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Do Military Pay Taxes

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Do Military Pay Taxes

Do military pay taxes 2. Do military pay taxes   Accounting Methods Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Accounting MethodsCash Method Accrual Method Farm Inventory Cash Versus Accrual Method Special Methods of Accounting Combination Method Changes in Methods of Accounting Introduction You must use an accounting method that clearly shows your income and expenses. Do military pay taxes You must also figure your taxable income and file an income tax return for an annual accounting period called a tax year. Do military pay taxes This chapter discusses accounting methods. Do military pay taxes For information on accounting periods, see Publication 538, Accounting Periods and Methods, and the Instructions for Form 1128, Application To Adopt, Change, or Retain a Tax Year. Do military pay taxes Topics - This chapter discusses: Cash method Accrual method Farm inventory Special methods of accounting Changes in methods of accounting Useful Items - You may want to see: Publication 538 Accounting Periods and Methods 535 Business Expenses Form (and Instructions) 1128 Application To Adopt, Change, or Retain a Tax Year 3115 Application for Change in Accounting Method See chapter 16 for information about getting publications and forms. Do military pay taxes Accounting Methods An accounting method is a set of rules used to determine when and how your income and expenses are reported on your tax return. Do military pay taxes Your accounting method includes not only your overall method of accounting, but also the accounting treatment you use for any material item. Do military pay taxes A material item is one that affects the proper time for inclusion of income or allowance of a deduction. Do military pay taxes An item considered material for financial statement purposes is generally also considered material for income tax purposes. Do military pay taxes See Publication 538 for more information. Do military pay taxes You generally choose an accounting method for your farm business when you file your first income tax return that includes a Schedule F (Form 1040), Profit or Loss From Farming. Do military pay taxes If you later want to change your accounting method, you generally must get IRS approval. Do military pay taxes How to obtain IRS approval is discussed later under Changes in Methods of Accounting . Do military pay taxes Types of accounting methods. Do military pay taxes   Generally, you can use any of the following accounting methods. Do military pay taxes Each method is discussed in detail below. Do military pay taxes Cash method. Do military pay taxes Accrual method. Do military pay taxes Special methods of accounting for certain items of income and expenses. Do military pay taxes Combination (hybrid) method using elements of two or more of the above. Do military pay taxes Business and other items. Do military pay taxes   You can account for business and personal items using different accounting methods. Do military pay taxes For example, you can figure your business income under an accrual method, even if you use the cash method to figure personal items. Do military pay taxes Two or more businesses. Do military pay taxes   If you operate two or more separate and distinct businesses, you can use a different accounting method for each business. Do military pay taxes Generally, no business is separate and distinct unless a complete and separate set of books and records is maintained for each business. Do military pay taxes Cash Method Most farmers use the cash method because they find it easier to keep records using the cash method. Do military pay taxes However, certain farm corporations and partnerships and all tax shelters must use an accrual method of accounting. Do military pay taxes See Accrual Method Required , later. Do military pay taxes Income Under the cash method, include in your gross income all items of income you actually or constructively received during the tax year. Do military pay taxes Items of income include money received as well as property or services received. Do military pay taxes If you receive property or services, you must include the fair market value (FMV) of the property or services in income. Do military pay taxes See chapter 3 for information on how to report farm income on your income tax return. Do military pay taxes Constructive receipt. Do military pay taxes   Income is constructively received when an amount is credited to your account or made available to you without restriction. Do military pay taxes You do not need to have possession of the income for it to be treated as income for the tax year. Do military pay taxes If you authorize someone to be your agent and receive income for you, you are considered to have received the income when your agent receives it. Do military pay taxes Income is not constructively received if your receipt of the income is subject to substantial restrictions or limitations. Do military pay taxes Direct payments and counter-cyclical payments. Do military pay taxes   If you received direct payments or counter-cyclical payments under Subtitle A or C of the Farm Security and Rural Investment Act of 2002, you will not be considered to have constructively received a payment merely because you had the option to receive it in the year before it is required to be paid. Do military pay taxes Delaying receipt of income. Do military pay taxes   You cannot hold checks or postpone taking possession of similar property from one tax year to another to avoid paying tax on the income. Do military pay taxes You must report the income in the year the money or property is received or made available to you without restriction. Do military pay taxes Example. Do military pay taxes Frances Jones, a farmer, was entitled to receive a $10,000 payment on a grain contract in December 2013. Do military pay taxes She was told in December that her payment was available. Do military pay taxes She requested not to be paid until January 2014. Do military pay taxes However, she must still include this payment in her 2013 income because it was made available to her in 2013. Do military pay taxes Debts paid by another person or canceled. Do military pay taxes   If your debts are paid by another person or are canceled by your creditors, you may have to report part or all of this debt relief as income. Do military pay taxes If you receive income in this way, you constructively receive the income when the debt is canceled or paid. Do military pay taxes See Cancellation of Debt in chapter 3. Do military pay taxes Deferred payment contract. Do military pay taxes   If you sell an item under a deferred payment contract that calls for payment in a future year, there is no constructive receipt in the year of sale. Do military pay taxes However, if the sales contract states that you have the right to the proceeds of the sale from the buyer at any time after delivery of the item, then you must include the sales price in income in the year of the sale, regardless of when you actually receive payment. Do military pay taxes Example. Do military pay taxes You are a farmer who uses the cash method and a calendar tax year. Do military pay taxes You sell grain in December 2013 under a bona fide arm's-length contract that calls for payment in 2014. Do military pay taxes You include the proceeds from the sale in your 2014 gross income since that is the year payment is received. Do military pay taxes However, if the contract states that you have the right to the proceeds from the buyer at any time after the grain is delivered, you must include the sales price in your 2013 income, regardless of when you actually receive payment. Do military pay taxes Repayment of income. Do military pay taxes   If you include an amount in income and in a later year you have to repay all or part of it, then you can usually deduct the repayment in the year repaid. Do military pay taxes If the repayment is more than $3,000, a special rule applies. Do military pay taxes For details, see Repayments in chapter 11 of Publication 535, Business Expenses. Do military pay taxes Expenses Under the cash method, generally you deduct expenses in the tax year you pay them. Do military pay taxes This includes business expenses for which you contest liability. Do military pay taxes However, you may not be able to deduct an expense paid in advance or you may be required to capitalize certain costs, as explained under Uniform Capitalization Rules in chapter 6. Do military pay taxes See chapter 4 for information on how to deduct farm business expenses on your income tax return. Do military pay taxes Prepayment. Do military pay taxes   Generally, you cannot deduct expenses paid in advance. Do military pay taxes This rule applies to any expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. Do military pay taxes Example. Do military pay taxes On November 1, 2013, you signed and paid $3,600 for a 3-year (36-month) insurance contract for