Publication 523 (2007), Selling Your Home

IRS Resources

Publication 523 - Main Contents

Table of Contents

Main Home

This section explains the term “main home.” 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.

To exclude gain under the rules in this publication, you generally 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.

Land. 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.

Example.

You sell the land on which your main home is located. You buy another piece of land and move your house to it. This sale is not considered a sale of your main home, and you cannot exclude any gain on the sale of the land.

Vacant land. 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 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 the vacant land have been satisfied.

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. See Excluding the Gain, later.

The destruction of your home is treated as a sale of your home. Therefore, 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 (3 years if your main home was destroyed as a result of Hurricanes Katrina, Rita, or Wilma.

More than one home. If you have more than one home, you can exclude gain only from the sale of your main home. You must include in income gain from the sale of any other home. 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.

Example 1.

You own and live in a house in the city. You also own a beach house, which you use during the summer months. The house in the city is your main home.

Example 2.

You own a house, but you live in another house that you rent. The rented house is your main home.

Factors used to determine main home. In addition to the amount of time you live in each home, other factors are relevant in determining which home is your main home. Those factors include the following.

Your place of employment.
The location of your family members' main home.
Your mailing address for bills and correspondence.
The address listed on your:
1. Federal and state tax returns,
2. Driver's license,
3. Car registration, and
4. Voter registration card.
The location of the banks you use.
The location of recreational clubs and religious organizations in which you are a member.

Property used partly as your main home. 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. For details, see Business Use or Rental of Home, later.

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. Subtract the adjusted basis from the amount realized to get your gain or loss.

		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. It includes money; all notes, mortgages, or other debts assumed by the buyer as part of the sale; and the fair market value of any other property or any services you receive.

Personal property. The selling price of your home does not include amounts you received for personal property sold with your home. Personal property is property that is not a permanent part of the home. Examples are furniture, draperies, rugs, a washer and dryer, and lawn equipment. Separately stated amounts you received for these items should not be shown on Form 1099-S (discussed later). Any gains from sales of personal property must be included in your income.

Payment by employer. You may have to sell your home because of a job transfer. 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. Your employer will include it as wages in box 1 of your Form W-2 and you will include it on Form 1040, line 7, or on Form 1040NR, line 8.

Option to buy. 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. If the option is not exercised, you must report the amount as ordinary income in the year the option expires. Report this amount on Form 1040, line 21, or on Form 1040NR, line 21.

Form 1099-S. 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.

However, box 2 will not include the fair market value of any property other than cash or notes, or any services, you received or will receive. Instead, box 4 will be checked to indicate your receipt or expected receipt of these items.

If you can exclude the entire gain, the person responsible for closing the sale generally will not have to report it on Form 1099-S. If you do not receive Form 1099-S, use sale documents and other records to figure the total amount you received for your home.

Amount Realized

The amount realized is the selling price minus selling expenses.

Selling expenses. Selling expenses include:

Commissions,
Advertising fees,
Legal fees, and
Loan charges paid by the seller, such as loan placement fees or “points.”

Adjusted Basis

While you owned your home, you may have made adjustments (increases or decreases) to the basis. This adjusted basis must be determined before you can figure gain or loss on the sale of your home. For information on how to figure your home's adjusted basis, see Determining Basis, later.

Amount of Gain or Loss

To figure the amount of gain or loss, compare the amount realized to the adjusted basis.

Gain on sale. 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.

Loss on sale. If the amount realized is less than the adjusted basis, the difference is a loss. A loss on the sale of your main home cannot be deducted.

Jointly owned home. If you and your spouse sell your jointly owned home and file a joint return, you figure your gain or loss as one taxpayer.

Separate returns. If you file separate returns, each of you must figure your own gain or loss according to your ownership interest in the home. Your ownership interest is determined by state law.

Joint owners not married. 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. Each of you applies the rules discussed in this publication on an individual basis.

