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2003 Tax Help Archives |
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Tax Help Archives > 2003 > Publications > Publication 3
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Table B. Excluded Items The exclusion for certain items applies whether the item is furnished in kind or is a reimbursement or allowance. There is no exclusion for the personal use of a government-provided vehicle.
Claim for death gratuity refunds.
In 2003, the death gratuity paid to a survivor of a member of the Armed Forces who died after September 10, 2001,
was increased to $12,000 and was
made nontaxable. Previously, the death gratuity was $6,000 and only $3,000 of it was nontaxable. So, you may be able to claim
a refund if you paid tax
on a death gratuity you received due to the death of a member of the Armed Forces after September 10, 2001. If you are entitled
to a refund, complete
and file Form 1040X, Amended U.S. Individual Income Tax Return. At the top of Form 1040X, write “Military Family Tax Relief Act” in
red. Generally, you must file a claim for credit or refund within 3 years from the date you filed your original return or
2 years from the date you
paid the tax, whichever is later.
Military base realignment and closure benefit.
Payments made under the Homeowners Assistance Program (HAP) after November 11, 2003, generally are excluded from income.
However, the excludable
amount cannot be more than the following limit:
If you are a U.S. citizen with income from sources outside the United States (foreign income), you must report all of that income on your tax return unless it is exempt by U.S. law. This is true whether you reside inside or outside the United States and whether or not you receive a Form W–2, Wage and Tax Statement, or a Form 1099. This applies to earned income (such as wages and tips) as well as unearned income (such as interest, dividends, capital gains, pensions, rents, and royalties). Certain taxpayers can exclude income earned in foreign countries. For 2003, this exclusion amount is $80,000. However, the foreign earned income exclusion does not apply to the wages and salaries of military and civilian employees of the U.S. Government. Employees of the U.S. Government include those who work at Armed Forces post exchanges, officers' and enlisted personnel clubs, and embassy commissaries, and similar personnel paid from nonappropriated funds. Other foreign income earned by military personnel or their spouses may be eligible for the foreign earned income exclusion. For more information on the exclusion, get Publication 54. Residents of American Samoa may be able to exclude income from Guam, American Samoa, and the Northern Mariana Islands. This possession exclusion does not apply to wages and salaries of military and civilian employees of the U.S. Government. If you need information on the possession exclusion, get Publication 570, Tax Guide for Individuals With Income From U.S. Possessions. The pay you earn as a member of the Armed Forces may be subject to community property laws depending on your marital status, your domicile, and the nature of the payment. The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Marital status.
Community property rules apply to married persons whose domicile during the tax year was in a community property state.
The rules may affect your
tax liability if you file separate returns or are divorced during the year.
Domicile.
Your domicile is the permanent legal home you intend to use for an indefinite or unlimited period, and to which, when
absent, you intend to return.
It is not always where you presently live.
Nature of the payment.
Active duty military pay is subject to community property laws. Armed Forces retired or retainer pay may be subject
to community property laws.
Adjusted gross income is your total income minus certain adjustments. The following adjustments are of particular interest to members of the Armed Forces. If you are a member of a reserve component of the Armed Forces and you travel more than 100 miles away from home in connection with your performance of services as a member of the reserves, you can deduct your travel expenses as an adjustment to income on line 33 of Form 1040 rather than as a miscellaneous itemized deduction. The deduction is limited to the amount the federal government pays its employees for travel expenses. For more information about this limit, see Per Diem and Car Allowances in chapter 6 of Publication 463. Member of a reserve component.
You are a member of a reserve component of the Armed Forces if you are in the Army, Navy, Marine Corps, Air Force,
or Coast Guard Reserve, the Army
National Guard of the United States, the Air National Guard of the United States, or the Reserve Corps of the Public Health
Service.
How to report.
If you have reserve-related travel that takes you more than 100 miles from home, you should first complete Form 2106,
Employee Business
Expenses, or Form 2106–EZ, Unreimbursed Employee Business Expenses. Then include in the total on line 33 of Form 1040 your
expenses for reserve travel over 100 miles from home, up to the federal rate, from line 10 of Form 2106 or line 6 of Form
2106–EZ. Write
“RC” and the amount of these expenses in the space to the left of line 33 of Form 1040. Subtract this amount from the total on
line 10 of Form
2106 or line 6 of Form 2106–EZ and deduct the balance as an itemized deduction on line 20 of Schedule A (Form 1040). See Armed Forces
reservists under Miscellaneous Itemized Deductions, later.