equipment. Do military pay taxes In 2013, you are allowed to deduct only $200 (2/36 x $3,600) of the cost of the policy that is attributable to 2013. Do military pay taxes In 2014, you'll be able to deduct $1,200 (12/36 x $3,600); in 2015, you'll be able to deduct $1,200 (12/36 x $3,600); and in 2016 you'll be able to deduct the remaining balance of $1,000. Do military pay taxes An exception applies if the expense qualifies for the 12-month rule. Do military pay taxes See Publication 538 for more information and examples. Do military pay taxes See chapter 4 for special rules for prepaid farm supplies and prepaid livestock feed. Do military pay taxes Accrual Method Under an accrual method of accounting, you generally report income in the year earned and deduct or capitalize expenses in the year incurred. Do military pay taxes The purpose of an accrual method of accounting is to correctly match income and expenses. Do military pay taxes Certain businesses engaged in farming must use an accrual method of accounting for its farm business and for sales and purchases of inventory items. Do military pay taxes See Accrual Method Required and Farm Inventory , later. Do military pay taxes Income Generally, you include an amount in income for the tax year in which all events that fix your right to receive the income have occurred, and you can determine the amount with reasonable accuracy. Do military pay taxes Under this rule, include an amount in income on the earliest of the following dates. Do military pay taxes When you receive payment. Do military pay taxes When the income amount is due to you. Do military pay taxes When you earn the income. Do military pay taxes When title passes. Do military pay taxes If you use an accrual method of accounting, complete Part III of Schedule F (Form 1040) to report your income. Do military pay taxes Inventory. Do military pay taxes   If you keep an inventory, generally you must use an accrual method of accounting to determine your gross income. Do military pay taxes An inventory is necessary to clearly show income when the production, purchase, or sale of merchandise is an income-producing factor. Do military pay taxes See Publication 538 for more information. Do military pay taxes Also see Farm Inventory , later, for more information on items that must be included in inventory by farmers and inventory valuation methods for farmers. Do military pay taxes Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both of the following apply. Do military pay taxes The all-events test has been met. Do military pay taxes This test is met when: All events have occurred that fix the fact that you have a liability, and The amount of the liability can be determined with reasonable accuracy. Do military pay taxes Economic performance has occurred. Do military pay taxes Economic performance. Do military pay taxes   Generally, you cannot deduct or capitalize a business expense until economic performance occurs. Do military pay taxes If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided or as the property is used. Do military pay taxes If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Do military pay taxes Example. Do military pay taxes Jane, who is a farmer, uses a calendar tax year and an accrual method of accounting. Do military pay taxes She entered into a contract with ABC Farm Consulting in 2012. Do military pay taxes The contract stated that Jane pay ABC Farm Consulting $2,000 in December 2012. Do military pay taxes It further stipulates that ABC Farm Consulting will develop a plan for integrating her farm with a larger farm operation based in a neighboring state by March 1, 2013. Do military pay taxes Jane paid ABC Farm Consulting $2,000 in December 2012. Do military pay taxes Integration of operations according to the plan began in May 2013 and they completed the integration in December 2013. Do military pay taxes Economic performance for Jane's liability in the contract occurs as the services are provided. Do military pay taxes Jane incurs the $2,000 cost in 2013. Do military pay taxes An exception to the economic performance rule allows certain recurring items to be treated as incurred during a tax year even though economic performance has not occurred. Do military pay taxes For more information, see Economic Performance in Publication 538. Do military pay taxes Special rule for related persons. Do military pay taxes   Business expenses and interest owed to a related person who uses the cash method of accounting are not deductible until you make the payment and the corresponding amount is includible in the related person's gross income. Do military pay taxes Determine the relationship for this rule as of the end of the tax year for which the expense or interest would otherwise be deductible. Do military pay taxes For more information, see Internal Revenue Code section 267. Do military pay taxes Accrual Method Required Generally, the following businesses, if engaged in farming, must use an accrual method of accounting. Do military pay taxes A corporation (other than a family corporation) that had gross receipts of more than $1,000,000 for any tax year beginning after 1975. Do military pay taxes A family corporation that had gross receipts of more than $25,000,000 for any tax year beginning after 1985. Do military pay taxes A partnership with a corporation as a partner, if that corporation meets the requirements of (1) or (2) above. Do military pay taxes A tax shelter. Do military pay taxes Note. Do military pay taxes Items (1), (2), and (3) above do not apply to an S corporation or a business operating a nursery or sod farm, or the raising or harvesting of trees (other than fruit and nut trees). Do military pay taxes Family corporation. Do military pay taxes   A family corporation is generally a corporation that meets one of the following ownership requirements. Do military pay taxes Members of the same family own at least 50% of the total combined voting power of all classes of stock entitled to vote and at least 50% of the total shares of all other classes of stock of the corporation. Do military pay taxes Members of two families have owned, directly or indirectly, since October 4, 1976, at least 65% of the total combined voting power of all classes of voting stock and at least 65% of the total shares of all other classes of the corporation's stock. Do military pay taxes Members of three families have owned, directly or indirectly, since October 4, 1976, at least 50% of the total combined voting power of all classes of voting stock and at least 50% of the total shares of all other classes of the corporation's stock. Do military pay taxes For more information on family corporations, see Internal Revenue Code section 447. Do military pay taxes Tax shelter. Do military pay taxes   A tax shelter is a partnership, noncorporate enterprise, or S corporation that meets either of the following tests. Do military pay taxes Its principal purpose is the avoidance or evasion of federal income tax. Do military pay taxes It is a farming syndicate. Do military pay taxes A farming syndicate is an entity that meets either of the following tests. Do military pay taxes Interests in the activity have been offered for sale in an offering required to be registered with a federal or state agency with the authority to regulate the offering of securities for sale. Do military pay taxes More than 35% of the losses during the tax year are allocable to limited partners or limited entrepreneurs. Do military pay taxes   A “limited partner” is one whose personal liability for partnership debts is limited to the money or other property the partner contributed or is required to contribute to the partnership. Do military pay taxes   A “limited entrepreneur” is one who has an interest in an enterprise other than as a limited partner and does not actively participate in the management of the enterprise. Do military pay taxes Farm Inventory If you are required to keep an inventory, you should keep a complete record of your inventory as part of your farm records. Do military pay taxes This record should show the actual count or measurement of the inventory. Do military pay taxes It should also show all factors that enter into its valuation, including quality and weight, if applicable. Do military pay taxes Hatchery business. Do military pay taxes   If you are in the hatchery business, and use an accrual method of accounting, you must include in inventory eggs in the process of incubation. Do military pay taxes Products held for sale. Do military pay taxes   All harvested and purchased farm products held for sale or for feed or seed, such as grain, hay, silage, concentrates, cotton, tobacco, etc. Do military pay taxes , must be included in inventory. Do military pay taxes Supplies. Do military pay taxes   Supplies acquired for sale or that become a physical part of items held for sale must be included in inventory. Do military pay taxes Deduct the cost of supplies in the year used or consumed in operations. Do military pay taxes Do not include incidental supplies in