Other Dispositions

The following rules apply to foreclosures and repossessions, abandonments, trades, transfers to a spouse, and involuntary conversions (such as when your home is destroyed or condemned).

Foreclosure or repossession. If your home was foreclosed on or repossessed, you have a sale.

You figure the gain or loss from the sale in generally the same way as gain or loss from any sale. But the selling price of your home used to figure the amount of your gain or loss depends, in part, on whether you were personally liable for repaying the debt secured by the home, as shown in the following chart.

IF you were...	THEN your selling price includes...
not personally liable for the debt	the full amount of debt canceled by the foreclosure or repossession.
personally liable for the debt	the amount of canceled debt up to the home's fair market value. You may also have ordinary income, as explained next.

Ordinary income. If you were personally liable for the canceled debt, you may have ordinary income in addition to any gain or loss. If the canceled debt is more than the home's fair market value, you have ordinary income equal to the difference. Report that income on Form 1040, line 21, or on Form 1040NR, line 21. However, the income from cancellation of debt is not taxed to you if the cancellation is intended as a gift, or if you are insolvent or bankrupt. For more information on insolvency or bankruptcy, see Publication 908, Bankruptcy Tax Guide.

Form 1099-A and Form 1099-C. Generally, you will receive Form 1099-A, Acquisition or Abandonment of Secured Property, from your lender if your home is transferred in a foreclosure. This form will have the information you need to determine the amount of your gain or loss and any ordinary income from cancellation of debt. If your debt is canceled, you may receive Form 1099-C, Cancellation of Debt.

More information. If part of your home is used for business or rental purposes, see Foreclosures and Repossessions in chapter 1 of Publication 544 for more information. Publication 544 has examples of how to figure gain or loss on a foreclosure or repossession.

Abandonment. If you abandon your home, you may have ordinary income. If the abandoned home secures a debt for which you are personally liable and the debt is canceled, you have ordinary income equal to the amount of canceled debt.

If the home is secured by a loan and the lender knows the home has been abandoned, the lender should send you Form 1099-A or Form 1099-C. See Foreclosure or repossession, earlier, for information about those forms. If the home is later foreclosed on or repossessed, gain or loss is figured as explained in that discussion.

Trading homes. If you trade your old home for another home, treat the trade as a sale and a purchase.

Example.

You owned and lived in a home with an adjusted basis of $41,000. 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. This is treated as a sale of your old home for $50,000 with a gain of $9,000 ($50,000 - $41,000).

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).

Transfer to spouse. If you transfer your home to your spouse, or to your former spouse incident to your divorce, you generally have no gain or loss (unless the Exception, discussed next, applies). This is true even if you receive cash or other consideration for the home. Therefore, the rules explained in this publication do not apply.

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. You have no gain or loss.

Exception. These transfer rules do not apply if your spouse or former spouse is a nonresident alien. In that case, you generally will have a gain or loss.

More information. See Property Settlements in Publication 504, Divorced or Separated Individuals, if you need more information.

Destruction or condemnation. You have a sale when your home is destroyed or condemned and you receive other property or money in payment, such as insurance or a condemnation award. You may be able to exclude all or part of any gain from the destruction or condemnation of your home as explained later in the discussion about a home that was destroyed or condemned under Special Situations.

Determining Basis

You need to know your basis in your home to determine any gain or loss when you sell it. Your basis in your home is determined by how you got the home. Your basis is its cost if you bought it or built it. If you got it in some other way (inheritance, gift, etc.), its basis is either its fair market value when you got it or the adjusted basis of the person you got it from.

While you owned your home, you may have made adjustments (increases or decreases) to your home's basis. 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.

To figure your adjusted basis, you can use Worksheet 1, shown later. Filled-in examples of that worksheet are included in the Comprehensive Examples, later.

Cost As Basis

The cost of property is the amount you pay for it in cash, debt obligations, other property, or services.

