1040ez online filing free Qualified property. 1040ez online filing free   To qualify for the increased section 179 deduction, your property must be section 179 property that is either: Qualified Liberty Zone property, or Property that would be qualified Liberty Zone property except that it is eligible for the special depreciation allowance. 1040ez online filing free Qualified Liberty Zone property is explained earlier in Qualified Liberty Zone Property under Special Liberty Zone Depreciation Allowance. 1040ez online filing free Property eligible for the special depreciation allowance is explained earlier in Qualified Property under Special Depreciation Allowance. 1040ez online filing free For information on the requirements that must be met for property to qualify for the section 179 deduction, see What Property Qualifies? on page 14 of Publication 946. 1040ez online filing free Example 1. 1040ez online filing free In 2002, you place in service in your business, which is in the Liberty Zone, qualified property (defined earlier) costing $25,000. 1040ez online filing free Because this cost is less than $35,000, the dollar limit on the section 179 deduction is increased by $25,000 to $49,000 ($24,000 + $25,000). 1040ez online filing free Example 2. 1040ez online filing free In 2002, you place in service in your business, which is in the Liberty Zone, qualified property (defined earlier) costing $75,000. 1040ez online filing free Because $35,000 is less than the cost of the property you place in service, the dollar limit on the section 179 deduction you can claim is increased by $35,000 to $59,000 ($24,000 + $35,000). 1040ez online filing free Reduced Dollar Limit Generally, you must reduce the dollar limit for a year by the cost of qualifying section 179 property placed in service in the year that is more than $200,000. 1040ez online filing free However, if the cost of your Liberty Zone property exceeds $200,000, you take into account only 50% (instead of 100%) of the cost of qualified property placed in service in a year. 1040ez online filing free Example. 1040ez online filing free In 2002, you place in service in your business, which is in the Liberty Zone, qualified property costing $460,000. 1040ez online filing free Your increased dollar limit is $59,000 ($35,000 + $24,000). 1040ez online filing free Because 50% of the cost of the property you place in service ($230,000) is $30,000 more than $200,000, you must reduce your $59,000 dollar limit to $29,000 ($59,000 - $30,000). 1040ez online filing free Recapture Rules Rules similar to those explained on page 20 of Publication 946 under When Must You Recapture the Deduction? apply with respect to any qualified property you stop using in the Liberty Zone. 1040ez online filing free Returns Filed Before June 1, 2002 If you filed a return before June 1, 2002, and did not deduct the increased section 179 amount for qualified property placed in service after September 10, 2001, you can deduct the increased amount by filing an amended return by the due date (not including extensions) of the return for the year after the year the property was placed in service. 1040ez online filing free This rule applies to returns for the following years. 1040ez online filing free 2000 fiscal years that end after September 10, 2001. 1040ez online filing free 2001 calendar and fiscal years. 1040ez online filing free On the amended return, write “Filed Pursuant to Rev. 1040ez online filing free Proc. 1040ez online filing free 2002–33. 1040ez online filing free ” Liberty Zone Leasehold Improvement Property Qualified Liberty Zone leasehold improvement property (described earlier in Qualified Property under Special Depreciation Allowance) is 5-year property. 1040ez online filing free This means that it is depreciated over a recovery period of 5 years. 1040ez online filing free For information about recovery periods, see Which Recovery Period Applies? on page 23 of Publication 946. 1040ez online filing free The straight-line method must be used with respect to qualified Liberty Zone leasehold improvement property. 1040ez online filing free Under ADS, the recovery period for qualified Liberty Zone leasehold improvement property is 9 years. 1040ez online filing free Returns Filed Before June 1, 2002 If you filed either of the following returns before June 1, 2002, and did not depreciate qualified Liberty Zone leasehold improvement property placed in service during the tax year as 5-year property using the straight line method, you should file an amended return before you file your return for the year after the year the property was placed in service. 1040ez online filing free Your 2000 fiscal year return (for a 2000 fiscal year that ends after September 10, 2001). 1040ez online filing free Your 2001 calendar or fiscal year return. 1040ez online filing free On the amended return, write “Filed Pursuant to Rev. 1040ez online filing free Proc. 1040ez online filing free 2002–33. 1040ez online filing free ” Table 2. 1040ez online filing free Rules for Returns Filed Before June 1, 2002 Note:This chart highlights the rules for returns affected by the Job Creation and Worker Assistance Act of 2002 that were filed before June 1, 2002, without accounting for any of the new benefits under the law. 1040ez online filing free See the text for definitions and examples. 1040ez online filing free Do not rely on this chart alone. 1040ez online filing free IF you want to. 1040ez online filing free . 1040ez online filing free . 1040ez online filing free THEN you. 1040ez online filing free . 1040ez online filing free . 1040ez online filing free BY. 1040ez online filing free . 1040ez online filing free . 1040ez online filing free claim the special depreciation allowance or special Liberty Zone depreciation allowance • must file an amended return • the due date (not including extensions) of your return for the year after the year the property was placed in service, or • must file Form 3115, Application for Change in Accounting Method, with your return for the year after the year the property was placed in service • the due date (including extensions) of your return for the year after the year the property was placed in service, and • must file a copy of your completed Form 3115 with the IRS National Office • the date you file the original Form 3115 with your return for the year after the year the property was placed in service. 1040ez online filing free elect not to claim the special depreciation allowance or the special Liberty Zone depreciation allowance 1 • must have filed your return timely for the year the property was placed in service, and   • must file an amended return stating you are not claiming the allowance • the date that is 6 months after the due date of the original return (not including extensions). 1040ez online filing free deduct the increased section 179 amount • must file an amended return • the due date (not including extensions) of your return for the year after the year the property was placed in service. 1040ez online filing free use a 5-year recovery period for depreciating qualified Liberty Zone leasehold improvement property • should file an amended return • the date you file your return for the year after the year the property was placed in service. 1040ez online filing free 1See also Deemed election under Rules for Returns Filed Before June 1, 2002, earlier. 1040ez online filing free Prev  Up  Next   Home   More Online Publications
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1040ez online filing free Publication 523 - Main Content Table of Contents Main HomeVacant land. 1040ez online filing free Factors used to determine main home. 1040ez online filing free Figuring Gain or LossSelling Price Amount Realized Adjusted Basis Amount of Gain or Loss Dispositions Other Than Sales Determining BasisCost As Basis Basis Other Than Cost Adjusted Basis Excluding the GainMaximum Exclusion Ownership and Use Tests Reduced Maximum Exclusion Nonqualified Use Business Use or Rental of HomeUnrecaptured section 1250 gain. 1040ez online filing free Property Used Partly for Business or Rental Reporting the SaleSeller-financed mortgage. 1040ez online filing free Individual taxpayer identification number (ITIN). 1040ez online filing free More information. 1040ez online filing free Comprehensive Examples Special SituationsException for sales to related persons. 1040ez online filing free Deducting Taxes in the Year of SaleForm 1099-S. 1040ez online filing free More information. 1040ez online filing free Recapturing (Paying Back) a Federal Mortgage Subsidy Recapture of First-Time Homebuyer CreditExample. 1040ez online filing free Worksheets How To Get Tax HelpLow Income Taxpayer Clinics Main Home This section explains the term “main home. 1040ez online filing free ” Usually, the home you live in most of the time is your main home and can be a: House, Houseboat, Mobile home, Cooperative apartment, or Condominium. 1040ez online filing free To exclude gain under the rules in this publication, you in most cases must have owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date of sale. 1040ez online filing free Land. 1040ez online filing free   If you sell the land on which your main home is located, but not the house itself, you cannot exclude any gain you have from the sale of the land. 1040ez online filing free Example. 1040ez online filing free You buy a piece of land and move your main home to it. 1040ez online filing free Then, you sell the land on which your main home was located. 1040ez online filing free This sale is not considered a sale of your main home, and you cannot exclude any gain on the sale of the land. 1040ez online filing free Vacant land. 1040ez online filing free   The sale of vacant land is not a sale of your main home unless: The vacant land is adjacent to land containing your home, You owned and used the vacant land as part of your main home, The separate sale of your home satisfies the requirements for exclusion and occurs within 2 years before or 2 years after the date of the sale of the vacant land, and The other requirements for excluding gain from the sale of a main home have been satisfied with respect to the vacant land. 1040ez online filing free If these requirements are met, the sale of the home and the sale of the vacant land are treated as one sale and only one maximum exclusion can be applied to any gain. 1040ez online filing free See Excluding the Gain , later. 1040ez online filing free The destruction of your home is treated as a sale of your home. 1040ez online filing free As a result, you may be able to meet these requirements if you sell vacant land used as a part of your main home within 2 years from the date of the destruction of your main home. 1040ez online filing free For information, see Publication 547. 