Individual Retirement Arrangements For purposes of a deduction for contributions to a traditional individual retirement arrangement (IRA), Armed Forces' members (including reservists on active duty for more than 90 days during the year) are considered to be active participants in an employer-maintained retirement plan. Generally, you can deduct the lesser of the contributions to your traditional IRA for the year or the general limit (or spousal IRA limit, if applicable). However, if you or your spouse was covered by an employer-maintained retirement plan at any time during the year for which contributions were made, you may not be able to deduct all of the contributions. The Form W–2 you or your spouse receives from an employer has a box used to indicate whether you were covered for the year. The Retirement plan box should have a mark in it if you were covered. Individuals serving in the U.S. Armed Forces or in support of the U.S. Armed Forces in designated combat zones have additional time to make a qualified retirement contribution to an IRA. For more information on this extension of deadline provision, see Extension of Deadline, later. For more information on IRAs, get Publication 590. To deduct moving expenses, you generally must meet certain time and distance tests. However, if you are a member of the Armed Forces on active duty and you move because of a permanent change of station, you do not have to meet these tests. You can deduct your unreimbursed moving expenses on Form 3903. Permanent change of station.
A permanent change of station includes:
Spouse and dependents.
If a member of the Armed Forces deserts, is imprisoned, or dies, a permanent change of station for the spouse or dependent
includes a move to:
Services or reimbursements provided by the government.
Do not include in your income the value of moving and storage services provided by the government because of a permanent
change of station.
Similarly, do not include in income amounts received as a dislocation allowance, temporary lodging expense, temporary lodging
allowance, or move-in
housing allowance. Generally, if the total reimbursements or allowances that you receive from the government because of the
move are more than your
actual moving expenses, the excess is included in your wages on Form W–2. However, if any reimbursements or allowances (other
than dislocation,
temporary lodging, temporary lodging expense, or move-in housing allowances) exceed the cost of moving and the excess is not
included in your Form
W–2, the excess still must be included in gross income on line 7 of Form 1040.
Deductible moving expenses.
If you meet the requirements discussed earlier, you can deduct the reasonable unreimbursed expenses that are incurred
by you and members of your
household.
Member of your household.
A member of your household is anyone who has both your former home and your new home as his or her main home. It does
not include a tenant or
employee unless you can claim that person as a dependent.
Foreign moves.
A foreign move is a move from the United States or its possessions to a foreign country or from one foreign country
to another foreign country. It
is not a move from a foreign country to the United States or its possessions.
Reporting moving expenses.
Figure moving expense deductions on Form 3903. Carry the deduction from Form 3903 to line 27, Form 1040. For more
information, get Publication 521
and Form 3903.
If you are a member of the U.S. Armed Forces who serves in a combat zone (defined later), you can exclude certain pay from your income. You do not have to receive the pay while you are in a combat zone, are hospitalized, or in the same year you served in a combat zone. However, your entitlement to the pay must have fully accrued in a month during which you served in the combat zone or were hospitalized as a result of wounds, disease, or injury incurred while serving in the combat zone. Enlisted personnel, warrant officers, and commissioned warrant officers can exclude the following amounts from their income. (Other officer personnel are discussed later.)
Retirement pay and pensions do not qualify for the combat zone exclusion. Partial (month) service.
If you serve in a combat zone for any part of one or more days during a particular month, you are entitled to an exclusion
for that entire month.
A combat zone is any area the President of the United States designates by Executive Order as an area in which the U.S. Armed Forces are engaging or have engaged in combat. An area usually becomes a combat zone and ceases to be a combat zone on the dates the President designates by Executive Order. Afghanistan area.
By Executive Order No. 13239, Afghanistan (and airspace above) was designated as a combat zone beginning September
19, 2001.
The Kosovo area.
By Executive Order No. 13119 and Public Law 106–21, the following locations (including air space above) were designated
as a combat zone and
a qualified hazardous duty area beginning March 24, 1999.
Persian Gulf area.
By Executive Order No. 12744, the following locations (and airspace above) were designated as a combat zone beginning
January 17, 1991.
Qualified hazardous duty area.
