# Presentation: 191219

## Lesson 13

**Sale of Home**

**Notes:**
This lesson contains information for the Advanced and Military and International courses and has been updated for Tax Year 2007.

  References:
Form 1099-S, Proceeds from Real Estate Transactions
Publication 523, Selling Your Home
Publication 3, Armed Forces’ Tax Guide
Schedule D, Capital Gains and Losses 

Note:  The sale of a main home that was converted into rental property is beyond the scope of the VITA/TCE and taxpayer should seek a tax professional.

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## Objectives

- Determine if the taxpayer meets the **ownership*** *and **use tests**
- Determine whether a home is the taxpayer’s **main** home
- Determine when the ownership and use tests may be suspended
- Determine the amount of gain eligible for exclusion from income

**Notes:**
Things to keep in mind: 
There is not always a source document for the sale of a residence.
There is not a question on the Form 13614 that asks if you sold a personal residence.
As in the sale of investment property, it is the taxpayer’s responsibility to provide the basis, adjusted basis, sale price, etc.  
Be sure that you are certified to prepare intermediate, advanced, international and military tax returns.
If a personal residence was used as rental property at any time during the time it is owned by the taxpayer, it becomes an issue that should be referred to a tax professional.
If all documentation is available the above objectives will be used for the preparation of this issue on a tax return.
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## Intake/Interview Process

- Form 13614 – Intake and Interview Sheet
-                      Income Section

**Notes:**
It is important  to ask the taxpayer all relevant questions to determine if anything was sold during the previous year.  An address change from the previous year may indicate the sale of a home.
Explain that the person responsible for closing the transaction is generally required to file and furnish Form 1099-S. A list of transactions that are not reportable are covered in the instructions for Form 1099-S.
Reinforce that if a taxpayer sold a home that was used as rental property or partly for business, he or she must report the taxable gain on the sale of the home on his or her tax return. A taxpayer with this situation should seek the assistance of a tax professional.
Remind students that it is important to avoid overly complicated returns. If the volunteer does not feel qualified to deal with a particular sale-of-home situation, or if the taxpayer is only eligible for a partial gain exclusion, the volunteer should suggest the taxpayer see a tax professional
It is important to note on Form 13614 (or approved alternative used at your site) that a sale occurred.  It will be added to the tax return only if there was gain above the exclusion. 

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## Requirements for Exclusion

- Exclude up to $250,000 ($500,000 if married filing jointly) of gain on the sale of main home if the following requirements are met:
- Ownership Test (either spouse, if married)
- Use Test (both spouses, if married)
- Did not excluded gain in the past 2 years (neither spouse, if married)
- File a joint return, if married

**Notes:**
Explain that this is the amount that may be excludible.
Explain that these are the tests that must be met, and that each is discussed in detail later.

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## Ownership & Use Tests	

- During the **5-year period** before the sale:
- The taxpayer owned the home for at least 2 years, and
- The taxpayer lived in the home (as a main home) for at least 2 years

**Notes:**
Both the ownership and use tests have to be met.
The 5-year period for the purposes of these tests ends on the date of sale.
The required 2 years of ownership and use during the 5-year test period do not have to be continuous. Short, temporary absences count as periods of use.
Taxpayers can meet the ownership and use tests during different 2-year periods.
Review Example 1.
Military has special consideration for these tests, see slide 9

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## Main Home

- The home a taxpayer lives in most of the time is considered a **main home**
- Main home can be a:
- House
- Boat
- Mobile home
- Cooperative apartment
- Condominium

**Notes:**
Define main home.
Explain that a main home doesn’t have to be a “traditional house” and give examples.
Taxpayers owning more that one home may not designate a main home.
Review Examples 2 & 3 in the text.
Remind students that it is important to ask the taxpayer relevant questions to determine if the home is a main home.
Review the list of other factors on page 13-4 of the text and ask the student’s opinion of which items may carry more weight.
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## Reporting the Exclusion

- Eligible taxpayers do not report the sale of a main home on a tax return unless:
-   The gain **exceeds** the exclusion amount, or
-   The taxpayer chooses not to exclude it
- Report taxable gains on the sale of a main home on Schedule D, Form 1040

