Internal Revenue Service United States Department of the Treasury
Level Basic Advanced Military International

Income — Capital Gain or Loss

Summary and Exercises

Summary

This lesson covered how to report the sale of capital assets and the sale of a taxpayer's principal residence.

In most cases, a taxpayer must use Form 8949 and Schedule D to report capital gains and losses on the sale of assets. This involves identifying the asset's holding period, adjusted basis, net short-term and long-term capital gains or losses, the taxable gain or deductible loss, and the amount of capital loss carryover.

Qualified taxpayers may be able to exclude a portion of the gain on the sale of a home if they meet the following conditions:

  • The home they sold was their main home
  • They meet the ownership and use tests
  • They did not exclude gain in the two years before the current sale of the home

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:

  • Owned the home for at least two years (the ownership test), and
  • Lived in the home as their main home for at least two years (the Use test)

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 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.