1040ez online filing free More than one home. 1040ez online filing free   If you have more than one home, you can exclude gain only from the sale of your main home. 1040ez online filing free You must include in income the gain from the sale of any other home. 1040ez online filing free If you have two homes and live in each of them, your main home is ordinarily the one you live in most of the time during the year. 1040ez online filing free Example 1. 1040ez online filing free You own two homes, one in New York and one in Florida. 1040ez online filing free From 2009 through 2013, you live in the New York home for 7 months and in the Florida residence for 5 months of each year. 1040ez online filing free In the absence of facts and circumstances indicating otherwise, the New York home is your main home. 1040ez online filing free You would be eligible to exclude the gain from the sale of the New York home but not of the Florida home in 2013. 1040ez online filing free Example 2. 1040ez online filing free You own a house, but you live in another house that you rent. 1040ez online filing free The rented house is your main home. 1040ez online filing free Example 3. 1040ez online filing free You own two homes, one in Virginia and one in New Hampshire. 1040ez online filing free In 2009 and 2010, you lived in the Virginia home. 1040ez online filing free In 2011 and 2012, you lived in the New Hampshire home. 1040ez online filing free In 2013, you lived again in the Virginia home. 1040ez online filing free Your main home in 2009, 2010, and 2013 is the Virginia home. 1040ez online filing free Your main home in 2011 and 2012 is the New Hampshire home. 1040ez online filing free You would be eligible to exclude gain from the sale of either home (but not both) in 2013. 1040ez online filing free Factors used to determine main home. 1040ez online filing free   In addition to the amount of time you live in each home, other factors are relevant in determining which home is your main home. 1040ez online filing free Those factors include the following. 1040ez online filing free Your place of employment. 1040ez online filing free The location of your family members' main home. 1040ez online filing free Your mailing address for bills and correspondence. 1040ez online filing free The address listed on your: Federal and state tax returns, Driver's license, Car registration, and Voter registration card. 1040ez online filing free The location of the banks you use. 1040ez online filing free The location of recreational clubs and religious organizations of which you are a member. 1040ez online filing free Property used partly as your main home. 1040ez online filing free   If you use only part of the property as your main home, the rules discussed in this publication apply only to the gain or loss on the sale of that part of the property. 1040ez online filing free For details, see Business Use or Rental of Home , later. 1040ez online filing free Figuring Gain or Loss To figure the gain or loss on the sale of your main home, you must know the selling price, the amount realized, and the adjusted basis. 1040ez online filing free Subtract the adjusted basis from the amount realized to get your gain or loss. 1040ez online filing free     Selling price     − Selling expenses       Amount realized     − Adjusted basis       Gain or loss   Gain. 1040ez online filing free   Gain is the excess of the amount realized over the adjusted basis of the property. 1040ez online filing free Loss. 1040ez online filing free   Loss is the excess of the adjusted basis over the amount realized for the property. 1040ez online filing free Selling Price The selling price is the total amount you receive for your home. 1040ez online filing free It includes money and the fair market value of any other property or any other services you receive and all notes, mortgages or other debts assumed by the buyer as part of the sale. 1040ez online filing free Personal property. 1040ez online filing free   The selling price of your home does not include amounts you received for personal property sold with your home. 1040ez online filing free Personal property is property that is not a permanent part of the home. 1040ez online filing free Examples are furniture, draperies, rugs, a washer and dryer, and lawn equipment. 1040ez online filing free Separately stated amounts you received for these items should not be shown on Form 1099-S (discussed later). 1040ez online filing free Any gains from sales of personal property must be included in your income, but not as part of the sale of your home. 1040ez online filing free Payment by employer. 1040ez online filing free   You may have to sell your home because of a job transfer. 1040ez online filing free If your employer pays you for a loss on the sale or for your selling expenses, do not include the payment as part of the selling price. 1040ez online filing free Your employer will include it as wages in box 1 of your Form W-2 and you will include it in your income on Form 1040, line 7, or on Form 1040NR, line 8. 1040ez online filing free Option to buy. 1040ez online filing free   If you grant an option to buy your home and the option is exercised, add the amount you receive for the option to the selling price of your home. 1040ez online filing free If the option is not exercised, you must report the amount as ordinary income in the year the option expires. 1040ez online filing free Report this amount on Form 1040, line 21, or on Form 1040NR, line 21. 1040ez online filing free Form 1099-S. 1040ez online filing free   If you received Form 1099-S, box 2 (gross proceeds) should show the total amount you received for your home. 1040ez online filing free   However, box 2 will not include the fair market value of any services or property other than cash or notes you received or will receive. 1040ez online filing free Instead, box 4 will be checked to indicate your receipt or expected receipt of these items. 1040ez online filing free Amount Realized The amount realized is the selling price minus selling expenses. 1040ez online filing free Selling expenses. 1040ez online filing free   Selling expenses include: Commissions, Advertising fees, Legal fees, and Loan charges paid by the seller, such as loan placement fees or “points. 1040ez online filing free ” Adjusted Basis While you owned your home, you may have made adjustments (increases or decreases) to the basis. 1040ez online filing free This adjusted basis must be determined before you can figure gain or loss on the sale of your home. 1040ez online filing free For information on how to figure your home's adjusted basis, see Determining Basis , later. 1040ez online filing free Amount of Gain or Loss To figure the amount of gain or loss, compare the amount realized to the adjusted basis. 1040ez online filing free Gain on sale. 1040ez online filing free   If the amount realized is more than the adjusted basis, the difference is a gain and, except for any part you can exclude, generally is taxable. 1040ez online filing free Loss on sale. 1040ez online filing free   If the amount realized is less than the adjusted basis, the difference is a loss. 1040ez online filing free Generally, a loss on the sale of your main home cannot be deducted. 1040ez online filing free Jointly owned home. 1040ez online filing free   If you and your spouse sell your jointly owned home and file a joint return, you figure your gain or loss as one taxpayer. 1040ez online filing free Separate returns. 1040ez online filing free   If you file separate returns, each of you must figure your own gain or loss according to your ownership interest in the home. 1040ez online filing free Your ownership interest is generally determined by state law. 1040ez online filing free Joint owners not married. 1040ez online filing free   If you and a joint owner other than your spouse sell your jointly owned home, each of you must figure your own gain or loss according to your ownership interest in the home. 1040ez online filing free Each of you applies the rules discussed in this publication on an individual basis. 1040ez online filing free Dispositions Other Than Sales Some special rules apply to other dispositions of your main home. 1040ez online filing free Foreclosure or repossession. 1040ez online filing free   If your home was foreclosed on or repossessed, you have a disposition. 1040ez online filing free See Publication 4681 to determine if you have ordinary income, gain, or loss. 1040ez online filing free More information. 1040ez online filing free   If part of a home is used for business or rental purposes, see Foreclosures and Repossessions in chapter 1 of Publication 544 for more information. 1040ez online filing free Publication 544 has examples of how to figure gain or loss on a foreclosure or repossession. 1040ez online filing free Abandonment. 1040ez online filing free   If you abandon your home, see Publication 4681 to determine if you have ordinary income, gain, or loss. 1040ez online filing free Trading (exchanging) homes. 1040ez online filing free   If you trade your home for another home, treat the trade as a sale and a purchase. 1040ez online filing free Example. 1040ez online filing free You owned and lived in a home with an adjusted basis of $41,000. 1040ez online filing free A real estate dealer accepted your old home as a trade-in and allowed you $50,000 toward a new home priced at $80,000. 1040ez online filing free This is treated as a sale of your old home for $50,000 with a gain of $9,000 ($50,000 − $41,000). 1040ez online filing free If the dealer had allowed you $27,000 and assumed your unpaid mortgage of $23,000 on your old home, your sales price would still be $50,000 (the $27,000 trade-in allowed plus the $23,000 mortgage assumed). 1040ez online filing free Transfer to spouse. 1040ez online filing free   If you transfer your home to your spouse or you transfer it to your former spouse incident to your divorce, you in most cases have no gain or loss (unless the Exception, discussed next, applies). 1040ez online filing free This is true even if you receive cash or other consideration for the home. 1040ez online filing free As a result, the rules explained in this publication do not apply. 1040ez online filing free   If you owned your home jointly with your spouse and transfer your interest in the home to your spouse, or to your former spouse incident to your divorce, the same rule applies. 1040ez online filing free You have no gain or loss. 1040ez online filing free Exception. 1040ez online filing free   These transfer rules do not apply if your spouse or former spouse is a nonresident alien. 1040ez online filing free In that case, you generally will have a gain or loss. 1040ez online filing free More information. 1040ez online filing free    See Property Settlements in Publication 504, Divorced or Separated Individuals, for more information. 