inventory as these are deductible in the year of purchase. Do military pay taxes Livestock. Do military pay taxes   Livestock held primarily for sale must be included in inventory. Do military pay taxes Livestock held for draft, breeding, or dairy purposes can either be depreciated or included in inventory. Do military pay taxes See also Unit-livestock-price method , later. Do military pay taxes If you are in the business of breeding and raising chinchillas, mink, foxes, or other fur-bearing animals, these animals are livestock for inventory purposes. Do military pay taxes Growing crops. Do military pay taxes   Generally, growing crops are not required to be included in inventory. Do military pay taxes However, if the crop has a preproductive period of more than 2 years, you may have to capitalize (or include in inventory) costs associated with the crop. Do military pay taxes See Uniform capitalization rules below. Do military pay taxes Also see Uniform Capitalization Rules in  chapter 6. Do military pay taxes Items to include in inventory. Do military pay taxes   Your inventory should include all items held for sale, or for use as feed, seed, etc. Do military pay taxes , whether raised or purchased, that are unsold at the end of the year. Do military pay taxes Uniform capitalization rules. Do military pay taxes   The following applies if you are required to use an accrual method of accounting. Do military pay taxes The uniform capitalization rules apply to all costs of raising a plant, even if the preproductive period of raising a plant is 2 years or less. Do military pay taxes The costs of animals are subject to the uniform capitalization rules. Do military pay taxes Inventory valuation methods. Do military pay taxes   The following methods, described below, are those generally available for valuing inventory. Do military pay taxes The method you use must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. Do military pay taxes Cost. Do military pay taxes Lower of cost or market. Do military pay taxes Farm-price method. Do military pay taxes Unit-livestock-price method. Do military pay taxes Cost and lower of cost or market methods. Do military pay taxes   See Publication 538 for information on these valuation methods. Do military pay taxes If you value your livestock inventory at cost or the lower of cost or market, you do not need IRS approval to change to the unit-livestock-price method. Do military pay taxes However, if you value your livestock inventory using the farm-price method, then you must obtain permission from the IRS to change to the unit-livestock-price method. Do military pay taxes Farm-price method. Do military pay taxes   Under this method, each item, whether raised or purchased, is valued at its market price less the direct cost of disposition. Do military pay taxes Market price is the current price at the nearest market in the quantities you usually sell. Do military pay taxes Cost of disposition includes broker's commissions, freight, hauling to market, and other marketing costs. Do military pay taxes If you use this method, you must use it for your entire inventory, except that livestock can be inventoried under the unit-livestock-price method. Do military pay taxes Unit-livestock-price method. Do military pay taxes   This method recognizes the difficulty of establishing the exact costs of producing and raising each animal. Do military pay taxes You group or classify livestock according to type and age and use a standard unit price for each animal within a class or group. Do military pay taxes The unit price you assign should reasonably approximate the normal costs incurred in producing the animals in such classes. Do military pay taxes Unit prices and classifications are subject to approval by the IRS on examination of your return. Do military pay taxes You must annually reevaluate your unit livestock prices and adjust the prices upward or downward to reflect increases or decreases in the costs of raising livestock. Do military pay taxes IRS approval is not required for these adjustments. Do military pay taxes Any other changes in unit prices or classifications do require IRS approval. Do military pay taxes   If you use this method, include all raised livestock in inventory, regardless of whether they are held for sale or for draft, breeding, sport, or dairy purposes. Do military pay taxes This method accounts only for the increase in cost of raising an animal to maturity. Do military pay taxes It does not provide for any decrease in the animal's market value after it reaches maturity. Do military pay taxes Also, if you raise cattle, you are not required to inventory hay you grow to feed your herd. Do military pay taxes   Do not include sold or lost animals in the year-end inventory. Do military pay taxes If your records do not show which animals were sold or lost, treat the first animals acquired as sold or lost. Do military pay taxes The animals on hand at the end of the year are considered those most recently acquired. Do military pay taxes   You must include in inventory all livestock purchased primarily for sale. Do military pay taxes You can choose either to include in inventory or depreciate livestock purchased for draft, breeding, sport or dairy purposes. Do military pay taxes However, you must be consistent from year to year, regardless of the method you have chosen. Do military pay taxes You cannot change your method without obtaining approval from the IRS. Do military pay taxes   You must include in inventory animals purchased after maturity or capitalize them at their purchase price. Do military pay taxes If the animals are not mature at purchase, increase the cost at the end of each tax year according to the established unit price. Do military pay taxes However, in the year of purchase, do not increase the cost of any animal purchased during the last 6 months of the year. Do military pay taxes This “no increase” rule does not apply to tax shelters which must make an adjustment for any animal purchased during the year. Do military pay taxes It also does not apply to taxpayers that must make an adjustment to reasonably reflect the particular period in the year in which animals are purchased, if necessary to avoid significant distortions in income. Do military pay taxes Uniform capitalization rules. Do military pay taxes   A farmer can determine costs required to be allocated under the uniform capitalization rules by using the farm-price or unit-livestock-price inventory method. Do military pay taxes This applies to any plant or animal, even if the farmer does not hold or treat the plant or animal as inventory property. Do military pay taxes Cash Versus Accrual Method The following examples compare the cash and accrual methods of accounting. Do military pay taxes Example 1. Do military pay taxes You are a farmer who uses an accrual method of accounting. Do military pay taxes You keep your books on the calendar year basis. Do military pay taxes You sell grain in December 2013 but you are not paid until January 2014. Do military pay taxes Because the accrual method was used and 2013 was the tax year in which the grain was sold, you must both include the sales proceeds and deduct the costs incurred in producing the grain on your 2013 tax return. Do military pay taxes Example 2. Do military pay taxes Assume the same facts as in Example 1 except that you use the cash method and there was no constructive receipt of the sales proceeds in 2013. Do military pay taxes Under this method, you include the sales proceeds in income for 2014, the year you receive payment. Do military pay taxes Deduct the costs of producing the grain in the year you pay for them. Do military pay taxes Special Methods of Accounting There are special methods of accounting for certain items of income and expense. Do military pay taxes Crop method. Do military pay taxes   If you do not harvest and dispose of your crop in the same tax year that you plant it, you can, with IRS approval, use the crop method of accounting. Do military pay taxes You cannot use the crop method for any tax return, including your first tax return, unless you receive approval from the IRS. Do military pay taxes Under this method, you deduct the entire cost of producing the crop, including the expense of seed or young plants, in the year you realize income from the crop. Do military pay taxes    See chapter 4 for details on deducting the costs of operating a farm. Do military pay taxes Also see Regulations section 1. Do military pay taxes 162-12. Do military pay taxes Other special methods. Do military pay taxes   Other special methods of accounting apply to the following items. Do military pay taxes Amortization, see chapter 7. Do military pay taxes Casualties, see chapter 11. Do military pay taxes Condemnations, see chapter 11. Do military pay taxes Depletion, see chapter 7. Do military pay taxes Depreciation, see chapter 7. Do military pay taxes Farm business expenses, see chapter 4. Do military pay taxes Farm income, see chapter 3. Do military pay taxes Installment sales, see chapter 