**Notes:**
Taxpayers (within the scope of the VITA/TCE) will rarely have to report gain from the sale of a main residence.
Example – If the selling price of a home is $400,000 for a married couple and they meet the use and ownership tests, there is no reporting on the return because even if they have no basis they are entitled to exclude up to $500,000.
 If any portion of the gain is taxable, the transaction should be reported on Schedule D.
Ask your students if they might guess why anyone would want to include the gain on the sale of a home.  Reason: they could have two homes they want to sell and the gain will be much bigger on the second home.  They want to sell the other home soon but they can only exclude this type of gain every two years.  

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## Loss on the sale of a main home is not deductible!

**Reporting Losses**

**Notes:**
Because the class has already had the lesson on the Sale of Stock, which allows a loss, it may be important to point out once again the difference in the sale of a personal property and investment property.

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## Test Period Extended

- Members of armed forces can extend the 5-year test period of the ownership and use tests if:
- They are serving on “qualified official extended duty,”
- The period of suspension doesn’t exceed 10 years, and
- Not more than one property at a time is being suspended.

**Notes:**
The Military Families Tax Relief Act of 2003 contains special provisions for Armed Forces members who sell their main home. The 5-year test period for members of the Armed Services can be suspended for up to ten years.
Define Qualified Official Extended Duty
Called or ordered to active duty for more than 90 days (or an indefinite period)
Serve at a duty station at least 50 miles from their main home or live in government quarters under government order
Only one property at a time qualifies for this time extension
Exclusion amounts may be reduced if there are unforeseen circumstances causing the home to be sold.
Refer volunteers to Pub 523, Selling Your Home, for examples of unforeseen circumstances.
This is beyond the scope of VITA/TCE and the taxpayer should seek a tax professional.  
Review Example 4.

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## Gain on Sale of Main Home

- Gain = Amount Realized – Adjusted Basis
- Amount Realized
- Total selling price, minus:
- Selling expenses (commissions, fees, advertising)
- Adjusted Basis
- Basis (usually cost), plus or minus:
- Capital improvements or losses

**Notes:**
Explain how to determine the gain or loss.  (This is very similar to the previous chapter on sale of investment property.)
Remember that if the selling price is below the exclusion. No calculations have to be made.  For example, a single person who meets the use and ownership tests and sells a house for $250,000 wouldn’t have any gain.  Basis has to be something.  
Review Example 5.
Have students review a Form 1099-S, Proceeds from Real Estate Transactions.
Go over Example 6.
Have students review a Schedule D.  Show how to enter the exclusion amount if the proceeds be more than the exclusion.
Inform students that if the home was used to produce rental income, part of the gain will have to be reported on Form 4797.  However, this is beyond the scope of the volunteer program and taxpayer should seek a tax professional.
Have students complete all exercises. 

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## Quality Review (QR)

- Form 8158 – Quality Review Sheet
-                       Income Section

**Notes:**
Use the Form 8158, Quality Review Checklist or your site’s approved equivalent form to review all returns prepared.  
Apply the quality review tools, in combination with the Intake and Interview Sheet and all the source documents, to the returns you prepare to ensure quality and accuracy for every taxpayer.  
Consider each box on the Quality Review Sheet that applies to the taxpayer’s situation to confirm that all the necessary questions and issues have been addressed.   If items are incorrect or incomplete, revisit each issue and make corrections to the return, and note any changes you made to the Intake Sheet as needed.
To ensure accurate reporting of income, verify that the taxpayer’s wages are accurate and that all income from Form(s) W-2 and other income documents, such as Form(s) 1099, have been included. 
Confirm that all income received by the taxpayer has been discussed and shown on the return, if required. 

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## Lesson Summary

- Eligible taxpayers may exclude up to $250,000 ($500,000, if married filing jointly) gain on the sale of their main home
- Taxpayers must meet the ownership and use tests to qualify for exclusion
- A main home is the home the taxpayer lives in most of the time
- Do not report gains that qualify for exclusion
- Losses are not deductible

**Notes:**
Review Summary power point. 
Ask students if they have any questions.

Progress to the next lesson.