1040ez online filing free Involuntary conversion. 1040ez online filing free   You have a disposition when your home is destroyed or condemned and you receive other property or money in payment, such as insurance or a condemnation award. 1040ez online filing free This is treated as a sale and you may be able to exclude all or part of any gain from the destruction or condemnation of your home, as explained later under Special Situations (see Home destroyed or condemned ). 1040ez online filing free Determining Basis You need to know your basis in your home to figure any gain or loss when you sell it. 1040ez online filing free Your basis in your home is determined by how you got the home. 1040ez online filing free Generally, your basis is its cost if you bought it or built it. 1040ez online filing free If you got it in some other way (inheritance, gift, etc. 1040ez online filing free ), your basis is generally either its fair market value when you received it or the adjusted basis of the previous owner. 1040ez online filing free While you owned your home, you may have made adjustments (increases or decreases) to your home's basis. 1040ez online filing free The result of these adjustments is your home's adjusted basis, which is used to figure gain or loss on the sale of your home. 1040ez online filing free To figure your adjusted basis, you can use Worksheet 1, near the end of this publication. 1040ez online filing free Filled-in examples of that worksheet are included in the Comprehensive Examples , later. 1040ez online filing free Cost As Basis The cost of property is the amount you paid for it in cash, debt obligations, other property, or services. 1040ez online filing free Purchase. 1040ez online filing free   If you bought your home, your basis is its cost to you. 1040ez online filing free This includes the purchase price and certain settlement or closing costs. 1040ez online filing free In most cases, your purchase price includes your down payment and any debt, such as a first or second mortgage or notes you gave the seller in payment for the home. 1040ez online filing free If you build, or contract to build, a new home, your purchase price can include costs of construction, as discussed later. 1040ez online filing free Seller-paid points. 1040ez online filing free   If the person who sold you your home paid points on your loan, you may have to reduce your home's basis by the amount of the points, as shown in the following chart. 1040ez online filing free    IF you bought your home. 1040ez online filing free . 1040ez online filing free . 1040ez online filing free THEN reduce your home's basis by the seller-paid points. 1040ez online filing free . 1040ez online filing free . 1040ez online filing free after 1990 but before April 4, 1994 only if you deducted them as home mortgage interest in the year paid. 1040ez online filing free after April 3, 1994 even if you did not deduct them. 1040ez online filing free Settlement fees or closing costs. 1040ez online filing free   When you bought your home, you may have paid settlement fees or closing costs in addition to the contract price of the property. 1040ez online filing free You can include in your basis some of the settlement fees and closing costs you paid for buying the home, but not the fees and costs for getting a mortgage loan. 1040ez online filing free A fee paid for buying the home is any fee you would have had to pay even if you paid cash for the home (that is, without the need for financing). 1040ez online filing free   Settlement fees do not include amounts placed in escrow for the future payment of items such as taxes and insurance. 1040ez online filing free   Some of the settlement fees or closing costs that you can include in your basis are: Abstract fees (abstract of title fees), Charges for installing utility services, Legal fees (including fees for the title search and preparing the sales contract and deed), Recording fees, Survey fees, Transfer or stamp taxes, Owner's title insurance, and Any amounts the seller owes that you agree to pay, such as: Certain real estate taxes (discussed later), Back interest, Recording or mortgage fees, Charges for improvements or repairs, and Sales commissions. 1040ez online filing free   Some settlement fees and closing costs you cannot include in your basis are: Fire insurance premiums, Rent for occupancy of the house before closing, Charges for utilities or other services related to occupancy of the house before closing, Any fee or cost that you deducted as a moving expense (allowed for certain fees and costs before 1994), Charges connected with getting a mortgage loan, such as: Mortgage insurance premiums (including funding fees connected with loans guaranteed by the Department of Veterans Affairs), Loan assumption fees, Cost of a credit report, Fee for an appraisal required by a lender, and Fees for refinancing a mortgage. 1040ez online filing free Real estate taxes. 1040ez online filing free   Real estate taxes for the year you bought your home may affect your basis, as shown in the following chart. 1040ez online filing free    IF. 1040ez online filing free . 1040ez online filing free . 1040ez online filing free AND. 1040ez online filing free . 1040ez online filing free . 1040ez online filing free THEN the taxes. 1040ez online filing free . 1040ez online filing free . 1040ez online filing free you pay taxes that the seller owed on the home up to the date of sale the seller does not reimburse you are added to the basis of your home. 1040ez online filing free the seller reimburses you do not affect the basis of your home. 1040ez online filing free the seller pays taxes for you (taxes owed beginning on the date of sale) you do not reimburse the seller are subtracted from the basis of your home. 1040ez online filing free you reimburse the seller do not affect the basis of your home. 1040ez online filing free Construction. 1040ez online filing free   If you contracted to have your house built on land you own, your basis is: The cost of the land, plus The amount it cost you to complete the house, including: The cost of labor and materials, Any amounts paid to a contractor, Any architect's fees, Building permit charges, Utility meter and connection charges, and Legal fees directly connected with building the house. 1040ez online filing free   Your cost includes your down payment and any debt such as a first or second mortgage or notes you gave the seller or builder. 1040ez online filing free It also includes certain settlement or closing costs. 1040ez online filing free You may have to reduce your basis by points the seller paid for you. 1040ez online filing free For more information, see Seller-paid points and Settlement fees or closing costs , earlier. 1040ez online filing free Built by you. 1040ez online filing free   If you built all or part of your house yourself, its basis is the total amount it cost you to complete it. 1040ez online filing free Do not include in the cost of the house: The value of your own labor, or The value of any other labor you did not pay for. 1040ez online filing free Temporary housing. 1040ez online filing free   If a builder gave you temporary housing while your home was being finished, you must reduce your basis by the part of the contract price that was for the temporary housing. 1040ez online filing free To figure the amount of the reduction, multiply the contract price by a fraction. 1040ez online filing free The numerator is the value of the temporary housing, and the denominator is the sum of the value of the temporary housing plus the value of the new home. 1040ez online filing free Cooperative apartment. 1040ez online filing free   If you are a tenant-stockholder in a cooperative housing corporation, your basis in the cooperative apartment used as your home is usually the cost of your stock in the corporation. 1040ez online filing free This may include your share of a mortgage on the apartment building. 1040ez online filing free Condominium. 1040ez online filing free   To determine your basis in a condominium apartment used as your home, use the same rules as for any other home. 1040ez online filing free Basis Other Than Cost You must use a basis other than cost, such as adjusted basis or fair market value, if you received your home as a gift, inheritance, a trade, or from your spouse. 1040ez online filing free These situations are discussed in the following pages. 1040ez online filing free Also, the instructions for Worksheet 1 (near the end of the publication) address each of these issues. 1040ez online filing free Other special rules may apply in certain situations. 1040ez online filing free If you converted the property, or some part of it, to business or rental use, see Property Changed to Business or Rental Use, in Publication 551. 1040ez online filing free Home received as gift. 1040ez online filing free   Use the following chart to find the basis of a home you received as a gift. 1040ez online filing free IF the donor's adjusted basis at the time of the gift was. 1040ez online filing free . 1040ez online filing free . 1040ez online filing free THEN your basis is. 1040ez online filing free . 1040ez online filing free . 1040ez online filing free more than the fair market value of the home at that time the same as the donor's adjusted basis at the time of the gift. 1040ez online filing free   Exception: If using the donor's adjusted basis results in a loss when you sell the home, you must use the fair market value of the home at the time of the gift as your basis. 1040ez online filing free If using the fair market value results in a gain, you have neither gain nor loss. 1040ez online filing free equal to or less than the fair market value at that time, and you received the gift before 1977 the smaller of the: • donor's adjusted basis, plus  any federal gift tax paid on  the gift, or • the home's fair market value  at the time of the gift. 1040ez online filing free equal to or less than the fair market value at that time, and you received the gift after 1976 the same as the donor's adjusted basis, plus the part of any federal gift tax paid that is due to the net increase in value of the home (explained next). 1040ez online filing free Fair market value. 1040ez online filing free   The fair market value of property at the time of the gift is the value of the property as appraised for purposes of the federal gift tax. 1040ez online filing free If the gift was not subject to the federal gift tax, the fair market value is the value as appraised for the purposes of a state gift tax. 1040ez online filing free Part of federal gift tax due to net increase in value. 1040ez online filing free   Figure the part of the federal gift tax paid that is due to the net increase in value of the home by multiplying the total federal gift tax paid by a fraction. 