10. Do military pay taxes Soil and water conservation expenses, see chapter 5. Do military pay taxes Thefts, see chapter 11. Do military pay taxes Combination Method Generally, you can use any combination of cash, accrual, and special methods of accounting if the combination clearly shows your income and expenses and you use it consistently. Do military pay taxes However, the following restrictions apply. Do military pay taxes If you use the cash method for figuring your income, you must use the cash method for reporting your expenses. Do military pay taxes If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. Do military pay taxes Changes in Methods of Accounting A change in your method of accounting includes a change in: Your overall method, such as from the cash method to an accrual method, and Your treatment of any material item, such as a change in your method of valuing inventory (for example, a change from the farm-price method to the unit-livestock-price method, discussed earlier). Do military pay taxes Generally, once you have set up your accounting method, you must receive approval from the IRS before you can change to another method of accounting. Do military pay taxes You may also have to pay a fee. Do military pay taxes To obtain approval, you must generally file Form 3115. Do military pay taxes There are instances when you can obtain automatic consent to change certain methods of accounting. Do military pay taxes See the List of Automatic Accounting Method Changes located in the Instructions for Form 3115. Do military pay taxes For more information on changes in methods of accounting, see Form 3115 and the Instructions for Form 3115. Do military pay taxes Also see Publication 538. Do military pay taxes Prev  Up  Next   Home   More Online Publications
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Do military pay taxes 15. Do military pay taxes   Selling Your Home Table of Contents Reminder Introduction Useful Items - You may want to see: Main Home Figuring Gain or LossSelling Price Amount Realized Adjusted Basis Amount of Gain or Loss Dispositions Other Than Sales Determining Basis Excluding the GainMaximum Exclusion Ownership and Use Tests Reduced Maximum Exclusion Business Use or Rental of Home Reporting the SaleSeller-financed mortgage. Do military pay taxes More information. Do military pay taxes Special SituationsException for sales to related persons. Do military pay taxes Recapturing (Paying Back) a Federal Mortgage Subsidy Reminder Home sold with undeducted points. Do military pay taxes  If you have not deducted all the points you paid to secure a mortgage on your old home, you may be able to deduct the remaining points in the year of the sale. Do military pay taxes See Mortgage ending early under Points in chapter 23. Do military pay taxes Introduction This chapter explains the tax rules that apply when you sell your main home. Do military pay taxes In most cases, your main home is the one in which you live most of the time. Do military pay taxes If you sold your main home in 2013, you may be able to exclude from income any gain up to a limit of $250,000 ($500,000 on a joint return in most cases). Do military pay taxes See Excluding the Gain , later. Do military pay taxes Generally, if you can exclude all the gain, you do not need to report the sale on your tax return. Do military pay taxes If you have gain that cannot be excluded, it is taxable. Do military pay taxes Report it on Form 8949, Sales and Other Dispositions of Capital Assets, and Schedule D (Form 1040). Do military pay taxes You may also have to complete Form 4797, Sales of Business Property. Do military pay taxes See Reporting the Sale , later. Do military pay taxes If you have a loss on the sale, you generally cannot deduct it on your return. Do military pay taxes However, you may need to report it. Do military pay taxes See Reporting the Sale , later. Do military pay taxes The following are main topics in this chapter. Do military pay taxes Figuring gain or loss. Do military pay taxes Basis. Do military pay taxes Excluding the gain. Do military pay taxes Ownership and use tests. Do military pay taxes Reporting the sale. Do military pay taxes Other topics include the following. Do military pay taxes Business use or rental of home. Do military pay taxes Recapturing a federal mortgage subsidy. Do military pay taxes Useful Items - You may want to see: Publication 523 Selling Your Home 530 Tax Information for Homeowners 547 Casualties, Disasters, and Thefts Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 982 Reduction of Tax Attributes Due to Discharge of Indebtedness 8828 Recapture of Federal Mortgage Subsidy 8949 Sales and Other Dispositions of Capital Assets Main Home This section explains the term “main home. Do military pay taxes ” 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. Do military pay taxes To exclude gain under the rules of this chapter, 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. Do military pay taxes Land. Do military pay taxes   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. Do military pay taxes However, if you sell vacant land used as part of your main home and that is adjacent to it, you may be able to exclude the gain from the sale under certain circumstances. Do military pay taxes See Vacant land under Main Home in Publication 523 for more information. Do military pay taxes Example. Do military pay taxes You buy a piece of land and move your main home to it. Do military pay taxes Then you sell the land on which your main home was located. Do military pay taxes This sale is not considered a sale of your main home, and you cannot exclude any gain on the sale of the land. Do military pay taxes More than one home. Do military pay taxes   If you have more than one home, you can exclude gain only from the sale of your main home. Do military pay taxes You must include in income gain from the sale of any other home. Do military pay taxes If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time during the year. Do military pay taxes Example 1. Do military pay taxes You own two homes, one in New York and one in Florida. Do military pay taxes 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. Do military pay taxes In the absence of facts and circumstances indicating otherwise, the New York home is your main home. Do military pay taxes You would be eligible to exclude the gain from the sale of the New York home but not of the Florida home in 2013. Do military pay taxes Example 2. Do military pay taxes You own a house, but you live in another house that you rent. Do military pay taxes The rented house is your main home. Do military pay taxes Example 3. Do military pay taxes You own two homes, one in Virginia and one in New Hampshire. Do military pay taxes In 2009 and 2010, you lived in the Virginia home. Do military pay taxes In 2011 and 2012, you lived in the New Hampshire home. Do military pay taxes In 2013, you lived again in the Virginia home. Do military pay taxes Your main home in 2009, 2010, and 2013 is the Virginia home. Do military pay taxes Your main home in 2011 and 2012 is the New Hampshire home. Do military pay taxes You would be eligible to exclude gain from the sale of either home (but not both) in 2013. Do military pay taxes Property used partly as your main home. Do military pay taxes   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. Do military pay taxes For details, see Business Use or Rental of Home , later. Do military pay taxes 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. Do military pay taxes Subtract the adjusted basis from the amount realized to get your gain or loss. Do military pay taxes     Selling price     − Selling expenses       Amount realized       Amount realized     − Adjusted basis       Gain or loss   Selling Price The selling price is the total amount you receive for your home. Do military pay taxes 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. Do military pay taxes Payment by employer. Do military pay taxes   You may have to sell your home because of a job transfer. Do military pay taxes 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. Do military pay taxes 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. Do military pay taxes Option to buy. Do military pay taxes   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. Do military pay taxes If the option is not exercised, you must report the amount as ordinary income in the year the option expires. Do military pay taxes Report this amount on Form 1040, line 21. Do military pay taxes Form 1099-S. Do military pay taxes   If you received Form 1099-S, Proceeds From Real Estate Transactions, box 2 (Gross proceeds) should show the total amount you received for your home. Do military pay taxes   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. Do military pay taxes Instead, box 4 will be checked to indicate your receipt or expected receipt of these items. Do military pay taxes Amount Realized The amount realized is the selling price minus selling expenses. Do military pay taxes Selling expenses. Do