Beginning November 21, 1995, a qualified hazardous duty area in the former Yugoslavia is treated as if it were a combat
zone. The qualified
hazardous duty area includes:
Note. Members of the Armed Forces deployed overseas away from their permanent duty station in support of operations in a qualified hazardous duty area, but outside the qualified hazardous duty area, are treated as if they are in a combat zone solely for the purposes of the extension of deadlines. These personnel are not entitled to other combat zone tax benefits. However, if they satisfy additional requirements, they may be entitled to full combat zone tax benefits. See Qualifying service outside combat zone, later. Service in a combat zone includes any periods you are absent from duty because of sickness, wounds, or leave. If, as a result of serving in a combat zone, a person becomes a prisoner of war or is missing in action, that person is considered to be serving in the combat zone so long as he or she keeps that status for military pay purposes. Note. You are considered to be serving in a combat zone if you are either assigned on official temporary duty to a combat zone or you qualify for hostile fire/imminent danger pay while in a combat zone. Qualifying service outside combat zone.
Military service outside a combat zone is considered to be performed in a combat zone if:
Nonqualifying presence in combat zone.
None of the following types of military service qualify as service in a combat zone.
If you are an enlisted member, warrant officer, or commissioned warrant officer and you serve in a combat zone during any part of a month, all of your military pay for that month is excluded from your income. You also can exclude military pay earned while you are hospitalized as a result of wounds, disease, or injury incurred in the combat zone. The exclusion of your military pay while you are hospitalized does not apply to any month that begins more than 2 years after the end of combat activities in that combat zone. Your hospitalization does not have to be in the combat zone. If you are a commissioned officer (other than a commissioned warrant officer), you may exclude your pay according to the rules just discussed. However, the amount of your exclusion is limited to the highest rate of enlisted pay (plus imminent danger/hostile fire pay you received) for each month during any part of which you served in a combat zone or were hospitalized as a result of your service there.
You do not need to claim the combat zone exclusion on your tax return because this type of income is not included in the wages reported on your Form W–2. (See Form W–2, below.) Hospitalized while serving in the combat zone.
If you are hospitalized while serving in the combat zone, the wound, disease, or injury causing the hospitalization
will be presumed to have been
incurred while serving in the combat zone unless there is clear evidence to the contrary.
Example. You are hospitalized for a specific disease in a combat zone where you have been serving for 3 weeks, and the disease for which you are hospitalized has an incubation period of 2 to 4 weeks. The disease is presumed to have been incurred while you were serving in the combat zone. On the other hand, if the incubation period of the disease is one year, the disease would not have been incurred while you were serving in the combat zone. Hospitalized after leaving the combat zone.
In some cases, the wound, disease, or injury may have been incurred while you were serving in the combat zone, even
though you were not
hospitalized until after you left.
Form W–2.
The wages shown in box 1 of your 2003 Form W–2 should not include military pay excluded from your income under the
combat zone exclusion
provisions. If it does, you will need to get a corrected Form W–2 from your finance office.
For tax purposes, an alien is an individual who is not a U.S. citizen. An alien is in one of three categories: resident, nonresident, or dual-status. Placement in the correct category is crucial in determining what income to report and what forms to file. Most members of the Armed Forces are U.S. citizens or resident aliens. However, if you have questions about your alien status or the alien status of your dependents or spouse, you should read the information in the following paragraphs and get Publication 519. Under peacetime enlistment rules, you generally cannot enlist in the Armed Forces unless you are a citizen or have been legally admitted to the United States for permanent residence. If you are an alien enlistee in the Armed Forces, you are probably a resident alien. If, under an income tax treaty, you are considered a resident of a foreign country, see your base legal officer. Other aliens who are in the United States only because of military assignments and who have a home outside the United States are nonresident aliens. Guam and Puerto Rico have special rules. Residents of those areas should contact their taxing authority with their questions. You are considered a U.S. resident alien for tax purposes if you meet either the green card test or the substantial presence test for the calendar year (January 1 – December 31). These tests are explained in Publication 519. Generally, resident aliens are taxed on their worldwide income and file the same tax forms as U.S. citizens. Treating nonresident alien spouse as resident alien.
A nonresident alien spouse can be treated as a resident alien if all the following conditions are met.
Making the choice.
Both you and your spouse must sign a statement and attach it to your joint return for the first tax year for which
the choice applies. Include in
the statement:
Ending the choice.
Once you make this choice, it applies to all later years unless one of the following situations occurs.
Choice not made.
