Tax Implications of Home Ownership, written by Bruce Neil Edwards, Esq., of Sorensen & Edwards, P.S., discusses the different tax rules that apply to home ownership, home sales, and owner relocations and the tax consequences of the purchase, financing, refinancing, and sale or exchange of a taxpayer's principal residence. 

First, this Portfolio deals with the tax consequences to purchasers and existing owners, including first-time homebuyer credits, basis concepts and deductibility of mortgage interest. Second, it deals with the tax consequences of moving expenses.  

This Portfolio also deals with the tax consequences to sellers under the tax law as it applies to post-May 6, 1997 sales. It then delves into the tax consequences to sellers under the former §1034 as applicable to pre-May 7, 1997 sales, as well as the tax consequences to sellers under the former §121 as applicable to pre-May 7, 1997 sales. The Portfolio also outlines other considerations that may apply in given home ownership situations. 

It should be stressed that the dividing line between pre-May 7, 1997 home sales and those that occur after May 6, 1997 is particularly critical. The post-May 6, 1997 law is fairly straightforward. By contrast, the pre-May 7, 1997 law was fairly complex, had a number of pitfalls for the unwary, and is of only limited continuing relevance. 

A number of the authorities discussed with regard to former §§1034 and 121 may have application with regard to present law §121.  With this in mind, citations to these authorities have been included in the portion of this Portfolio that discusses present law §121. In most cases, parallel discussions have also been included in the portions of the Portfolio that discuss former §1034 and/or former §121. 

Tax Implications of Home Ownership allows you to benefit from:

• Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area
• Invaluable practice documents, including tables, charts, and lists
• Plain-English guidance from world-class experts
• Real-world and in-depth analysis that lets you explore various options
• Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents, and more
• Alternative approaches to both common and unique tax scenarios 

This Portfolio is part of the U.S. Income Portfolios Library, a comprehensive series that includes more than 200 Portfolios, which cover every federal tax topic with expert, in-depth analysis, and offer commentary on a wide range of federal taxation topics, including Compensation Planning, Deductions and Credits, Partnerships and Corporations, Special Pass-Through Entities, Corporate Reorganizations, Real Estate, Procedure and Administration, and more. 