military pay taxes   Selling expenses include: Commissions, Advertising fees, Legal fees, and Loan charges paid by the seller, such as loan placement fees or “points. Do military pay taxes ” Adjusted Basis While you owned your home, you may have made adjustments (increases or decreases) to the basis. Do military pay taxes This adjusted basis must be determined before you can figure gain or loss on the sale of your home. Do military pay taxes For information on how to figure your home's adjusted basis, see Determining Basis , later. Do military pay taxes Amount of Gain or Loss To figure the amount of gain or loss, compare the amount realized to the adjusted basis. Do military pay taxes Gain on sale. Do military pay taxes   If the amount realized is more than the adjusted basis, the difference is a gain and, except for any part you can exclude, in most cases is taxable. Do military pay taxes Loss on sale. Do military pay taxes   If the amount realized is less than the adjusted basis, the difference is a loss. Do military pay taxes A loss on the sale of your main home cannot be deducted. Do military pay taxes Jointly owned home. Do military pay taxes   If you and your spouse sell your jointly owned home and file a joint return, you figure your gain or loss as one taxpayer. Do military pay taxes Separate returns. Do military pay taxes   If you file separate returns, each of you must figure your own gain or loss according to your ownership interest in the home. Do military pay taxes Your ownership interest is generally determined by state law. Do military pay taxes Joint owners not married. Do military pay taxes   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. Do military pay taxes Each of you applies the rules discussed in this chapter on an individual basis. Do military pay taxes Dispositions Other Than Sales Some special rules apply to other dispositions of your main home. Do military pay taxes Foreclosure or repossession. Do military pay taxes   If your home was foreclosed on or repossessed, you have a disposition. Do military pay taxes See Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments, to determine if you have ordinary income, gain, or loss. Do military pay taxes Abandonment. Do military pay taxes   If you abandon your home, see Publication 4681 to determine if you have ordinary income, gain, or loss. Do military pay taxes Trading (exchanging) homes. Do military pay taxes   If you trade your old home for another home, treat the trade as a sale and a purchase. Do military pay taxes Example. Do military pay taxes You owned and lived in a home with an adjusted basis of $41,000. Do military pay taxes 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. Do military pay taxes This is treated as a sale of your old home for $50,000 with a gain of $9,000 ($50,000 – $41,000). Do military pay taxes 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). Do military pay taxes Transfer to spouse. Do military pay taxes   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. Do military pay taxes This is true even if you receive cash or other consideration for the home. Do military pay taxes As a result, the rules in this chapter do not apply. Do military pay taxes More information. Do military pay taxes   If you need more information, see Transfer to spouse in Publication 523 and Property Settlements in Publication 504, Divorced or Separated Individuals. Do military pay taxes Involuntary conversion. Do military pay taxes   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. Do military pay taxes 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 . Do military pay taxes Determining Basis You need to know your basis in your home to figure any gain or loss when you sell it. Do military pay taxes Your basis in your home is determined by how you got the home. Do military pay taxes Generally, your basis is its cost if you bought it or built it. Do military pay taxes If you got it in some other way (inheritance, gift, etc. Do military pay taxes ), your basis is generally either its fair market value when you received it or the adjusted basis of the previous owner. Do military pay taxes While you owned your home, you may have made adjustments (increases or decreases) to your home's basis. Do military pay taxes 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. Do military pay taxes See Adjusted Basis , later. Do military pay taxes You can find more information on basis and adjusted basis in chapter 13 of this publication and in Publication 523. Do military pay taxes Cost As Basis The cost of property is the amount you paid for it in cash, debt obligations, other property, or services. Do military pay taxes Purchase. Do military pay taxes   If you bought your home, your basis is its cost to you. Do military pay taxes This includes the purchase price and certain settlement or closing costs. Do military pay taxes 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. Do military pay taxes If you build, or contract to build, a new home, your purchase price can include costs of construction, as discussed in Publication 523. Do military pay taxes Settlement fees or closing costs. Do military pay taxes   When you bought your home, you may have paid settlement fees or closing costs in addition to the contract price of the property. Do military pay taxes 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. Do military pay taxes 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). Do military pay taxes    Chapter 13 lists some of the settlement fees and closing costs that you can include in the basis of property, including your home. Do military pay taxes It also lists some settlement costs that cannot be included in basis. Do military pay taxes   Also see Publication 523 for additional items and a discussion of basis other than cost. Do military pay taxes Adjusted Basis Adjusted basis is your cost or other basis increased or decreased by certain amounts. Do military pay taxes To figure your adjusted basis, you can use Worksheet 1 in Publication 523. Do military pay taxes Do not use Worksheet 1 if you acquired an interest in your home from a decedent who died in 2010 and whose executor filed Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent. Do military pay taxes Increases to basis. Do military pay taxes   These include the following. Do military pay taxes Additions and other improvements that have a useful life of more than 1 year. Do military pay taxes Special assessments for local improvements. Do military pay taxes Amounts you spent after a casualty to restore damaged property. Do military pay taxes Improvements. Do military pay taxes   These add to the value of your home, prolong its useful life, or adapt it to new uses. Do military pay taxes You add the cost of additions and other improvements to the basis of your property. Do military pay taxes   For example, putting a recreation room or another bathroom in your unfinished basement, putting up a new fence, putting in new plumbing or wiring, putting on a new roof, or paving your unpaved driveway are improvements. Do military pay taxes An addition to your house, such as a new deck, a sunroom, or a new garage, is also an improvement. Do military pay taxes Repairs. Do military pay taxes   These maintain your home in good condition but do not add to its value or prolong its life. Do military pay taxes You do not add their cost to the basis of your property. Do military pay taxes   Examples of repairs include repainting your house inside or outside, fixing your gutters or floors, repairing leaks or plastering, and replacing broken window panes. Do military pay taxes Decreases to basis. Do military pay taxes   These include the following. Do military pay taxes Discharge of qualified principal residence indebtedness that was excluded from income. Do military pay taxes Some or all of the cancellation of debt income that was excluded due to your bankruptcy or insolvency. Do military pay taxes For details, see Publication 4681. Do military pay taxes Gain you postponed from the sale of a previous home before May 7, 1997. Do military pay taxes Deductible casualty losses. Do military pay taxes Insurance payments you received or expect to receive for casualty losses. Do military pay taxes Payments you received for granting an easement or right-of-way. Do military pay taxes Depreciation allowed or allowable if you used your home for business or rental purposes. Do military pay taxes Energy-related credits allowed for expenditures made on the residence. Do military pay taxes (Reduce the increase in basis otherwise allowable for expenditures on the residence by the amount of credit allowed for those expenditures. Do military pay taxes ) Adoption credit you claimed for improvements added to the basis of your home. Do military pay taxes Nontaxable payments from an adoption assistance program of your employer you used for improvements you added to the basis of your home. Do military pay taxes 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. Do military pay taxes 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. Do