If you and your nonresident alien spouse do not make this choice:
An alien who does not meet the requirements to be a resident alien, as discussed earlier, is a nonresident alien. If required to file a federal tax return, nonresident aliens must file either Form 1040NR, U.S. Nonresident Alien Income Tax Return, or Form 1040NR–EZ, U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents. See the form instructions for information on who must file and filing status. Nonresident aliens generally must pay tax on income from sources in the United States. A nonresident alien's income that is from conducting a trade or business in the United States is taxed at graduated U.S. tax rates. Other income from U.S. sources is taxed at a flat 30% (or lower treaty) rate. For example, dividends from a U.S. corporation paid to a nonresident alien generally are subject to a 30% (or lower treaty) rate. An alien may be both a nonresident and resident alien during the same tax year, usually the year of arrival or departure. Dual-status aliens are taxed on income from all sources for the part of the year they are resident aliens. Generally, they are taxed only on income from sources in the United States for the part of the year they are nonresident aliens. Exemptions reduce your income before you figure your tax. There are two types of exemptions.
While both types of exemptions are worth the same amount, different rules apply to each. You generally can claim one exemption for yourself. If you are married and file a joint return, you can claim your own exemption and one for your spouse. If you file a separate return, you can claim the exemption for your spouse only if your spouse had no gross income and was not a dependent of another taxpayer. You also can claim one exemption for each person qualifying as your dependent who meets five specific tests.
You may be eligible to claim an exemption for a child, even if the child has been kidnapped. See Kidnapped child under Exemptions for Dependents in Publication 501. For 2003, you generally can deduct $3,050 for each exemption you claim for yourself, your spouse, and each person who qualifies as your dependent. If another taxpayer can claim an exemption for you or your spouse, you cannot claim that exemption on your tax return. If you can claim an exemption for a dependent, that dependent cannot claim an exemption on his or her own tax return. To claim an exemption for a dependent on your tax return, you must list either the social security number (SSN), individual taxpayer identification number (ITIN), or adoption taxpayer identification number (ATIN) for that person on your return. For more information on exemptions, see Publication 501.
This image is too large to be displayed in the current screen.
Please click the link to view the image. Can You Claim a Dependency Exemption?
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Please click the link to view the image. Can You Claim a Dependency Exemption?
If you do not list the dependent's SSN, ITIN, or ATIN, the exemption may be disallowed. A dependent is a person, other than you or your spouse, who meets the dependency tests. You can claim a dependency exemption if all five of the following tests are met.
Expenses that are not directly related to any one member of a household, such as the cost of food for the household, must be divided among the members of the household. Divorced or separated parents.
Different rules apply to the support test for children of divorced or separated parents. These rules are discussed
in Publication 501.
Dependency allotments.
You can authorize an allotment from your pay for the support of your dependents. The amount is considered as provided
by you in figuring whether
you provide more than half the dependent's support.
Example. Army Sergeant Jeff Banks authorizes an allotment for his widowed mother. She uses the money to support herself and Jeff's 10-year-old sister. If that amount provides more than half their support, Jeff can claim an exemption for each of them, if they otherwise qualify, even though he only authorized the allotment for his mother. Dependent in the Armed Forces.
Generally, an exemption cannot be claimed for a person who is in the Armed Forces or is at one of the Armed Forces
academies for the entire year
because the support test will not have been met. However, if your dependent receives only partial support from the Armed Forces,
you can still claim
the exemption if you provided more than half his or her support and the other tests are met.
Example. Leslie James is 18 and single. She graduated from high school in June 2003 and entered the U.S. Air Force in September 2003. Leslie provided $4,400 (her wages of $3,400 and $1,000 for other items provided by the Air Force) for her support that year. Her parents provided $4,100. Her parents cannot claim a dependency exemption for her for 2003 because they did not provide more than half her support.
Current tax rules that apply when you sell your main home differ from tax rules that applied when you sold your main home before May 7, 1997. Usually, your main home is the one in which you live most of the time. It can be a:
See Publication 523 for more information. You generally can exclude up to $250,000 of gain ($500,000, in most cases, if married filing a joint return) realized on the sale or exchange of a main home in 2003. The exclusion is allowed each time you sell or exchange a main home, but generally not more than once every 2 years. To be eligible, 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 to ownership and use tests.
You can exclude gain, but the maximum amount of gain you can exclude will be reduced if you do not meet the ownership
and use tests due to a move
to a new permanent duty station.
5-year test period suspended.
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 Armed Forces. 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.