1040ez online filing free The numerator of the fraction is the net increase in the value of the home, and the denominator is the value of the home for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. 1040ez online filing free The net increase in the value of the home is its fair market value minus the donor's adjusted basis immediately before the gift. 1040ez online filing free Home acquired from a decedent who died before or after 2010. 1040ez online filing free   If you inherited your home from a decedent who died before or after 2010, your basis is the fair market value of the property on the date of the decedent's death (or the later alternate valuation date chosen by the personal representative of the estate). 1040ez online filing free If an estate tax return was filed or required to be filed, the value of the property listed on the estate tax return is your basis. 1040ez online filing free If a federal estate tax return did not have to be filed, your basis in the home is the same as its appraised value at the date of death, for purposes of state inheritance or transmission taxes. 1040ez online filing free Surviving spouse. 1040ez online filing free   If you are a surviving spouse and you owned your home jointly, your basis in the home will change. 1040ez online filing free The new basis for the interest your spouse owned will be its fair market value on the date of death (or alternate valuation date). 1040ez online filing free The basis in your interest will remain the same. 1040ez online filing free Your new basis in the home is the total of these two amounts. 1040ez online filing free   If you and your spouse owned the home either as tenants by the entirety or as joint tenants with right of survivorship, you will each be considered to have owned one-half of the home. 1040ez online filing free Example. 1040ez online filing free Your jointly owned home (owned as joint tenants with right of survivorship) had an adjusted basis of $50,000 on the date of your spouse's death, and the fair market value on that date was $100,000. 1040ez online filing free Your new basis in the home is $75,000 ($25,000 for one-half of the adjusted basis plus $50,000 for one-half of the fair market value). 1040ez online filing free Community property. 1040ez online filing free   In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), each spouse is usually considered to own half of the community property. 1040ez online filing free When either spouse dies, the total fair market value of the community property becomes the basis of the entire property, including the part belonging to the surviving spouse. 1040ez online filing free For this to apply, at least half the value of the community property interest must be includible in the decedent's gross estate, whether or not the estate must file a return. 1040ez online filing free   For more information about community property, see Publication 555, Community Property. 1040ez online filing free    If you are selling a home in which you acquired an interest from a decedent who died in 2010, see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, to determine your basis. 1040ez online filing free Home received as trade. 1040ez online filing free   If you acquired your home as a trade for other property, in most cases, the basis of your home is the fair market value (at the time of the trade) of the property you gave up. 1040ez online filing free If you traded one home for another, you have made a sale and purchase. 1040ez online filing free In that case, you may have a gain. 1040ez online filing free See Trading (exchanging) homes under Dispositions Other Than Sales, earlier, for an example of figuring the gain. 1040ez online filing free Home received from spouse. 1040ez online filing free   If you received your home from your spouse or from your former spouse incident to your divorce, your basis in the home depends on the date of the transfer. 1040ez online filing free Transfers after July 18, 1984. 1040ez online filing free   If you received the home after July 18, 1984, there was no gain or loss on the transfer. 1040ez online filing free In most cases, your basis in this home is the same as your spouse's (or former spouse's) adjusted basis just before you received it. 1040ez online filing free This rule applies even if you received the home in exchange for cash, the release of marital rights, the assumption of liabilities, or other considerations. 1040ez online filing free   If you owned a home jointly with your spouse and your spouse transferred his or her interest in the home to you, in most cases, your basis in the half interest received from your spouse is the same as your spouse's adjusted basis just before the transfer. 1040ez online filing free This also applies if your former spouse transferred his or her interest in the home to you incident to your divorce. 1040ez online filing free Your basis in the half interest you already owned does not change. 1040ez online filing free Your new basis in the home is the total of these two amounts. 1040ez online filing free Transfers before July 19, 1984. 1040ez online filing free   If you received your home before July 19, 1984, in exchange for your release of marital rights, in most cases, your basis in the home is generally its fair market value at the time you received it. 1040ez online filing free More information. 1040ez online filing free   For more information on property received from a spouse or former spouse, see Property Settlements in Publication 504. 1040ez online filing free Involuntary conversion. 1040ez online filing free   If your home is destroyed or condemned, you may receive insurance proceeds or a condemnation award. 1040ez online filing free If you acquired a replacement home with these proceeds, the basis is its cost decreased by any gain not recognized on the conversion under the rules explained in: Publication 547, in the case of a home that was destroyed, or Chapter 1 of Publication 544, in the case of a home that was condemned. 1040ez online filing free Example. 1040ez online filing free A fire destroyed your home that you owned and used for only 6 months. 1040ez online filing free The home had an adjusted basis of $80,000 and the insurance company paid you $130,000 for the loss. 1040ez online filing free Your gain is $50,000 ($130,000 − $80,000). 1040ez online filing free You bought a replacement home for $100,000. 1040ez online filing free The part of your gain that is taxable is $30,000 ($130,000 − $100,000), the unspent part of the payment from the insurance company. 1040ez online filing free The rest of the gain ($20,000) is not taxable, so that amount reduces your basis in the new home. 1040ez online filing free The basis of the new home is figured as follows. 1040ez online filing free Cost of replacement home $100,000 Minus: Gain not recognized 20,000 Basis of the replacement home $80,000 More information. 1040ez online filing free   For more information about basis, see Publication 551. 1040ez online filing free Adjusted Basis Adjusted basis is your cost or other basis increased or decreased by certain amounts. 1040ez online filing free To figure your adjusted basis, you can use Worksheet 1, found toward the end of this publication. 1040ez online filing free Filled-in examples of that worksheet are included in Comprehensive Examples , later. 1040ez online filing free Recordkeeping. 1040ez online filing free You should keep records to prove your home's adjusted basis. 1040ez online filing free Ordinarily, you must keep records for 3 years after the due date for filing your return for the tax year in which you sold your home. 1040ez online filing free But if you sold a home before May 7, 1997, and postponed tax on any gain, the basis of that home affects the basis of the new home you bought. 1040ez online filing free Keep records proving the basis of both homes as long as they are needed for tax purposes. 1040ez online filing free The records you should keep include: Proof of the home's purchase price and purchase expenses; Receipts and other records for all improvements, additions, and other items that affect the home's adjusted basis; Any worksheets or other computations you used to figure the adjusted basis of the home you sold, the gain or loss on the sale, the exclusion, and the taxable gain; Any Form 982 you filed to exclude any discharge of qualified principal residence indebtedness; Any Form 2119, Sale of Your Home, you filed to postpone gain from the sale of a previous home before May 7, 1997; and Any worksheets you used to prepare Form 2119, such as the Adjusted Basis of Home Sold Worksheet or the Capital Improvements Worksheet from the Form 2119 instructions, or other source of computations. 1040ez online filing free Increases to Basis These include the following. 1040ez online filing free Additions and other improvements that have a useful life of more than 1 year. 1040ez online filing free Special assessments for local improvements. 1040ez online filing free Amounts you spent after a casualty to restore damaged property. 1040ez online filing free Improvements. 1040ez online filing free   These add to the value of your home, prolong its useful life, or adapt it to new uses. 1040ez online filing free You add the cost of additions and other improvements to the basis of your property. 1040ez online filing free   The following chart lists some other examples of improvements. 1040ez online filing free Examples of Improvements That Increase Basis Additions Bedroom Bathroom Deck Garage Porch Patio Heating & Air Conditioning Heating system Central air conditioning Furnace Duct work Central humidifier Filtration system Lawn & Grounds Landscaping Driveway Walkway Fence  Retaining wall Sprinkler system Swimming pool  Miscellaneous Storm windows, doors New roof Central vacuum Wiring upgrades Satellite dish Security system  Plumbing Septic system Water heater Soft water system Filtration system  Interior Improvements Built-in appliances  Kitchen modernization  Flooring Wall-to-wall carpeting  Insulation Attic Walls Floors Pipes and duct work Improvements no longer part of home. 1040ez online filing free   Your home's adjusted basis does not include the cost of any improvements that are replaced and are no longer part of the home. 1040ez online filing free Example. 1040ez online filing free You put wall-to-wall carpeting in your home 15 years ago. 1040ez online filing free Later, you replaced that carpeting with new wall-to-wall carpeting. 1040ez online filing free The cost of the old carpeting you replaced is no longer part of your home's adjusted basis. 1040ez online filing free Repairs. 1040ez online filing free   These maintain your home in good condition but do not add to its value or prolong its life. 1040ez online filing free You do not add their cost to the basis of your property. 