military pay taxes District of Columbia first-time homebuyer credit (allowed on the purchase of a principal residence in the District of Columbia beginning on August 5, 1997 and before January 1, 2012). Do military pay taxes General sales taxes (allowed beginning 2004 and ending before 2014) 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. Do military pay taxes Discharges of qualified principal residence indebtedness. Do military pay taxes   You may be able to exclude from gross income a discharge of qualified principal residence indebtedness. Do military pay taxes This exclusion applies to discharges made after 2006 and before 2014. Do military pay taxes If you choose to exclude this income, you must reduce (but not below zero) the basis of the principal residence by the amount excluded from your gross income. Do military pay taxes   File Form 982 with your tax return. Do military pay taxes See the form's instructions for detailed information. Do military pay taxes Recordkeeping. Do military pay taxes You should keep records to prove your home's adjusted basis. Do military pay taxes 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. Do military pay taxes 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. Do military pay taxes Keep records proving the basis of both homes as long as they are needed for tax purposes. Do military pay taxes 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 report 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. Do military pay taxes Excluding the Gain You may qualify to exclude from your income all or part of any gain from the sale of your main home. Do military pay taxes 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. Do military pay taxes To qualify, you must meet the ownership and use tests described later. Do military pay taxes 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. Do military pay taxes You can use Worksheet 2 in Publication 523 to figure the amount of your exclusion and your taxable gain, if any. Do military pay taxes If you have any taxable gain from the sale of your home, you may have to increase your withholding or make estimated tax payments. Do military pay taxes See Publication 505, Tax Withholding and Estimated Tax. Do military pay taxes 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. Do military pay taxes You meet the ownership test. Do military pay taxes You meet the use test. Do military pay taxes During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home. Do military pay taxes For details on gain allocated to periods of nonqualified use, see Periods of nonqualified use , later. Do military pay taxes 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 . Do military pay taxes Ownership and Use Tests To claim the exclusion, you must meet the ownership and use tests. Do military pay taxes 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). Do military pay taxes Exception. Do military pay taxes   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. Do military pay taxes However, the maximum amount you may be able to exclude will be reduced. Do military pay taxes See Reduced Maximum Exclusion , later. Do military pay taxes Example 1—home owned and occupied for at least 2 years. Do military pay taxes Mya bought and moved into her main home in September 2011. Do military pay taxes She sold the home at a gain in October 2013. Do military pay taxes 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. Do military pay taxes She meets the ownership and use tests. Do military pay taxes Example 2—ownership test met but use test not met. Do military pay taxes Ayden bought a home, lived in it for 6 months, moved out, and never occupied the home again. Do military pay taxes He later sold the home for a gain. Do military pay taxes He owned the home during the entire 5-year period ending on the date of sale. Do military pay taxes He meets the ownership test but not the use test. Do military pay taxes He cannot exclude any part of his gain on the sale unless he qualified for a reduced maximum exclusion (explained later). Do military pay taxes 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. Do military pay taxes 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. Do military pay taxes Temporary absence. Do military pay taxes   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. Do military pay taxes The following examples assume that the reduced maximum exclusion (discussed later) does not apply to the sales. Do military pay taxes Example 1. Do military pay taxes David Johnson, who is single, bought and moved into his home on February 1, 2011. Do military pay taxes Each year during 2011 and 2012, David left his home for a 2-month summer vacation. Do military pay taxes David sold the house on March 1, 2013. Do military pay taxes Although the total time David used his home is less than 2 years (21 months), he meets the requirement and may exclude gain. Do military pay taxes 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. Do military pay taxes Example 2. Do military pay taxes Professor Paul Beard, who is single, bought and moved into a house on August 18, 2010. Do military pay taxes He lived in it as his main home continuously until January 5, 2012, when he went abroad for a 1-year sabbatical leave. Do military pay taxes On February 6, 2013, 1 month after returning from the leave, Paul sold the house at a gain. Do military pay taxes Because his leave was not a short temporary absence, he cannot include the period of leave to meet the 2-year use test. Do military pay taxes He cannot exclude any part of his gain, because he did not use the residence for the required 2 years. Do military pay taxes Ownership and use tests met at different times. Do military pay taxes   You can meet the ownership and use tests during different 2-year periods. Do military pay taxes However, you must meet both tests during the 5-year period ending on the date of the sale. Do military pay taxes Example. Do military pay taxes Beginning in 2002, Helen Jones lived in a rented apartment. Do military pay taxes The apartment building was later converted to condominiums, and she bought her same apartment on December 3, 2010. Do military pay taxes In 2011, Helen became ill and on April 14 of that year she moved to her daughter's home. Do military pay taxes On July 12, 2013, while still living in her daughter's home, she sold her condominium. Do military pay taxes 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. Do military pay taxes She owned her condominium from December 3, 2010, to July 12, 2013 (more than 2 years). Do military pay taxes She lived in the property from July 13, 2008 (the beginning of the 5-year period), to April 14, 2011 (more than 2 years). Do military pay taxes 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. Do military pay taxes Cooperative apartment. Do military pay taxes   If you sold stock as a tenant-stockholder 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 entitles you to occupy as your main home for at least 2 years. Do military pay taxes Exceptions to Ownership and Use Tests The following sections contain exceptions to the ownership and use tests for certain taxpayers. Do military pay taxes Exception for individuals with a disability. Do military pay taxes   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. Do military pay taxes 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. Do military pay taxes 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. Do military pay taxes Previous home destroyed or condemned. Do military pay taxes   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. Do military pay taxes This rule applies if any part of the basis of the home you sold depended on the basis of the destroyed or condemned home. Do military pay taxes 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. Do military pay taxes Members of the uniformed services or Foreign Service, employees of the intelligence community, or employees or volunteers of the Peace Corps. Do military pay taxes   You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve on “qualified official extended duty” as a member of the uniformed services or Foreign Service of the United States, or as an employee of the intelligence community. Do military pay taxes 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" or as an enrolled volunteer or volunteer leader of the Peace Corps. Do military pay taxes 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. Do military pay taxes   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. Do military pay taxes For more information about the suspension of the 5-year test period, see Members of the uniformed services or Foreign Service, employees of the intelligence community, or employees or volunteers of the Peace Corps in Publication 523. Do military pay taxes 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. Do military pay taxes (But see Special rules for joint returns , next. Do military pay taxes ) Special rules for joint returns. Do military pay taxes   You can exclude up to $500,000 