Purchase. If you buy your home, your basis is its cost to you. This includes the purchase price and certain settlement or closing costs. Generally, 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. If you build, or contract to build, a new home, your purchase price can include costs of construction, as discussed later.

Seller-paid points. 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.

IF you bought your home...	THEN reduce your home's basis by the seller-paid points...
after 1990 but before April 4, 1994	only if you deducted them as home mortgage interest in the year paid.
after April 3, 1994	even if you did not deduct them.

If you must reduce your basis by seller-paid points and you use Worksheet 1 to figure your adjusted basis, enter the seller-paid points on line 2 of the worksheet (unless you used the seller-paid points to reduce the amount on line 1).

Settlement fees or closing costs. When you bought your home, you may have paid settlement fees or closing costs in addition to the contract price of the property. You can include in your basis some of the settlement fees and closing costs you paid for buying the home. You cannot include in your basis the fees and costs for getting a mortgage loan. 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).

Settlement fees do not include amounts placed in escrow for the future payment of items such as taxes and insurance.

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:
1. Certain real estate taxes (discussed later),
2. Back interest,
3. Recording or mortgage fees,
4. Charges for improvements or repairs, and
5. Sales commissions.

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:
1. Mortgage insurance premiums (including funding fees connected with loans guaranteed by the Department of Veterans Affairs),
2. Loan assumption fees,
3. Cost of a credit report,
4. Fee for an appraisal required by a lender, and
Fees for refinancing a mortgage.

Real estate taxes. Real estate taxes for the year you bought your home may affect your basis, as shown in the following chart.

IF...	AND...	THEN the taxes...
you pay taxes that the seller owed on the home (the taxes up to the date of sale)	the seller does not reimburse you	are added to the basis of your home.
	the seller reimburses you	do not affect the basis of your home.
the seller paid taxes for you (the taxes beginning on the date of sale)	you do not reimburse the seller	are subtracted from the basis of your home.
	you reimburse the seller	do not affect the basis of your home.

Construction. 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:
1. The cost of labor and materials,
2. Any amounts paid to a contractor,
3. Any architect's fees,
4. Building permit charges,
5. Utility meter and connection charges, and
6. Legal fees directly connected with building the house.

Your cost includes your down payment and any debt such as a first or second mortgage or notes you gave the seller or builder. It also includes certain settlement or closing costs. You may have to reduce your basis by points the seller paid for you. For more information, see Seller-paid points and Settlement fees or closing costs, earlier.

Built by you. If you built all or part of your house yourself, its basis is the total amount it cost you to complete it. 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.

Temporary housing. 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. To figure the amount of the reduction, multiply the contract price by a fraction. 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 home.

Cooperative apartment. 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. This may include your share of a mortgage on the apartment building.

Condominium. To determine your basis in a condominium apartment used as your home, use the same rules as for any other home.

Basis Other Than Cost

You must use a basis other than cost, such as fair market value, if you got your home as a gift, from your spouse, as an inheritance, or in a trade. If you got your home in any of these ways, see the following discussion that applies to you. If you want to figure your adjusted basis using Worksheet 1, see the Worksheet 1 Instructions, later, for help.

Fair market value. Fair market value is the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts. Sales of similar property, on or about the same date, may be helpful in figuring the fair market value of the property.

Home received as gift. Use the following chart to find the basis of a home you received as a gift.

IF the donor's adjusted basis at the time of the gift was...	THEN your basis is...
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. 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. If using the fair market value results in a gain, you have neither gain nor loss.
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.
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).

Part of federal gift tax due to net increase in value. 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. 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. The net increase in the value of the home is its fair market value minus the donor's adjusted basis.

Home received from spouse. 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.

Transfers after July 18, 1984. If you received the home after July 18, 1984, there was no gain or loss on the transfer. Your basis in this home is generally the same as your spouse's (or former spouse's) adjusted basis just before you received it. 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.