1040ez online filing free Examples. 1040ez online filing free Repainting your house inside or outside, fixing your gutters or floors, repairing leaks or plastering, and replacing broken window panes are examples of repairs. 1040ez online filing free Exception. 1040ez online filing free   The entire job is considered an improvement if items that would otherwise be considered repairs are done as part of an extensive remodeling or restoration of your home. 1040ez online filing free For example, if you have a casualty and your home is damaged, increase your basis by the amount you spend on repairs that restore the property to its pre-casualty condition. 1040ez online filing free Decreases to Basis These include the following. 1040ez online filing free Discharge of qualified principal residence indebtedness that was excluded from income (but not below zero). 1040ez online filing free For details, see Publication 4681. 1040ez online filing free Some or all of the cancellation of debt income that was excluded due to your bankruptcy or insolvency. 1040ez online filing free For details, see Publication 4681. 1040ez online filing free Gain you postponed from the sale of a previous home before May 7, 1997. 1040ez online filing free Deductible casualty losses. 1040ez online filing free Insurance payments you received or expect to receive for casualty losses. 1040ez online filing free Payments you received for granting an easement or right-of-way. 1040ez online filing free Depreciation allowed or allowable if you used your home for business or rental purposes. 1040ez online filing free Energy-related credits allowed for expenditures made on the residence. 1040ez online filing free (Reduce the increase in basis otherwise allowable for expenditures on the residence by the amount of credit allowed for those expenditures. 1040ez online filing free ) Adoption credit you claimed for improvements added to the basis of your home. 1040ez online filing free Nontaxable payments from an adoption assistance program of your employer you used for improvements you added to the basis of your home. 1040ez online filing free Energy conservation subsidy excluded from your gross income because you received it (directly or indirectly) from a public utility after 1992 to buy or install any energy conservation measure. 1040ez online filing free An energy conservation measure is an installation or modification primarily designed either to reduce consumption of electricity or natural gas or to improve the management of energy demand for a home. 1040ez online filing free District of Columbia first-time homebuyer credit allowed on the purchase of a principal residence in the District of Columbia. 1040ez online filing free General sales taxes claimed as an itemized deduction on Schedule A (Form 1040) that were imposed on the purchase of personal property, such as a houseboat used as your home or a mobile home. 1040ez online filing free Discharges of qualified principal residence indebtedness. 1040ez online filing free   You may be able to exclude from gross income a discharge of qualified principal residence indebtedness. 1040ez online filing free This exclusion applies to discharges made after 2006 and before 2014. 1040ez online filing free If you choose to exclude this income, you must reduce (but not below zero) the basis of your principal residence by the amount excluded from gross income. 1040ez online filing free   File Form 982 with your tax return. 1040ez online filing free See the form's instructions for detailed information. 1040ez online filing free    A decrease in basis due to a discharge of qualified principal residence indebtedness that is excluded from income occurs only if you retain ownership of the principal residence after a discharge. 1040ez online filing free In most cases, this would occur in a refinancing or a restructuring of the mortgage. 1040ez online filing free Excluding the Gain You may qualify to exclude from your income all or part of any gain from the sale of your main home. 1040ez online filing free 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. 1040ez online filing free To qualify, you must meet the ownership and use tests described later. 1040ez online filing free 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. 1040ez online filing free This choice can be made (or revoked) at any time before the expiration of a 3-year period beginning on the due date of your return (not including extensions) for the year of the sale. 1040ez online filing free You can use Worksheet 2 (near the end of this publication) to figure the amount of your exclusion and your taxable gain, if any. 1040ez online filing free If you have any taxable gain from the sale of your home, you may have to increase your withholding or make estimated tax payments. 1040ez online filing free See Publication 505, Tax Withholding and Estimated Tax. 1040ez online filing free Maximum Exclusion You can exclude up to $250,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if all of the following are true. 1040ez online filing free You meet the ownership test. 1040ez online filing free You meet the use test. 1040ez online filing free During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home. 1040ez online filing free For details on gain allocated to periods of nonqualified use, see Nonqualified Use , later. 1040ez online filing free If you and another person owned the home jointly but file separate returns, each of you can exclude up to $250,000 of gain from the sale of your interest in the home if each of you meets the three conditions just listed. 1040ez online filing free You may be able to exclude up to $500,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if you are married and file a joint return and meet the requirements listed in the discussion of the special rules for joint returns, later, under Married Persons . 1040ez online filing free Ownership and Use Tests To claim the exclusion, you must meet the ownership and use tests. 1040ez online filing free This means that during the 5-year period ending on the date of the sale, you must have: Owned the home for at least 2 years (the ownership test), and Lived in the home as your main home for at least 2 years (the use test). 1040ez online filing free Exception. 1040ez online filing free   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. 1040ez online filing free However, the maximum amount you may be able to exclude will be reduced. 1040ez online filing free See Reduced Maximum Exclusion , later. 1040ez online filing free Example 1—home owned and occupied for at least 2 years. 1040ez online filing free Mya bought and moved into her main home in September 2011. 1040ez online filing free She sold the home at a gain in October 2013. 1040ez online filing free During the 5-year period ending on the date of sale in October 2013, she owned and lived in the home for more than 2 years. 1040ez online filing free She meets the ownership and use tests. 1040ez online filing free Example 2—ownership test met but use test not met. 1040ez online filing free Ayden bought a home, lived in it for 6 months, moved out, and never occupied the home again. 1040ez online filing free He later sold the home for a gain in June 2013. 1040ez online filing free He owned the home during the entire 5-year period ending on the date of sale. 1040ez online filing free He meets the ownership test but not the use test. 1040ez online filing free He cannot exclude any part of his gain on the sale unless he qualified for a reduced maximum exclusion (explained later). 1040ez online filing free 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 nor do they both have to occur at the same time. 1040ez online filing free 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. 1040ez online filing free Example. 1040ez online filing free Naomi bought and moved into a house in July 2009. 1040ez online filing free She lived there for 13 months and then moved in with a friend. 1040ez online filing free She later moved back into her house and lived there for 12 months until she sold it in August 2013. 1040ez online filing free Naomi meets the ownership and use tests because, during the 5-year period ending on the date of sale, she owned the house for more than 2 years and lived in it for a total of 25 (13 + 12) months. 1040ez online filing free Temporary absence. 1040ez online filing free   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. 1040ez online filing free The following examples assume that the reduced maximum exclusion (discussed later) does not apply to the sales. 1040ez online filing free Example 1. 1040ez online filing free David Johnson, who is single, bought and moved into his home on February 1, 2011. 1040ez online filing free Each year during 2011 and 2012, David left his home for a 2-month summer vacation. 1040ez online filing free David sold the house on March 1, 2013. 1040ez online filing free Although the total time David lived in his home is less than 2 years (21 months), he meets the use requirement and may exclude gain. 1040ez online filing free The 2-month vacations are short temporary absences and are counted as periods of use in determining whether David used the home for the required 2 years. 1040ez online filing free Example 2. 1040ez online filing free Professor Paul Beard, who is single, bought and moved into a house in December 2010, went abroad for a 1-year sabbatical leave in January 2012, returned to the house in January 2013, and sold it at a gain in February 2013. 1040ez online filing free Because his leave was not a short temporary absence, he cannot include the period of leave to meet the 2-year use test. 1040ez online filing free He cannot exclude any part of his gain because he did not use the residence for the required 2 years. 1040ez online filing free Ownership and use tests met at different times. 1040ez online filing free   You can meet the ownership and use tests during different 2-year periods. 1040ez online filing free However, you must meet both tests during the 5-year period ending on the date of the sale. 1040ez online filing free Example. 1040ez online filing free Beginning in 2002, Helen Jones lived in a rented apartment. 1040ez online filing free The apartment building was later converted to condominiums, and she bought her same apartment on December 3, 2010. 1040ez online filing free In 2011, Helen became ill and on April 14 of that year she moved to her daughter's home. 1040ez online filing free On July 12, 2013, while still living in her daughter's home, she sold her condominium. 1040ez online filing free Helen can exclude gain on the sale of her condominium because she met the ownership and use tests during the 5-year period from July 13, 2008, to July 12, 2013, the date she sold the condominium. 