of the gain on the sale of your main home if all of the following are true. Do military pay taxes You are married and file a joint return for the year. Do military pay taxes Either you or your spouse meets the ownership test. Do military pay taxes Both you and your spouse meet the use test. Do military pay taxes 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. Do military pay taxes 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. Do military pay taxes For this purpose, each spouse is treated as owning the property during the period that either spouse owned the property. Do military pay taxes Example 1—one spouse sells a home. Do military pay taxes Emily sells her home in June 2013 for a gain of $300,000. Do military pay taxes She marries Jamie later in the year. Do military pay taxes She meets the ownership and use tests, but Jamie does not. Do military pay taxes Emily can exclude up to $250,000 of gain on a separate or joint return for 2013. Do military pay taxes The $500,000 maximum exclusion for certain joint returns does not apply because Jamie does not meet the use test. Do military pay taxes Example 2—each spouse sells a home. Do military pay taxes 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. Do military pay taxes He meets the ownership and use tests on his home, but Emily does not. Do military pay taxes Emily can exclude $250,000 of gain and Jamie can exclude $200,000 of gain on the respective sales of their individual homes. Do military pay taxes However, Emily cannot use Jamie's unused exclusion to exclude more than $250,000 of gain. Do military pay taxes Therefore, Emily and Jamie must recognize $50,000 of gain on the sale of Emily's home. Do military pay taxes 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. Do military pay taxes Sale of main home by surviving spouse. Do military pay taxes   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. Do military pay taxes   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. Do military pay taxes The sale or exchange took place after 2008. Do military pay taxes The sale or exchange took place no more than 2 years after the date of death of your spouse. Do military pay taxes You have not remarried. Do military pay taxes You and your spouse met the use test at the time of your spouse's death. Do military pay taxes You or your spouse met the ownership test at the time of your spouse's death. Do military pay taxes Neither you nor your spouse excluded gain from the sale of another home during the last 2 years. Do military pay taxes Example. Do military pay taxes   Harry owned and used a house as his main home since 2009. Do military pay taxes Harry and Wilma married on July 1, 2013, and from that date they use Harry's house as their main home. Do military pay taxes Harry died on August 15, 2013, and Wilma inherited the property. Do military pay taxes Wilma sold the property on September 3, 2013, at which time she had not remarried. Do military pay taxes 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. Do military pay taxes Home transferred from spouse. Do military pay taxes   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. Do military pay taxes Use of home after divorce. Do military pay taxes   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. Do military pay taxes 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. Do military pay taxes 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. Do military pay taxes In both cases, to qualify for a reduced exclusion, the sale of your main home must be due to one of the following reasons. Do military pay taxes A change in place of employment. Do military pay taxes Health. Do military pay taxes Unforeseen circumstances. Do military pay taxes Unforeseen circumstances. Do military pay taxes   The sale of your main home is because of an unforeseen circumstance if your primary reason for the sale is the occurrence of an event that you could not reasonably have anticipated before buying and occupying your main home. Do military pay taxes   See Publication 523 for more information and to use Worksheet 3 to figure your reduced maximum exclusion. Do military pay taxes 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. Do military pay taxes But you must meet the ownership and use tests. Do military pay taxes Periods of nonqualified use. Do military pay taxes   In most cases, gain from the sale or exchange of your main home will not qualify for the exclusion to the extent that the gains are allocated to periods of nonqualified use. Do military pay taxes Nonqualified use is any period after 2008 during which neither you nor your spouse (or your former spouse) used the property as a main home with the following exceptions. Do military pay taxes Exceptions. Do military pay taxes   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. Do military pay taxes The gain resulting from the sale of the property is allocated between qualified and nonqualified use periods based on the amount of time the property was held for qualified and nonqualified use. Do military pay taxes Gain from the sale or exchange of a main home allocable to periods of qualified use will continue to qualify for the exclusion for the sale of your main home. Do military pay taxes Gain from the sale or exchange of property allocable to nonqualified use will not qualify for the exclusion. Do military pay taxes Calculation. Do military pay taxes   To figure the portion of the gain allocated to the period of nonqualified use, multiply the gain 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, in Publication 523. Do military pay taxes Example 1. Do military pay taxes On May 23, 2007, Amy, who is unmarried for all years in this example, bought a house. Do military pay taxes 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. Do military pay taxes The house was rented from June 1, 2009, to March 31, 2011. Do military pay taxes Amy claimed depreciation deductions in 2009 through 2011 totaling $10,000. Do military pay taxes 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. Do military pay taxes 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. Do military pay taxes Five Year Period Used as  Home Used as  Rental 1/31/08 – 5/31/09 16 months       6/1/09 – 3/31/11   22 months 4/1/11 – 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. Do military pay taxes Amy divides 668 by 2,080 and obtains a decimal (rounded to at least three decimal places) of 0. Do military pay taxes 321. Do military pay taxes To figure her gain attributable to the period of nonqualified use, she multiplies $190,000 (the gain not attributable to the $10,000 depreciation deduction) by 0. Do military pay taxes 321. Do military pay taxes Because the gain attributable to periods of nonqualified use is $60,990, Amy can exclude $129,010 of her gain. Do military pay taxes Example 2. Do military pay taxes William owned and used a house as his main home from 2007 through 2010. Do military pay taxes On January 1, 2011, he moved to another state. Do military pay taxes He rented his house from that date until April 30, 2013, when he sold it. Do military pay taxes 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. Do military pay taxes He must report the sale on Form 4797 because it was rental property at the time of sale. Do military pay taxes 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. Do military pay taxes Because he met the ownership and use tests, he can exclude gain up to $250,000. Do military pay taxes 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. Do military pay taxes Depreciation after May 6, 1997. Do military pay taxes   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. Do military pay taxes 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. Do military pay taxes See Publication 544 for more information. Do military pay taxes Property used partly for business or rental. Do military pay taxes   If you used property partly as a home and partly for business or to produce rental income, see Publication 523. Do military pay taxes Reporting the Sale Do not report the 2013 sale of your main home on your tax return unless: You have a gain and do not qualify to exclude all of it, You have a gain and choose not to exclude it, or You received Form 1099-S. Do military pay taxes If any of these conditions apply, report the entire gain or loss. Do military pay taxes For details on how to report the gain or loss, see the Instructions for Schedule D (Form 1040) and the Instructions for Form 8949. Do military pay taxes If you used the home for business or to produce rental income, you may have to use Form 4797 to report the sale of the business or rental part (or the sale of the entire property if used entirely for business or rental). Do military pay taxes See Business Use or Rental of Home in Publication 523 and the Instructions for Form 4797. Do military pay taxes Installment sale. Do military pay taxes    Some sales are made under arrangements that provide for part or all of the selling price to be paid in a later year. Do military pay taxes These sales are