If you owned a home jointly with your spouse and your spouse transferred his or her interest in the home to you, your basis in the half interest received from your spouse is generally the same as your spouse's adjusted basis just before the transfer. This also applies if your former spouse transferred his or her interest in the home to you incident to your divorce. Your basis in the half interest you already owned does not change. Your new basis in the home is the total of these two amounts.

Transfers before July 19, 1984. If you received your home before July 19, 1984, in exchange for your release of marital rights, your basis in the home is generally its fair market value at the time you received it.

More information. For more information on property received from a spouse or former spouse, see Property Settlements in Publication 504.

Home received as inheritance. If you inherited your home, your basis is its fair market value on the date of the decedent's death or the later alternate valuation date if that date was chosen by the personal representative for the estate. If an estate tax return was filed, the value listed for the property generally is your basis. 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.

Surviving spouse. If you are a surviving spouse and you owned your home jointly, your basis in the home will change. The new basis for the half interest that your spouse owned will be one-half of the fair market value on the date of death (or alternate valuation date). The basis in your half will remain one-half of the adjusted basis determined previously. Your new basis in the home is the total of these two amounts.

Example.

Your jointly owned home 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. 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).

Community property. 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. When either spouse dies, the total fair market value of the community property generally becomes the basis of the entire property, including the part belonging to the surviving spouse. 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.

For more information about community property, see Publication 555, Community Property.

Home received as trade. If you acquired your home as a trade for other property, the basis of your home is generally the fair market value of the other property at the time of the trade. If you traded one home for another, you have made a sale and purchase. In that case, you may have realized a gain. See Trading homes, earlier, for an example of figuring the gain.

Home destroyed or condemned. If you acquired your home with insurance proceeds or a condemnation award that you received as a result of an involuntary conversion, such as when your home is destroyed or condemned, the basis of your replacement home is its cost decreased by any gain not recognized on the conversion under the rules explained in:

Publication 547, Casualties, Disasters, and Thefts, in the case of a home that was destroyed, or
Chapter 1 of Publication 544, in the case of a home that was condemned.

Example.

A fire destroyed your home that you owned and used for only 6 months. The home had an adjusted basis of $80,000 and the insurance company paid you $130,000 for the loss. You realized a gain of $50,000 ($130,000 - $80,000). You bought a replacement home for $100,000. You recognize a gain of $30,000 ($130,000 - $100,000), the unspent part of the payment from the insurance company. Your gain not recognized is $20,000, the difference between the $50,000 realized gain and the $30,000 recognized gain. The basis of the new home is figured as follows:

Cost of replacement home	$100,000
Minus: Gain not recognized	20,000
Basis of the replacement home	$80,000

More information. For more information about basis, see Publication 551.

Adjusted Basis

Adjusted basis is your basis increased or decreased by certain amounts.

To figure your adjusted basis, you can use Worksheet 1, shown later. Filled-in examples of that worksheet are included in Comprehensive Examples, later.

Increases to basis. These include any:

Additions and other improvements that have a useful life of more than 1 year,
Special assessments for local improvements, and
Amounts you spent after a casualty to restore damaged property.

Decreases to basis. These include any:

Gain you postponed from the sale of a previous home before May 7, 1997,
Deductible casualty losses,
Insurance payments you received or expect to receive for casualty losses,
Payments you received for granting an easement or right-of-way,
Depreciation allowed or allowable if you used your home for business or rental purposes,
Residential energy credit (generally allowed from 1977 through 1987) claimed for the cost of energy improvements that you added to the basis of your home,
Nonbusiness energy property credit (allowed beginning in 2006) claimed for making certain energy saving improvements that you added to the basis of your home,
Residential energy efficient property credit (allowed beginning in 2006) claimed for making certain energy saving improvements that you added to the basis of your home,
Adoption credit you claimed for improvements added to the basis of your home,
Nontaxable payments from an adoption assistance program of your employer that you used for improvements you added to the basis of your home,
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. An energy conservation measure is an installation or modification that is primarily designed either to reduce consumption of electricity or natural gas or to improve the management of energy demand for a home, and
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).
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.