1040ez online filing free She owned her condominium from December 3, 2010, to July 12, 2013 (more than 2 years). 1040ez online filing free She lived in the property from July 13, 2008 (the beginning of the 5-year period), to April 14, 2011 (more than 2 years). 1040ez online filing free The time Helen lived in her daughter's home during the 5-year period can be counted toward her period of ownership, and the time she lived in her rented apartment during the 5-year period can be counted toward her period of use. 1040ez online filing free Cooperative apartment. 1040ez online filing free   If you sold stock as a tenant-shareholder 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: Owned the stock for at least 2 years, and Lived in the house or apartment that the stock entitled you to occupy as your main home for at least 2 years. 1040ez online filing free Exceptions to Ownership and Use Tests The following sections contain exceptions to the ownership and use tests for certain taxpayers. 1040ez online filing free Exception for individuals with a disability. 1040ez online filing free   There is an exception to the use test if: You become physically or mentally unable to care for yourself, and You owned and lived in your home as your main home for a total of at least 1 year during the 5-year period before the sale of your home. 1040ez online filing free Under this exception, you are considered to live in your home during any time within the 5-year period that you own the home and live in a facility (including a nursing home) licensed by a state or political subdivision to care for persons in your condition. 1040ez online filing free   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. 1040ez online filing free Previous home destroyed or condemned. 1040ez online filing free   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 replacement home on whose sale you wish to exclude gain. 1040ez online filing free This rule applies if any part of the basis of the home you sold depended on the basis of the destroyed or condemned home (see Involuntary Conversions in Publication 551). 1040ez online filing free 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. 1040ez online filing free Members of the uniformed services or Foreign Service, employees of the intelligence community, or employees or volunteers of the Peace Corps. 1040ez online filing free   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 (defined later) as a member of the uniformed services or Foreign Service of the United States, or as an employee of the intelligence community. 1040ez online filing free You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve outside the United States either as an employee of the Peace Corps on qualified official extended duty (defined later) or as an enrolled volunteer or volunteer leader of the Peace Corps. 1040ez online filing free 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. 1040ez online filing free   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. 1040ez online filing free Example. 1040ez online filing free John bought and moved into a home in 2005. 1040ez online filing free He lived in it as his main home for 2½ years. 1040ez online filing free For the next 6 years, he did not live in it because he was on qualified official extended duty with the Army. 1040ez online filing free He then sold the home at a gain in 2013. 1040ez online filing free To meet the use test, John chooses to suspend the 5-year test period for the 6 years he was on qualified official extended duty. 1040ez online filing free This means he can disregard those 6 years. 1040ez online filing free Therefore, John's 5-year test period consists of the 5 years before he went on qualified official extended duty. 1040ez online filing free He meets the ownership and use tests because he owned and lived in the home for 2½ years during this test period. 1040ez online filing free Period of suspension. 1040ez online filing free   The period of suspension cannot last more than 10 years. 1040ez online filing free Together, the 10-year suspension period and the 5-year test period can be as long as, but no more than, 15 years. 1040ez online filing free You cannot suspend the 5-year period for more than one property at a time. 1040ez online filing free You can revoke your choice to suspend the 5-year period at any time. 1040ez online filing free Example. 1040ez online filing free Mary bought a home on April 1, 1997. 1040ez online filing free She used it as her main home until August 31, 2000. 1040ez online filing free On September 1, 2000, she went on qualified official extended duty with the Navy. 1040ez online filing free She did not live in the house again before selling it on July 31, 2013. 1040ez online filing free Mary chooses to use the entire 10-year suspension period. 1040ez online filing free Therefore, the suspension period would extend back from July 31, 2013, to August 1, 2003, and the 5-year test period would extend back to August 1, 1998. 1040ez online filing free During that period, Mary owned the house all 5 years and lived in it as her main home from August 1, 1998, until August 31, 2000, a period of more than 24 months. 1040ez online filing free She meets the ownership and use tests because she owned and lived in the home for at least 2 years during this test period. 1040ez online filing free Uniformed services. 1040ez online filing free   The uniformed services are: The Armed Forces (the Army, Navy, Air Force, Marine Corps, and Coast Guard), The commissioned corps of the National Oceanic and Atmospheric Administration, and The commissioned corps of the Public Health Service. 1040ez online filing free Foreign Service member. 1040ez online filing free   For purposes of the choice to suspend the 5-year test period for ownership and use, you are a member of the Foreign Service if you are any of the following. 1040ez online filing free A Chief of mission. 1040ez online filing free An Ambassador at large. 1040ez online filing free A member of the Senior Foreign Service. 1040ez online filing free A Foreign Service officer. 1040ez online filing free Part of the Foreign Service personnel. 1040ez online filing free Employee of the intelligence community. 1040ez online filing free   For purposes of the choice to suspend the 5-year test period for ownership and use, you are an employee of the intelligence community if you are an employee of any of the following. 1040ez online filing free The Office of the Director of National Intelligence. 1040ez online filing free The Central Intelligence Agency. 1040ez online filing free The National Security Agency. 1040ez online filing free The Defense Intelligence Agency. 1040ez online filing free The National Geospatial-Intelligence Agency. 1040ez online filing free The National Reconnaissance Office and any other office within the Department of Defense for the collection of specialized national intelligence through reconnaissance programs. 1040ez online filing free Any of the intelligence elements of the Army, the Navy, the Air Force, the Marine Corps, the Federal Bureau of Investigation, the Department of Treasury, the Department of Energy, and the Coast Guard. 1040ez online filing free The Bureau of Intelligence and Research of the Department of State. 1040ez online filing free Any of the elements of the Department of Homeland Security concerned with the analyses of foreign intelligence information. 1040ez online filing free Qualified official extended duty. 1040ez online filing free   You are on qualified official extended duty if you are on extended duty while: Serving at a duty station at least 50 miles from your main home, or Living in Government quarters under Government orders. 1040ez online filing free   You are on extended duty when you are called or ordered to active duty for a period of more than 90 days or for an indefinite period. 1040ez online filing free Married Persons If you and your spouse file a joint return for the year of sale and one spouse meets the ownership and use tests, you can exclude up to $250,000 of the gain. 1040ez online filing free (But see Special rules for joint returns, next. 1040ez online filing free ) Special rules for joint returns. 1040ez online filing free   You can exclude up to $500,000 of the gain on the sale of your main home if all of the following are true. 1040ez online filing free You are married and file a joint return for the year. 1040ez online filing free Either you or your spouse meets the ownership test. 1040ez online filing free Both you and your spouse meet the use test. 1040ez online filing free 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. 1040ez online filing free If either spouse does not satisfy all these requirements, the maximum exclusion that can be claimed by the couple is the total of the maximum exclusions that each spouse would qualify for if not married and the amounts were figured separately. 1040ez online filing free For this purpose, each spouse is treated as owning the property during the period that either spouse owned the property. 1040ez online filing free Example 1—one spouse sells a home. 1040ez online filing free Emily sells her home in June 2013 for a gain of $300,000. 1040ez online filing free She marries Jamie later in the year. 1040ez online filing free She meets the ownership and use tests, but Jamie does not. 1040ez online filing free Emily can exclude up to $250,000 of gain on a separate or joint return for 2013. 1040ez online filing free The $500,000 maximum exclusion for certain joint returns does not apply because Jamie does not meet the use test. 1040ez online filing free Example 2—each spouse sells a home. 1040ez online filing free The facts are the same as in Example 1 except that Jamie also sells a home in 2013 for a gain of $200,000 before he marries Emily. 1040ez online filing free He meets the ownership and use tests on his home, but Emily does not. 1040ez online filing free Emily can exclude $250,000 of gain and Jamie can exclude $200,000 of gain on the respective sales of their individual homes. 1040ez online filing free However, Emily cannot use Jamie's unused exclusion to exclude more than $250,000 of gain. 1040ez online filing free Therefore, Emily and Jamie must recognize $50,000 of gain on the sale of Emily's home. 1040ez online filing free The $500,000 maximum exclusion for certain joint returns does not apply because Emily and Jamie do not both meet the use test for the same home. 1040ez online filing free Sale of main home by surviving spouse. 1040ez online filing free   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. 1040ez online filing free   If you meet all of the following requirements, you may qualify to exclude up to $500,000 of any gain from the sale or exchange of your main home. 1040ez online filing free The sale or exchange took place after 2008. 