Example. David bought and moved into a home in 1995. He lived in it as his main home for 2½ years. For the next 6 years, he did not live in it because he was on qualified official extended duty with the Army. He then sold the home at a gain in 2003. To meet the use test, David chooses to suspend the 5-year test period for the 6 years he was on qualifying official extended duty. This means he can disregard those 6 years. Therefore, David's 5-year test period consists of the 5 years before he went on qualifying official extended duty. He meets the ownership and use tests because he owned and lived in the home for 2½ years during this test period. Period of suspension.
The period of suspension cannot last more than 10 years. You cannot suspend the 5-year period for more than one property
at a time. You can revoke
your choice to suspend the 5-year period at any time.
Qualified official extended duty.
You are on qualified official extended duty if you serve on extended duty either:
Claiming a refund for a prior-year home sale.
This rule for suspending the 5-year period became law in 2003 but applies to any sale of a main home after May 6,
1997. Therefore, you may be
entitled to claim a refund if this rule applies to you and you paid tax on a gain from the sale of a home after that date.
If you are entitled to a
refund, complete and file Form 1040X, Amended U.S. Individual Income Tax Return. At the top of Form 1040X, write “Military Family Tax
Relief Act” in red.
The rules in this section apply to you only if you sold your main home at a gain before May 7, 1997, and all three of the following statements are true.
Gain.
If you had a gain from the sale, you had to include it in your income for the year of sale, except for any part you
postponed or excluded.
Under the rules of this section, you were required to postpone tax on the gain on the sale of your main home before May 7, 1997, if both of the following were true.
Also, if you were age 55 or older on the date of sale and met certain other qualifications, no tax applied to any gain you chose to exclude (on line 14 of Form 2119). This section explains the time allowed for replacing your main home (the replacement period) and how to determine the taxable gain, if any. The main topics in this section are:
Tax postponed, not forgiven.
The tax on the gain is postponed, not forgiven. You subtract any gain that is not taxed in the year you sell your
old home from the cost of your
new home. This gives you a lower basis in the new home.
Example. You sold your home in February 1997 for $90,000 and had a $5,000 gain. You were a member of the Armed Forces stationed outside the United States until your return in 2003. In January 2003, within the time allowed for replacement, you bought another home for $203,000 and moved into it. The $5,000 gain was not taxed in 1997, but you must subtract it from the $203,000. This makes the basis of your new home $198,000. If you later sell the new home for $210,000, your gain will be $12,000 ($210,000 - $198,000). Your replacement period is the time period during which you must replace your old home to postpone any of the gain from its sale. It starts 2 years before and ends 2 years after the date of sale unless the replacement period was suspended. Example. You sold your old home on April 27, 1997. You had until April 27, 1999, to buy and move into a new home that you use as your main home, unless you qualified for a suspension of the replacement period. Suspension of replacement period.
The 2-year replacement period after the sale may still be suspended only for members of the Armed Forces stationed
outside the United States.
Serving on extended active duty.
The replacement period after the sale of your old home is suspended while you serve on extended active duty in the
Armed Forces. You are on
extended active duty if you are serving under a call or order for more than 90 days or for an indefinite period. The suspension
applies only if your
service begins before the end of the 2-year replacement period. The replacement period, plus any period of suspension, is
limited to 4 years
after the date you sold your old home, unless you are stationed outside the United States.
Stationed outside the United States.
The suspension of the replacement period after the sale of your old home is extended for up to an additional 4 years
while you are:
Example. You are a regular member of the Armed Forces and sold your home on May 1, 1997. During the 4 years from April 1, 1997, to April 1, 2001, you served outside the United States. When you returned, you were stationed at a remote site and were required to live on base because off-base housing was not available. The time to replace your home was suspended:
The requirement that you live on base ended on October 31, 2002. The suspension period will expire October 31, 2003. You have less than the full 2-year replacement period to buy or build and occupy a new home. This is because your replacement period plus your 6½-year period of suspension is limited to 8 years after the sale of your old home. Therefore, your replacement period ends on April 1, 2005. Spouse in Armed Forces.
If your spouse is in the Armed Forces and you are not, the suspension also applies to you if you owned the old home.
Both of you must have used the
old home and must use the new home as your main home. However, if you are divorced or separated while the replacement period
is suspended, the
suspension ends for you on the date of the divorce or separation.
Combat zone service.
The running of the replacement period (including any suspension) is suspended for any period you served in a combat
zone. See Combat Zone
Exclusion, earlier, for the definition of a combat zone and when service is considered to have been performed in a combat zone.
When suspension ends.
