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IRS.gov Website
Publication 523
taxmap/pubs/p523-002.htm#en_us_publink100011707

How Much Is Taxable?(p14)

rule
taxmap/pubs/p523-002.htm#en_us_publink100072922

Review of the Eligibility Test. (p14)

rule
Generally, your home sale qualifies for the maximum exclusion, if all of the following conditions are true.
*If this condition isn’t met, your home sale may qualify for a partial exclusion. The sale must involve one of the following events experienced by you, your spouse, or a co-owner: a work-related move, a health-related move, a death, a divorce, a pregnancy with multiple children, a change in employment status, a change in unemployment compensation eligibility, or other unusual event.
**The transfer of vacant land or of a remainder interest may qualify for the maximum exclusion, but special rules apply in those situations.
For a step-by-step guide to determining whether your home sale qualifies for the maximum exclusion, see Does Your Home Sale Qualify for the Exclusion of Gain? above.
If you qualify for an exclusion on your home sale, up to $250,000 ($500,00 if married and filing jointly) of your gain will be tax-free. If your gain is more than that amount, or if you qualify only for a partial exclusion, then some of your gain may be taxable. This section contains step-by-step instructions for figuring out how much of your gain is taxable. See Worksheet 3, later, for assistance in determining your taxable gain.
If you determined in Does Your Home Sale Qualify for the Exclusion of Gain?, earlier, that your home sale doesn't qualify for any exclusion (either full or partial), then your entire gain is taxable. If you don’t have a gain, you owe no tax on the sale. In either case, you don’t need to complete Worksheet 3 and you can skip to Reporting Your Home Sale, later.
taxmap/pubs/p523-002.htm#en_us_publink100026233

Recapturing Depreciation(p15)

rule
If you used all or part of your home for business or rental after May 6, 1997, you may need to pay back ("recapture") some or all of the depreciation you were entitled to take on your property. "Recapturing" depreciation means you must include it as ordinary income on your tax return.
taxmap/pubs/p523-002.htm#en_us_publink100072923
PencilWorksheet 3. Determine If You Have Taxable Gain
If you completed "Business" and "Home" versions of your gain/loss worksheet as described in Business or Rental Use of Home, earlier, complete this worksheet only for the "Home" version.
Section A. Determine your net gain. Complete this section only if you used any part of your home for business or rental purposes between May 6, 1997, and the date of sale. Otherwise, skip to Section B.
Step 1Enter your gain from line 7 of Worksheet 2.
Step 2 List the total of all depreciation deductions that you took or could have taken for the use of your home for business or rental purposes between May 6, 1997, and the date of sale
Step 3Subtract the sum of Step 2 from the amount listed in Section A, Step 1. This is your net gain
Section B. Determine your non-qualified use gain. Complete this section only if there is a period, after the year 2008, when neither you nor your spouse (or your former spouse) used the property as a main home, and that period of non-use occurred during the 5-year period prior to the date of sale and before the time when you or your spouse (or your former spouse) used the property as a main home.* Otherwise, skip to Section C.
*Note: If the period of non-use was for 1) 2 years or less and due to a change in employment, a health condition, or other "unforeseen circumstance" described in Does Your Home Qualify for a Partial Exclusion of Gain?, earlier; or 2) for 10 years or less and due to a "stop the clock" exception for certain military, intelligence, and Peace Corps personnel described in Service, Intelligence, and Peace Corps Personnel, earlier, then you may skip Section B.
Step 1Enter the amount from Section A, Step 1 or, if you skipped Section A, your gain from line 7 of Worksheet 2
Step 2Enter the total number of days after 2008 when neither you nor your spouse (or former spouse) used the home as a main residence. This number is your non-use days
Step 3Enter the total number of days you owned your home (counting all days, not just days after 2008). This number is your number of days owned
Step 4Divide the non-use days by the days owned. This number is your non-residence factor
Step 5 Multiply the decimal from Section B, Step 4, by the amount listed in Section B, Step 1. This number is your non-qualified use gain.
taxmap/pubs/p523-002.htm#en_us_publink100077100
PencilWorksheet 3. Determine If You Have Taxable Gain Continued p. 2
Section C. Determine your gain that is eligible for exclusion.
IF...THEN your gain that is eligible for exclusion is …
you skipped Sections A and B your gain from line 7, under Worksheet 2.
you completed Section A but skipped Section B your net gain, from Section A, Step 3.
you completed Section B (regardless of whether you completed Section A) your non-qualified use gain, from Section B, Step 5.
Your gain that is eligible for exclusion is $ _______________
Section D. Determine if you have taxable gain.
IF...THEN …
your gain that is eligible for exclusion from Section C is less than or equal to your exclusion limit from Worksheet 1, Section C your entire gain is excludible from your income and you have no gain to report on your tax return. The Reporting Your Home Sale section doesn’t apply to you.
your gain that is eligible for exclusion from Section C is greater than your exclusion limit from Worksheet 1, Section C some of your gain isn’t excludible, and you may owe tax on it. See Reporting Your Home Sale for instructions on how to report the gain on your tax return.