1040ez online filing free The sale or exchange took place no more than 2 years after the date of death of your spouse. 1040ez online filing free You have not remarried. 1040ez online filing free You and your spouse met the use test at the time of your spouse's death. 1040ez online filing free You or your spouse met the ownership test at the time of your spouse's death. 1040ez online filing free Neither you nor your spouse excluded gain from the sale of another home during the last 2 years before the date of death. 1040ez online filing free The ownership and use tests were described earlier. 1040ez online filing free Example. 1040ez online filing free Harry owned and used a house as his main home since 2009. 1040ez online filing free Harry and Wilma married on July 1, 2013, and from that date they used Harry's house as their main home. 1040ez online filing free Harry died on August 15, 2013, and Wilma inherited the property. 1040ez online filing free Wilma sold the property on September 1, 2013, at which time she had not remarried. 1040ez online filing free Although Wilma owned and used the house for less than 2 years, Wilma is considered to have satisfied the ownership and use tests because her period of ownership and use includes the period that Harry owned and used the property before death. 1040ez online filing free Home transferred from spouse. 1040ez online filing free   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. 1040ez online filing free Use of home after divorce. 1040ez online filing free   You are considered to have used property as your main home during any period when: You owned it, and 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. 1040ez online filing free Reduced Maximum Exclusion If you fail to meet the requirements to qualify for the $250,000 or $500,000 exclusion, you may still qualify for a reduced exclusion. 1040ez online filing free This applies to those who: Fail to meet the ownership and use tests, or Have used the exclusion within 2 years of selling their current home. 1040ez online filing free In both cases, to qualify for a reduced exclusion, the sale of your main home must be due to one of the following reasons. 1040ez online filing free A change in place of employment. 1040ez online filing free Health. 1040ez online filing free Unforeseen circumstances. 1040ez online filing free Qualified individual. 1040ez online filing free   For purposes of the reduced maximum exclusion, a qualified individual is any of the following. 1040ez online filing free You. 1040ez online filing free Your spouse. 1040ez online filing free A co-owner of the home. 1040ez online filing free A person whose main home is the same as yours. 1040ez online filing free Primary reason for sale. 1040ez online filing free   One of the three reasons above will be considered to be the primary reason you sold your home if either (1) or (2) is true. 1040ez online filing free You qualify under a “safe harbor. 1040ez online filing free ” This is a specific set of facts and circumstances that, if applicable, qualifies you to claim a reduced maximum exclusion. 1040ez online filing free Safe harbors corresponding to the reasons listed above are described later. 1040ez online filing free A safe harbor does not apply, but you can establish, based on facts and circumstances, that the primary reason for the sale is a change in place of employment, health, or unforeseen circumstances. 1040ez online filing free  Factors that may be relevant in determining your primary reason for sale include whether: Your sale and the circumstances causing it were close in time, The circumstances causing your sale occurred during the time you owned and used the property as your main home, The circumstances causing your sale were not reasonably foreseeable when you began using the property as your main home, Your financial ability to maintain the property became materially impaired, The suitability of the property as your main home materially changed, and During the time you owned the property, you used it as your home. 1040ez online filing free Change in Place of Employment You may qualify for a reduced exclusion if the primary reason for the sale of your main home is a change in the location of employment of a qualified individual. 1040ez online filing free Employment. 1040ez online filing free   For this purpose, employment includes the start of work with a new employer or continuation of work with the same employer. 1040ez online filing free It also includes the start or continuation of self-employment. 1040ez online filing free Distance safe harbor. 1040ez online filing free   A change in place of employment is considered to be the reason you sold your home if: The change occurred during the period you owned and used the property as your main home, and The new place of employment is at least 50 miles farther from the home you sold than was the former place of employment (or, if there was no former place of employment, the distance between your new place of employment and the home sold is at least 50 miles). 1040ez online filing free Example. 1040ez online filing free Justin was unemployed and living in a townhouse in Florida he had owned and used as his main home since 2012. 1040ez online filing free He got a job in North Carolina and sold his townhouse in 2013. 1040ez online filing free Because the distance between Justin's new place of employment and the home he sold is at least 50 miles, the sale satisfies the conditions of the distance safe harbor. 1040ez online filing free Justin's sale of his home is considered to be because of a change in place of employment, and he is entitled to claim a reduced maximum exclusion of gain from the sale. 1040ez online filing free Health The sale of your main home is because of health if your primary reason for the sale is: To obtain, provide, or facilitate the diagnosis, cure, mitigation, or treatment of disease, illness, or injury of a qualified individual, or To obtain or provide medical or personal care for a qualified individual suffering from a disease, illness, or injury. 1040ez online filing free The sale of your home is not because of health if the sale merely benefits a qualified individual's general health or well-being. 1040ez online filing free For purposes of this reason, a qualified individual includes, in addition to the individuals listed earlier under Qualified individual , any of the following family members of these individuals. 1040ez online filing free Parent, grandparent, stepmother, stepfather. 1040ez online filing free Child, grandchild, stepchild, adopted child, eligible foster child. 1040ez online filing free Brother, sister, stepbrother, stepsister, half-brother, half-sister. 1040ez online filing free Mother-in-law, father-in-law, brother-in-law, sister-in-law, son-in-law, or daughter-in-law. 1040ez online filing free Uncle, aunt, nephew, niece, or cousin. 1040ez online filing free Example. 1040ez online filing free In 2012, Chase and Lauren, spouses, bought a house that they used as their main home. 1040ez online filing free Lauren's father has a chronic disease and is unable to care for himself. 1040ez online filing free In 2013, Chase and Lauren sold their home in order to move into Lauren's father's house to provide care for him. 1040ez online filing free Because the primary reason for the sale of their home was to provide care for Lauren's father, Chase and Lauren are entitled to a reduced maximum exclusion. 1040ez online filing free Doctor's recommendation safe harbor. 1040ez online filing free   Health is considered to be the reason you sold your home if, for one or more of the reasons listed at the beginning of this discussion, a doctor recommends a change of residence. 1040ez online filing free 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 that home. 1040ez online filing free You are not considered to have an unforeseen circumstance if the primary reason you sold your home was that you preferred to get a different home or because your finances improved. 1040ez online filing free Specific event safe harbors. 1040ez online filing free   Unforeseen circumstances are considered to be the reason for selling your home if any of the following events occurred while you owned and used the property as your main home. 1040ez online filing free An involuntary conversion of your home, such as when your home is destroyed or condemned. 1040ez online filing free Natural or man-made disasters or acts of war or terrorism resulting in a casualty to your home, whether or not your loss is deductible. 1040ez online filing free In the case of qualified individuals (listed earlier under Qualified individual ): Death, Unemployment (if the individual is eligible for unemployment compensation), A change in employment or self-employment status that results in the individual's inability to pay reasonable basic living expenses (listed under Reasonable basic living expenses , later) for his or her household, Divorce or legal separation under a decree of divorce or separate maintenance, or Multiple births resulting from the same pregnancy. 1040ez online filing free An event the IRS determined to be an unforeseen circumstance in published guidance of general applicability. 1040ez online filing free For example, the IRS determined the September 11, 2001, terrorist attacks to be an unforeseen circumstance. 1040ez online filing free Reasonable basic living expenses. 1040ez online filing free   Reasonable basic living expenses for your household include the following. 1040ez online filing free Amounts spent for food. 1040ez online filing free Amounts spent for clothing. 1040ez online filing free Housing and related expenses. 1040ez online filing free Medical expenses. 1040ez online filing free Transportation expenses. 1040ez online filing free Tax payments. 1040ez online filing free Court-ordered payments. 1040ez online filing free Expenses reasonably necessary to produce income. 1040ez online filing free   Any of these amounts spent to maintain an affluent or luxurious standard of living are not reasonable basic living expenses. 1040ez online filing free Nonqualified Use Gain from the sale or exchange of the main home is not excludable from income if it is allocable to periods of nonqualified use. 1040ez online filing free Nonqualified use means any period after 2008 where neither you nor your spouse (or your former spouse) used the property as a main home, with certain exceptions (see next). 1040ez online filing free Exceptions. 