This suspension ends 180 days after the later of:
Example. Sergeant James Smith, on extended active duty in an Army unit stationed in Virginia, had a gain from the sale of his home on April 4, 1997. He had not yet purchased a new home when he entered a combat zone on January 4, 1999. He left the combat zone on January 4, 2000, and returned with his unit to Virginia. He remains on active duty in Virginia. Sergeant Smith's replacement period began on April 4, 1997, the date he sold the home. When he entered the combat zone on January 4, 1999, Sergeant Smith had used 21 months of the replacement period. The replacement period was then suspended for the time he served in the combat zone plus 180 days. The replacement period started again on July 3, 2000, after the end of the 180-day period (January 5, 2000, to July 2, 2000) following his last day in the combat zone. Sergeant Smith then has 27 months remaining in his replacement period (4 years or 48 months minus the 21 months already used). His replacement period ends October 2, 2002 (27 months after July 2, 2000). Spouse.
The suspension for service in a combat zone generally applies to your spouse (even if you file separate returns).
However, any suspension because
of your hospitalization within the United States does not apply to your spouse. Also, the suspension for your spouse does
not apply for any tax year
beginning more than 2 years after the last day the area qualified as a combat zone.
Home not replaced within replacement period.
If you do not replace the home in time and you had postponed gain in the year of sale, you must file an amended return
for the year of sale. You
must include in your income the entire gain on the sale of your old home. For details, see What To Report Now, later.
Occupancy test.
You must physically live in the new home as your main home within the replacement period. If you move furniture or
other personal belongings into
the new home but do not actually live in it, you have not met the occupancy test.
No added time is allowed.
To postpone gain on the sale of your home, you must replace the old home and occupy the new home within the specified
period. You are not allowed
any additional time, even if conditions beyond your control keep you from doing it. For example, destruction of the new home
while it was being built
would not extend the replacement period.
To figure the taxable gain and postponed gain from the sale of your old home, compare the adjusted sales price of your old home with the cost of your new home, as shown in the following chart.
Adjusted sales price.
This is the amount realized from the sale of your old home minus:
Fixing-up expenses.
Fixing-up expenses are decorating and repair costs that you paid to sell your old home. For example, the costs of
painting the home, planting
flowers, and replacing broken windows are fixing-up expenses. Fixing-up expenses must meet all the following conditions. The
expenses:
Note. You subtract fixing-up expenses from the amount realized only in figuring the part of the gain that you postpone. You cannot use them in figuring the actual gain on the sale. Example. Your old home had a basis of $55,000. You signed a contract to sell it on December 17, 1996. On January 7, 1997, you sold it for $71,400. Selling expenses were $5,000. During the 90-day period ending December 17, 1996, you had the following work done. You paid for the work within 30 days after the date of sale.
Within the replacement period, you bought and lived in a new home that cost $64,600. You figure the gain postponed and not postponed, and the basis of your new home, as follows:
Property used partly as your home and partly for business or rental.
You may use part of your property as your home and part of it for business or to produce income. If you sell the entire
property, you should
consider the transaction as the sale of two properties. You postpone the gain only on the part used as your home. This includes
the land and
outbuildings, such as a garage for the home, but not those used for the business or the production of income.
Home changed to rental property.
You cannot postpone tax on the gain on rental property, even if you once used it as your home. The rules explained
in this publication generally
will not apply to sale of rental property. Gains are taxable and losses are deductible as explained in Publication 544.
Temporary rental of home before sale.
You have not changed your home to rental property if you temporarily rented your old home before selling it, or your
new home before living in it,
as a matter of convenience or for another nonbusiness purpose. You postpone the tax on the gain from the sale if you meet
the requirements explained
earlier.
Failed attempt to rent home.
If you placed your home with a real estate agent for rent or sale and it was not rented, it is not considered business property or
property held for the production of income. The postponement of gain rules explained in this publication will apply to the
sale.
Your new home must be your main home. See the explanation of main home, earlier. You must include in income any gain from the sale of your old home if you replace it with property that is not your main home. New home outside the United States.
A new home outside the United States qualifies as a new home for purposes of postponing gain. You must buy or build
and live in the new home as
your main home within the time allowed for replacement.
Retirement home.
You have not purchased a new home if you invest in a retirement home project that gives you living quarters and personal
care but does not give you
any legal interest in the property. Therefore, you must include in income any gain on the sale of your old home. However,
if you were age 55 or older
on the date of the sale, you may have been able to claim a one-time exclusion (line 14 of Form 2119).
Title to new home not held by you or spouse.
