Frequently Asked Questions - Sale of Home and Other Assets

Q: How does selling your home for a profit affect the income you report and your tax liability?

A: Any gain (profit) on the sale of your home can be subject to the capital gains tax. Your gain (or loss) is determined by subtracting your cost basis from your selling price, less selling expenses. A loss is not deductible on your return.

However, there can be an exclusion of all or part of your gain. If it was your main home, and during the five-year period ending on the date of sale, you owned and lived in the home for at least two years, you can exclude up to $250,000 (single person) or up to $500,000 (married filing joint and both qualify). The excess amount will still be taxed at favorable capital gains rates. If you can exclude all your gain, you do not have to report the sale on your tax return.

If you do not meet these tests, you still might be able to exclude some of the gain if you meet certain other conditions, such as a change of place of employment or health. Read the IRS discussion on this topic on its website to find out whether you qualify for one of the exceptions.

This information is in IRS Publication 523, Selling Your Home. If you need more details, you can obtain them by reviewing the publication or by calling, toll-free, 800-829-3676.

Q: I am married, and our house when sold will net about $400,000 in profit. We have lived here for 30 years. If I die before the house is sold, does my spouse lose the $250,000 exemption for me?

A: Starting in tax year 2008, an unmarried surviving spouse who hasn't remarried typically may qualify to exclude from income as much as $500,000 of the gain from the sale of the principal home, as long as the sale occurs no later than two years after the date of the other spouse's death. But this rule applies only if the couple would have met the qualifications for the $500,000 exclusion immediately before the spouse's death.

If you live in a community property state and the home is community property, the cost basis is stepped up to fair market value on the date of death. If later sold, a realized gain would only occur if the sales proceeds were to exceed the revised cost basis.

If you do not live in a community property state, then only the decedent's half of the house has its basis stepped up to fair market value. See IRS Publication 523 for more information.

Q: If I sell shares in a mutual fund and reinvest the proceeds in another fund from the same fund family, do I have to pay tax on any gain?

A: You are actually selling one fund and purchasing a new fund. You would need to report the sale of the shares you sold on Form 1040, Schedule D. The purchase price of the new shares you bought becomes the cost basis of those shares. Your holding period for the new shares starts on the date of purchase of those new shares.

Q: Last year I had some capital losses that exceeded the $3,000 maximum allowed. How do I get to use the remaining losses?

A: You need to use the data from last year's return and complete the Capital Loss Carryover work sheet in this year's Schedule D instruction book to allocate this carryover between long and short term. Then enter the short-term carryover, if any, on Part I, Line 6 and the long-term on Part II, Line 14.

Q: I invested in a company, and now all my shares are worthless. Can I carry the loss forward to coming years, or must I claim the loss this year?

A: You must take the loss in the year that the shares become worthless. If you discover that your shares became worthless in a prior year, you are allowed to go back up to seven years to amend your tax return to obtain a refund. Normally, you can only go back three years. Please note that when a company declares bankruptcy it does not mean that the stock has been become worthless.

You report the worthless security on Line 1 or Line 8 of Schedule D (Form 1040) depending upon whether the loss is short or long term. Enter "worthless" in columns (c) and (d) and the amount of the loss in parentheses in columns (f).

If your net capital loss for the year exceeds $3,000, you get to carry the excess forward. The Form 1040, Schedule D instructions explain how to account for worthless stock.