1040ez online filing free   A period of nonqualified use does not include: Any portion of the 5-year period ending on the date of the sale or exchange after the last date you (or your spouse) use the property as a main home; Any period (not to exceed an aggregate period of 10 years) during which you (or your spouse) are serving on qualified official extended duty: As a member of the uniformed services; As a member of the Foreign Service of the United States; or As an employee of the intelligence community; and Any other period of temporary absence (not to exceed an aggregate period of 2 years) due to change of employment, health conditions, or such other unforeseen circumstances as may be specified by the IRS. 1040ez online filing free Calculation. 1040ez online filing free   To figure the portion of the gain allocated to the period of nonqualified use, multiply the gain (net of any depreciation allowed or allowable on the property for periods after May 6, 1997) by the following fraction:   Total nonqualified use during the period of ownership after 2008     Total period of ownership     This calculation can be found in Worksheet 2, line 10, later in this publication. 1040ez online filing free   For examples of this calculation, see Business Use or Rental of Home , next. 1040ez online filing free Business Use or Rental of Home You may be able to exclude gain from the sale of a home you have used for business or to produce rental income if you meet the ownership and use tests. 1040ez online filing free Example 1. 1040ez online filing free On May 23, 2007, Amy, who is unmarried for all years in this example, bought a house. 1040ez online filing free She moved in on that date and lived in it until May 31, 2009, when she moved out of the house and put it up for rent. 1040ez online filing free The house was rented from June 1, 2009, to March 31, 2011. 1040ez online filing free Amy claimed depreciation deductions in 2009 through 2011 totaling $10,000. 1040ez online filing free Amy moved back into the house on April 1, 2011, and lived there until she sold it on January 31, 2013, for a gain of $200,000. 1040ez online filing free During the 5-year period ending on the date of the sale (January 31, 2008–January 31, 2013), Amy owned and lived in the house for more than 2 years as shown in the following table. 1040ez online filing free Five-Year Period Used as Home Used as Rental 1/31/08 – 5/31/09 16 months   6/01/09 – 3/31/11   22 months 4/01/11 – 1/31/13 22 months     38 months 22 months       During the period Amy owned the house (2,080 days), her period of nonqualified use was 668 days. 1040ez online filing free Because the gain attributable to periods of nonqualified use is $60,990, Amy can exclude $129,010 of her gain, as shown on Worksheet 2. 1040ez online filing free Example 2. 1040ez online filing free William owned and used a house as his main home from 2007 through 2010. 1040ez online filing free On January 1, 2011, he moved to another state. 1040ez online filing free He rented his house from that date until April 30, 2013, when he sold it. 1040ez online filing free During the 5-year period ending on the date of sale (May 1, 2008-April 30, 2013), William owned and lived in the house for more than 2 years. 1040ez online filing free Because it was rental property at the time of the sale, he must report the sale on Form 4797. 1040ez online filing free Because the period of nonqualified use does not include any part of the 5-year period after the last date William lived in the house, he has no period of nonqualified use. 1040ez online filing free Because he met the ownership and use tests, he can exclude gain up to $250,000. 1040ez online filing free However, he cannot exclude the part of the gain equal to the depreciation he claimed or could have claimed for renting the house, as explained next. 1040ez online filing free Depreciation after May 6, 1997. 1040ez online filing free   If you were entitled to take depreciation deductions because you used your home for business purposes or as rental property, you cannot exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997. 1040ez online filing free If you can show by adequate records or other evidence that the depreciation allowed was less than the amount allowable, then you may limit the amount of gain recognized to the depreciation allowed. 1040ez online filing free Unrecaptured section 1250 gain. 1040ez online filing free   This is the part of any long-term capital gain from the sale of your home that is due to depreciation and cannot be excluded. 1040ez online filing free To figure the amount of unrecaptured section 1250 gain to be reported on Schedule D (Form 1040), you must also take into account certain gains or losses from the sale of property other than your home. 1040ez online filing free Use the Unrecaptured Section 1250 Gain Worksheet in the Schedule D instructions for this purpose. 1040ez online filing free Worksheet 2. 1040ez online filing free Taxable Gain on Sale of Home—Completed Example 1 for Amy Part 1. 1040ez online filing free Gain or (Loss) on Sale       1. 1040ez online filing free   Selling price of home 1. 1040ez online filing free     2. 1040ez online filing free   Selling expenses (including commissions, advertising and legal fees, and seller-paid loan charges) 2. 1040ez online filing free     3. 1040ez online filing free   Subtract line 2 from line 1. 1040ez online filing free This is the amount realized 3. 1040ez online filing free     4. 1040ez online filing free   Adjusted basis of home sold (from Worksheet 1, line 13) 4. 1040ez online filing free     5. 1040ez online filing free   Gain or (loss) on the sale. 1040ez online filing free Subtract line 4 from line 3. 1040ez online filing free If this is a loss, stop here 5. 1040ez online filing free 200,000   Part 2. 1040ez online filing free Exclusion and Taxable Gain       6. 1040ez online filing free   Enter any depreciation allowed or allowable on the property for periods after May 6, 1997. 1040ez online filing free If none, enter -0- 6. 1040ez online filing free 10,000   7. 1040ez online filing free   Subtract line 6 from line 5. 1040ez online filing free If the result is less than zero, enter -0- 7. 1040ez online filing free 190,000   8. 1040ez online filing free   Aggregate number of days of nonqualified use after 2008. 1040ez online filing free If none, enter -0-. 1040ez online filing free  If line 8 is equal to zero, skip to line 12 and enter the amount from line 7 on line 12 8. 1040ez online filing free 668   9. 1040ez online filing free   Number of days taxpayer owned the property 9. 1040ez online filing free 2,080   10. 1040ez online filing free   Divide the amount on line 8 by the amount on line 9. 1040ez online filing free Enter the result as a decimal (rounded to at least 3 places). 1040ez online filing free But do not enter an amount greater than 1. 1040ez online filing free 00 10. 1040ez online filing free 0. 1040ez online filing free 321   11. 1040ez online filing free   Gain allocated to nonqualified use. 1040ez online filing free (Line 7 multiplied by line 10) 11. 1040ez online filing free 60,990   12. 1040ez online filing free   Gain eligible for exclusion. 1040ez online filing free Subtract line 11 from line 7 12. 1040ez online filing free 129,010   13. 1040ez online filing free   If you qualify to exclude gain on the sale, enter your maximum exclusion (see Maximum Exclusion ). 1040ez online filing free  If you qualify for a reduced maximum exclusion, enter the amount from Worksheet 3, line 7. 1040ez online filing free If you do  not qualify to exclude gain, enter -0- 13. 1040ez online filing free 250,000   14. 1040ez online filing free   Exclusion. 1040ez online filing free Enter the smaller of line 12 or line 13 14. 1040ez online filing free 129,010   15. 1040ez online filing free   Taxable gain. 1040ez online filing free Subtract line 14 from line 5. 1040ez online filing free Report your taxable gain as described under Reporting the Sale . 1040ez online filing free If the amount on line 6 is more than zero, complete line 16 15. 1040ez online filing free 70,990   16. 1040ez online filing free   Enter the smaller of line 6 or line 15. 1040ez online filing free Enter this amount on line 12 of the Unrecaptured Section 1250 Gain  Worksheet in the instructions for Schedule D (Form 1040) 16. 1040ez online filing free 10,000 Property Used Partly for Business or Rental If you use property partly as a home and partly for business or to produce rental income, the treatment of any gain on the sale depends partly on whether the business or rental part of the property is part of your home or separate from it. 1040ez online filing free Part of Home Used for Business or Rental If the part of your property used for business or to produce rental income is within your home, such as a room used as a home office for a business, you do not need to allocate gain on the sale of the property between the business part of the property and the part used as a home. 1040ez online filing free In addition, you do not need to report the sale of the business or rental part on Form 4797. 1040ez online filing free This is true whether or not you were entitled to claim any depreciation. 1040ez online filing free However, you cannot exclude the part of any gain equal to any depreciation allowed or allowable after May 6, 1997. 1040ez online filing free See Depreciation after May 6, 1997, earlier. 1040ez online filing free Example 1. 1040ez online filing free Ray sold his main home in 2013 at a $30,000 gain. 1040ez online filing free He has no gains or losses from the sale of property other than the gain from the sale of his home. 1040ez online filing free He meets the ownership and use tests to exclude the gain from his income. 1040ez online filing free However, he used part of the home as a business office in 2012 and claimed $500 depreciation. 1040ez online filing free Because the business office was part of his home (not separate from it), he does not have to allocate the gain on the sale between the business part of the property and the part used as a home. 1040ez online filing free In addition, he does not have to report any part of the gain on Form 4797. 1040ez online filing free Because Ray was entitled to take a depreciation deduction, he must recognize $500 of the gain as unrecaptured section 1250 gain. 1040ez online filing free He reports his gain, exclusion, and the taxable gain of $500 on Form 8949 and Schedule D (Form 1040). 1040ez online filing free Example 2. 1040ez online filing free The facts are the same as in Example 1 except that Ray was not entitled to claim depreciation for the business use of his home. 1040ez online filing free Since Ray did not claim any depreciation, he can exclude the entire $30,000 gain. 1040ez online filing free Separate Part of Property Used for Business or Rental You may have used part of your property as your home and a separate part of it for business or to produce rental income. 1040ez online filing free Examples are: A working farm on which your house was located, A duplex in w