You have not purchased a new home if you invest in a home in which neither you nor your spouse holds any legal interest
(for example, a house to
which someone else, such as your child, holds the title).
Holding period.
If you postponed tax on any part of the gain from the sale of your old home, you will be considered to have owned
your new home for the combined
period you owned both the old and the new homes. This may affect how any taxable gain when you sell the new home is reported
on Schedule D (Form
1040).
How To Figure Cost of New Home You need to know the cost of your new home to figure the gain taxed and the gain on which tax is postponed on the sale of your old home. The cost of your new home includes costs incurred during the replacement period for the following items:
You cannot consider any costs incurred before or after the replacement period. However, you can include any costs incurred during the suspension period (discussed under Replacement Period, earlier). Debts on new home.
The cost of a new home includes the debts it is subject to when you buy it (purchase-money mortgage or deed of trust)
and the face amount of notes
or other liabilities you give for it.
Temporary housing.
If a builder gives you temporary housing while your new home is being finished, you must reduce the contract price
to arrive at the cost of the new
home. To figure the amount of the reduction, multiply the contract price by a fraction. The numerator (top number) is the
value of the temporary
housing, and the denominator (bottom number) is the sum of the value of the temporary housing plus the value of the new home.
Seller-paid points.
In figuring the cost of your new home, you must subtract any points paid by the seller from your purchase price.
Settlement fees or closing costs.
The cost of your new home includes the settlement fees and closing costs that you can include in your basis. See Settlement fees or closing
costs under Basis, in Publication 523.
Real estate taxes.
If you agreed to pay taxes the seller owed on your new home (that is, taxes up to the date of sale), the taxes you
paid are treated as part of the
cost. For more information, see Real Estate and Transfer Taxes in Publication 523.
New home used partly for business or rental.
If you replace your old home with property used partly as your home and partly for business or rental, you consider
only the cost of the part used
as your home. You must compare the cost of this part to the adjusted sales price of the old home to determine the amount of
gain taxed in the year of
sale and the amount of gain on which tax is postponed.
Example. Your old home had a basis of $50,000. You sold it in February 1997 for a gain of $25,000. Your adjusted sales price is $75,000. Before your replacement period ended, you bought a duplex house for $120,000. You live in half and rent the other half. Only half of the cost of the duplex ($60,000) is considered an investment in a new main home, so you are taxed on $15,000 ($75,000 adjusted sales price - $60,000 cost) of the $25,000 gain on the sale. You must postpone tax on $10,000 of the gain reinvested in your new home. The basis of your new home is $50,000 ($60,000 cost - $10,000 postponed gain). The basis of the rented part of the duplex is $60,000. Inheritance or gift.
If you receive any part of your new home as a gift or an inheritance, you cannot include the value of that part in
the cost of the new home when
figuring the gain taxed in the year of sale and the gain on which tax is postponed. However, you include the basis of that
part in your adjusted basis
to determine any gain when you sell the new home.
Example. You bought a home in 1992 for $60,000. You sold that home in March 1997 for $65,000, at a gain of $5,000. You had fixing-up expenses of $200. Later, your father died and you inherited his home. Its basis to you is $62,000. You spent $14,000 to modernize the home, resulting in an adjusted basis to you of $76,000. You moved into the home before your replacement period ended. To find the gain taxed in the year of the sale, you compare the adjusted sales price of the old home, $64,800 ($65,000 - $200), with the $14,000 you invested in your new home. (For this purpose, you do not include the value of the inherited part of your property, $62,000, in the cost of your new home.) The $5,000 gain is fully taxed because the adjusted sales price of the old home is more than the amount you paid to remodel your new home, and the difference between the two amounts is more than $5,000. Certain Sales by Married Persons This section explains how married persons figure their postponed gain in certain situations. You may be able to postpone gain from the sale of your old home even if:
You and your spouse can figure the postponed gain, which reduces the basis of the new home, as if the two of you owned both homes jointly. To do this, both of you must meet both of the following requirements.