Improvements. These add to the value of your home, prolong its useful life, or adapt it to new uses. You add the cost of additions and other improvements to the basis of your property.

Examples.

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. An addition to your house, such as a new deck, a sunroom, or a new garage, is also an improvement.

The following chart lists some other examples of improvements.

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. Your home's adjusted basis does not include the cost of any improvements that are replaced and are no longer part of the home.

Example.

You put wall-to-wall carpeting in your home 15 years ago. Later, you replaced that carpeting with new wall-to-wall carpeting. The cost of the old carpeting you replaced is no longer part of your home's adjusted basis.

Repairs. These maintain your home in good condition but do not add to its value or prolong its life. You do not add their cost to the basis of your property.

Examples.

Repainting your house inside or outside, fixing your gutters or floors, repairing leaks or plastering, and replacing broken window panes are examples of repairs.

Exception. 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. 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.

Recordkeeping. You should keep records to prove your home's adjusted basis. 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. 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. Keep records proving the basis of both homes as long as they are needed for tax purposes.

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 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 2119, Sale of Your Home, that 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.

Excluding the Gain

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

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

You can use Worksheet 2, shown later, to figure the amount of your exclusion and your taxable gain, if any.

If you have any amount of taxable gain from the sale of your home, you may have to increase your withholding or make estimated tax payments. See Publication 505, Tax Withholding and Estimated Tax.

Maximum Exclusion

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

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

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.

You may be able to exclude up to $500,000 of the gain 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.

Ownership and Use Tests

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

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).

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

Example 1—home owned and occupied for 3 years.

Amanda bought and moved into her main home in September 2004. She sold the home at a gain on September 15, 2007. During the 5-year period ending on the date of sale (September 16, 2002 - September 15, 2007), she owned and lived in the home for 3 years. She meets the ownership and use tests.

Example 2—ownership test met but use test not met.

Dan bought a home in 2001. After living in it for 6 months, he moved out. He never lived in the home again and sold it at a gain on June 28, 2007. He owned the home during the entire 5-year period ending on the date of sale (June 29, 2002 - June 28, 2007). However, he did not live in it for the required 2 years. He meets the ownership test but not the use test. He cannot exclude any part of his gain on the sale, unless he qualified for a reduced maximum exclusion (explained later).

Period of Ownership and Use

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

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

Worksheet 1 Instructions.

If you use Worksheet 1 to figure the adjusted basis of your home, follow these instructions.

IF...		THEN...
you inherited your home	1	skip lines 1-4 of the worksheet.
	2	find your basis using the rules under Home received as inheritance. Enter this amount on line 5 of the worksheet.
	3	fill out the rest of the worksheet.
you received your home as a gift	1	read Home received as gift and enter on lines 1 and 3 of the worksheet either the donor's adjusted basis or the home's fair market value at the time of the gift, whichever is appropriate.
	2	if you can add any federal gift tax to your basis, enter that amount on line 5 of the worksheet.
	3	fill out the rest of the worksheet.
you received your home as a trade for other property	1	enter on line 1 of the worksheet the fair market value of the other property. (But if you received your home as a trade for your previous home before May 7, 1997, and had a gain on the trade that you postponed using Form 2119, enter on line 1 of the worksheet the adjusted basis of the new home from that Form 2119.)
you received your home as a trade for other property	2	fill out the rest of the worksheet.
you built your home	1	add the purchase price of the land and the cost of building the home. See Construction. Enter that total on line 1 of the worksheet. (However, if you filed a Form 2119 to postpone gain on the sale of a previous home before May 7, 1997, enter on line 1 of the worksheet the adjusted basis of the new home from that Form 2119.)
you built your home	2	fill out the rest of the worksheet.