This lesson covered how to report the sale of a taxpayer's principal residence.
To be eligible for the exclusion, taxpayers must meet the following conditions:
A main home is the place the taxpayer lived most of the time. The ownership and use tests require that, during the five-year period ending on the date of the sale, the taxpayers:
The required two years of ownership/use do not have to be continuous. Members of the uniformed services or Foreign Service of the United States, intelligence community employees, or Peace Corps employees or volunteers can choose to have the five-year test period for ownership and use suspended during any period the homeowner (either spouse, if married) served on "qualified official extended duty." A loss on the sale of a principal residence is not deductible but must be reported if the taxpayer received Form 1099-S.
Special rules apply to foreclosures and cancellation of debt income on a principal residence. Under the Mortgage Forgiveness Debt Relief Act of 2007, taxpayers may exclude certain debt forgiven on their principal residence. These rules are covered in a specialty course on Link & Learn Taxes for volunteers with an Advanced, Military, or International Certification.
The worksheets in Publication 523 help you figure the taxable gain from the sale of a home using selling price, amount realized, basis and adjusted basis, along with the maximum allowed exclusion.