Both of you must sign the statement. You can make the statement in the bottom margin on page 1 of Form 2119 or on an attached sheet. If either of you does not sign the statement, you must report the gain in the regular way, as explained in the following example. Example. In April 1997, you sold a home that you owned separately but that both you and your spouse used as your main home. The adjusted sales price was $98,000, the adjusted basis was $86,000, and the gain on the sale was $12,000. Before the replacement period ends, you and your spouse buy a new home for $100,000. You move in immediately. The title is held jointly, and under state law, you each have a one-half interest. If you both sign the statement to reduce the basis of the new home, you postpone the gain on the sale as if you had owned both the old and new homes jointly. You and your spouse will each have an adjusted basis of $44,000 ($50,000 cost minus $6,000 postponed gain) in the new home. If either of you does not sign the statement, your entire gain of $12,000 will be currently taxed, not postponed. This is because the adjusted sales price of the old home ($98,000) is greater than your part of the cost of the new home ($50,000). You and your spouse will each have a basis of $50,000 in the new home. Deceased spouse.
If your spouse died after you sold your old home and before you bought and occupied a new home, you can postpone the
gain from the sale of the old
home if the basic requirements are met, and:
Separate homes replaced by single home.
If you and your spouse both had gains from the sales of homes that had been your separate main homes before your marriage,
you may have to postpone
the tax on both gains. This can happen if all of the following are true.
Home replaced by two homes of spouses living apart.
If you and your spouse sell a jointly-owned home and each of you then buys and lives in separate new homes, the postponement
provisions apply
separately to your gain and to your spouse's gain.
Only one spouse buys a new home.
Even if your spouse does not buy a new home within the replacement period, you still should report only your share
of any gain from the sale of the
old home. You postpone your share of the gain if you meet all the requirements to do so, even though your spouse cannot postpone
his or her share.
If the rules for sales before May 7, 1997, apply to you, the reporting requirements you may have are explained here. Form 2119.
For sales before 1998, Form 2119 was used to report the sale of an old home and any purchase of a new one within the
replacement period. You should
have filed Form 2119 with your tax return for the year you sold your old home. If you filed your return for that year before
buying a new home, you
also may have to file a second Form 2119 when you do buy your new home. If you need Form 2119 for that purpose, you still
can order it from the IRS.
See How to Get Tax Help, later.
Loss reported on sale.
If you reported a loss on the sale of your home, do not file a second Form 2119 if you later buy a new home. The loss
on the sale was not
deductible and has no effect on the basis of your new home.
New home purchased after return filed.
If you postponed gain from the sale of your old home and you buy and live in a new home after you file your return
for the year of the sale but
within the replacement period, you should notify the IRS by filing a second Form 2119 and, if necessary, Form 1040X and Schedule
D.
New home costs at least as much as adjusted sales price.
If your new home costs at least as much as the adjusted sales price of your old home, file the second Form 2119 by
itself. This form must include
your address, signature, and the date. If you filed a joint return for the year of sale, the form also must include your spouse's
signature.
New home costs less.
If your new home costs less than the adjusted sales price of the old home, you must file an amended return (Form 1040X)
for the year of sale.
Attach a second completed Form 2119 to report the purchase and Schedule D (Form 1040) showing the gain you must report. You
will have to pay interest
on any additional tax due. The interest generally is figured from the due date of the original return.
No new home within replacement period.
If you postponed gain on the sale of your old home because you planned to replace it but you do not replace it within
the replacement period, you
must file a second Form 2119. Attach it to your amended return (Form 1040X) for the year of the sale. Include a Schedule D
(Form 1040) to report your
gain.
Divorce after sale.
If you are divorced after filing a joint return on which you postponed the gain on the sale of your home, but you
do not buy or build a new home
(and your former spouse does), you must file an amended joint return to report the tax on your share of the gain. If your
former spouse refuses to
sign the amended joint return, attach a letter explaining why your former spouse's signature is missing.
Statute of limitations.
The 3-year limit for assessing tax on the gain from the sale of your home begins when you give the IRS information
that shows:
Example.
Frank and Evelyn Smith sold their home on May 1, 1997, for $87,000. They spent $500 on fixing-up expenses and paid
a commission on the sale of
$5,200. Neither Frank nor Evelyn was 55 or older on the date of the sale. They planned to buy a replacement home but had not
bought one before they
filed their 1997 tax return.
To figure your taxable income, you must subtract either your standard deduction or your itemized deductions from adjusted gross income. For information on the standard deduction, get Publication 501. Itemized deductions are figured on Schedule A (Form 1040). This chapter discusses itemized deductions of particular interest to members of the Armed Forces. For information on other itemized deductions, get the publications listed below.
Miscellaneous Itemized Deductions You must reduce the total of most miscellaneous itemized deductions by 2% of your adjusted gross income. For information on deductions that are not subject to the 2% limit, get Publication 529. Deductible employee business expenses are miscellaneous itemized | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||