called “installment sales. Do military pay taxes ” If you finance the buyer's purchase of your home yourself instead of having the buyer get a loan or mortgage from a bank, you probably have an installment sale. Do military pay taxes You may be able to report the part of the gain you cannot exclude on the installment basis. Do military pay taxes    Use Form 6252, Installment Sale Income, to report the sale. Do military pay taxes Enter your exclusion on line 15 of Form 6252. Do military pay taxes Seller-financed mortgage. Do military pay taxes   If you sell your home and hold a note, mortgage, or other financial agreement, the payments you receive in most cases consist of both interest and principal. Do military pay taxes You must separately report as interest income the interest you receive as part of each payment. Do military pay taxes If the buyer of your home uses the property as a main or second home, you must also report the name, address, and social security number (SSN) of the buyer on line 1 of Schedule B (Form 1040A or 1040). Do military pay taxes The buyer must give you his or her SSN, and you must give the buyer your SSN. Do military pay taxes Failure to meet these requirements may result in a $50 penalty for each failure. Do military pay taxes If either you or the buyer does not have and is not eligible to get an SSN, see Social Security Number in chapter 1. Do military pay taxes More information. Do military pay taxes   For more information on installment sales, see Publication 537, Installment Sales. Do military pay taxes Special Situations The situations that follow may affect your exclusion. Do military pay taxes Sale of home acquired in a like-kind exchange. Do military pay taxes   You cannot claim the exclusion if: You acquired your home in a like-kind exchange (also known as a section 1031 exchange), or your basis in your home is determined by reference to the basis of the home in the hands of the person who acquired the property in a like-kind exchange (for example, you received the home from that person as a gift), and You sold the home during the 5-year period beginning with the date your home was acquired in the like-kind exchange. Do military pay taxes Gain from a like-kind exchange is not taxable at the time of the exchange. Do military pay taxes This means that gain will not be taxed until you sell or otherwise dispose of the property you receive. Do military pay taxes To defer gain from a like-kind exchange, you must have exchanged business or investment property for business or investment property of a like kind. Do military pay taxes For more information about like-kind exchanges, see Publication 544, Sales and Other Dispositions of Assets. Do military pay taxes Home relinquished in a like-kind exchange. Do military pay taxes   If you use your main home partly for business or rental purposes and then exchange the home for another property, see Publication 523. Do military pay taxes Expatriates. Do military pay taxes   You cannot claim the exclusion if the expatriation tax applies to you. Do military pay taxes The expatriation tax applies to certain U. Do military pay taxes S. Do military pay taxes citizens who have renounced their citizenship (and to certain long-term residents who have ended their residency). Do military pay taxes For more information about the expatriation tax, see Expatriation Tax in chapter 4 of Publication 519, U. Do military pay taxes S. Do military pay taxes Tax Guide for Aliens. Do military pay taxes Home destroyed or condemned. Do military pay taxes   If your home was destroyed or condemned, any gain (for example, because of insurance proceeds you received) qualifies for the exclusion. Do military pay taxes   Any part of the gain that cannot be excluded (because it is more than the maximum exclusion) can be postponed under the rules explained in: Publication 547, in the case of a home that was destroyed, or Publication 544, chapter 1, in the case of a home that was condemned. Do military pay taxes Sale of remainder interest. Do military pay taxes   Subject to the other rules in this chapter, you can choose to exclude gain from the sale of a remainder interest in your home. Do military pay taxes If you make this choice, you cannot choose to exclude gain from your sale of any other interest in the home that you sell separately. Do military pay taxes Exception for sales to related persons. Do military pay taxes   You cannot exclude gain from the sale of a remainder interest in your home to a related person. Do military pay taxes Related persons include your brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc. Do military pay taxes ), and lineal descendants (children, grandchildren, etc. Do military pay taxes ). Do military pay taxes Related persons also include certain corporations, partnerships, trusts, and exempt organizations. Do military pay taxes Recapturing (Paying Back) a Federal Mortgage Subsidy If you financed your home under a federally subsidized program (loans from tax-exempt qualified mortgage bonds or loans with mortgage credit certificates), you may have to recapture all or part of the benefit you received from that program when you sell or otherwise dispose of your home. Do military pay taxes You recapture the benefit by increasing your federal income tax for the year of the sale. Do military pay taxes You may have to pay this recapture tax even if you can exclude your gain from income under the rules discussed earlier; that exclusion does not affect the recapture tax. Do military pay taxes Loans subject to recapture rules. Do military pay taxes   The recapture applies to loans that: Came from the proceeds of qualified mortgage bonds, or Were based on mortgage credit certificates. Do military pay taxes The recapture also applies to assumptions of these loans. Do military pay taxes When recapture applies. Do military pay taxes   Recapture of the federal mortgage subsidy applies only if you meet both of the following conditions. Do military pay taxes You sell or otherwise dispose of your home at a gain within the first 9 years after the date you close your mortgage loan. Do military pay taxes Your income for the year of disposition is more than that year's adjusted qualifying income for your family size for that year (related to the income requirements a person must meet to qualify for the federally subsidized program). Do military pay taxes When recapture does not apply. Do military pay taxes   Recapture does not apply in any of the following situations. Do military pay taxes Your mortgage loan was a qualified home improvement loan (QHIL) of not more than $15,000 used for alterations, repairs, and improvements that protect or improve the basic livability or energy efficiency of your home. Do military pay taxes Your mortgage loan was a QHIL of not more than $150,000 in the case of a QHIL used to repair damage from Hurricane Katrina to homes in the hurricane disaster area; a QHIL funded by a qualified mortgage bond that is a qualified Gulf Opportunity Zone Bond; or a QHIL for an owner-occupied home in the Gulf Opportunity Zone (GO Zone), Rita GO Zone, or Wilma GO Zone. Do military pay taxes For more information, see Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma. Do military pay taxes Also see Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas. Do military pay taxes The home is disposed of as a result of your death. Do military pay taxes You dispose of the home more than 9 years after the date you closed your mortgage loan. Do military pay taxes You transfer the home to your spouse, or to your former spouse incident to a divorce, where no gain is included in your income. Do military pay taxes You dispose of the home at a loss. Do military pay taxes Your home is destroyed by a casualty, and you replace it on its original site within 2 years after the end of the tax year when the destruction happened. Do military pay taxes The replacement period is extended for main homes destroyed in a federally declared disaster area, a Midwestern disaster area, the Kansas disaster area, and the Hurricane Katrina disaster area. Do military pay taxes For more information, see Replacement Period in Publication 547. Do military pay taxes You refinance your mortgage loan (unless you later meet the conditions listed previously under When recapture applies ). Do military pay taxes Notice of amounts. Do military pay taxes   At or near the time of settlement of your mortgage loan, you should receive a notice that provides the federally subsidized amount and other information you will need to figure your recapture tax. Do military pay taxes How to figure and report the recapture. Do military pay taxes    The recapture tax is figured on Form 8828. Do military pay taxes If you sell your home and your mortgage is subject to recapture rules, you must file Form 8828 even if you do not owe a recapture tax. Do military pay taxes Attach Form 8828 to your Form 1040. Do military pay taxes For more information, see Form 8828 and its instructions. Do military pay taxes Prev  Up  Next   Home   More Online Publications