Detailed Analysis

I. Overview

II. Purchase, Improvement and Financing

A. Basis

1. In General

2. Items Included in Basis

3. Capital Additions and Other Increases to Basis Following Acquisition

a. Through Additional Expenditures

b. Operation of the Tax Law

4. Reductions to Basis

a. Casualty Losses

b. Involuntary Conversions

c. Pre-May 1997 Law - Gain Rollovers Under Former § 1034

d. Depreciation

B. Taxes and Similar Assessments

1. Property Taxes

2. Sales Taxes

3. Other Assessments

C. Date of Transaction

1. In General

2. Examples from Case Law

a. Baertschi

b. Poague

c. Comment

3. Ownership of Escrow Prior to Closing

D. Tax Issues Related to Purchasing/Financing/Refinancing

1. Deductibility of Interest

2. Qualified Residence Interest

a. In General

b. Interest on Home Equity and Acquisition Indebtedness

c. Qualified Residence

d. Debt Secured by Residence

e. Tax-Exempt Housing Allowance

f. Pre-October 13, 1987 Indebtedness

g. Mortgage Insurance Premiums

h. Cooperative Housing Corporations

i. Estates and Trusts

j. Alternative Minimum Tax

3. Points (Prepaid Interest) and Other Charges

a. Points

(1) Revenue Procedure 94-27 Safe Harbor

(2) Outside the Rev. Proc. 94-27 Safe Harbor

(a) General

(b) Refinancing

(c) Payment From Taxpayer's Separate Funds

(d) Capitalized Points

b. Other Charges

4. Home Mortgage Interest and First-Time Homebuyer Credits

5. Reporting by Mortgagees - Information Returns

a. In General

b. Points

c. Reimbursements of Mortgage Interest Overpayments

d. Cancellation of Indebtedness

6. Qualified Principal Residence Indebtedness

III. Moving to the New Residence

A. Moving Expenses and Reimbursements - Introduction

B. Tax Treatment of Job-Related Moving Expenses

1. Overview

2. Whose Expenses Are Deductible?

a. Employees and Self-Employed Individuals

b. Members of Taxpayer's Household

3. "Moving Expenses" Defined

4. Commencement of Work at New Principal Place of Work

5. Distance and Duration-of-Employment Conditions

a. The Minimum Distance Requirement

b. The Minimum Duration-of-Employment Requirement

6. Taxability of Reimbursements

C. Tax Treatment of Employers

1. Deductibility of Reimbursements

2. Withholding on Reimbursements

3. Reporting of Reimbursements

D. Special Situations

1. Foreign Moves

a. Deductions

b. Exclusions

c. Retirees and Survivors

2. Military Moves

3. Employer Provided "Bargain Loans" to Facilitate Relocations

E. Timing of Reimbursements and Deductions

F. Alternative Minimum Tax Considerations

IV. Sales - Exclusion of Gain on Sale of Residence: Current Law - Post-1997 Taxpayer Relief Act § 121

A. Introduction

1. Overview of Current Provision

2. Section 121: In General

B. Limitations

1. In General

2. Joint Returns

3. Disposition Caused by Employment, Health, or Unforeseen Circumstances

4. Exclusion of Gain Allocated to Nonqualified Use

C. Determination of Period of Ownership and Use

1. "Use" When Out-of-Residence Care

2. Ownership and Use in Context of Home of Deceased Spouse

3. Property Owned by Spouse or Former Spouse

4. Homes Acquired in Former § 1034 Rollovers

5. Involuntary Conversions

6. Use by Bankruptcy Estate

7. Use by Trust

8. Use by Former Partnership

9. Election to Suspend Period

10. Use by Tenant-Stockholder in Cooperative Housing Corporations

11. Ownership by Certain Single Owner Entities

12. Property Acquired in Like-Kind Exchange

D. Concept of Use of Principal Residence

1. In General

2. Alternating Use of Residences

3. Inclusion of Vacant Land as a Part of Principal Residence

E. Sale of Principal Residence Partially Used for Business Purposes

F. Recapture of Federally Subsidized Mortgages

G. Sales of Partial Interests

H. Expatriates and Aliens

I. Effective Date and Transition Provisions

J. Tax Reporting

K. Special Audit Protection

L. Retroactive Application

M. Interrelationship of § § 121 and 1031

N. Interrelationship of § § 121 and 453

V. Sales - Exclusions of Gain on Sale of Residence - Former Law: § 1034 Gain Rollovers

A. In General

B. Gain Rollovers Under Former § 1034

1. Concept of "Taxpayer"

2. Purchase for Another Taxpayer

C. Concept of "Principal Residence"

1. Physical Occupancy

a. Old Residence

b. New Residence

2. Multiple Residences

a. Split Occupancy

b. Summer or Weekend House

3. New Residence Sold Before Old Residence

4. Series of Purchases or Sales

5. Job-Related Move Exceptions

6. Old Residence Vacated or Rented Out Prior to Sale

7. Furniture

D. Houseboat or Trailer

E. Cooperative or Condominium

F. Investment in Retirement Home

G. Foreign Residence

H. Land Sold Without House

I. Multiple Use Property

J. Split Interests

K. Improvements to the New Residence

1. In General

2. Time for Replacement and Physical Occupation

a. Purchase of New Residence

b. Repurchase of Old Residence

c. Construction of New Residence

d. Reconstruction of Another Owned Residence

3. Expiration of Replacement Time

L. Determination of Recognized Gain

M. Basis of New Residence

N. Allocation of Gain Where Property Only Partly a New Residence

O. Special Situations

1. Husband and Wife

2. U.S. Armed Forces - Extension of Replacement Period

P. Involuntary Conversion of Old Residence

Q. Related Party Issues

R. Statute of Limitations

S. Reporting: Gain, Loss and Estimated Tax

VI. Sales - Exclusion of Gain on Sale of Residence: Former Law: § 121 - Sale or Exchange of Residence at Age 55 or Older: Prior Law

A. Outline of Former § 121

B. Purpose of Former § 121

C. Comparison of Former § 121 and Former § 1034

D. Effective Dates

E. Concept of Qualifying Taxpayer

1. Co-ownership and Joint Return

a. One Spouse Satisfies All Requirements

b. Determination of Marital Status-Date of Determination

c. Definition of Marital Status

2. Jointly Owned Property

3. Tenant-Stockholder in Cooperative Housing Corporation

4. Trust or Estate as Taxpayer

5. Bankruptcy Estate

6. Other Situations

F. Age Requirements

G. Occupancy and Ownership Requirements Under Pre-1997 Act § 121

1. Time Measurement

2. Temporary Absences

3. Comparison with Former § 1034 Requirements

4. Application of Occupancy and Use Requirements

5. Property of Deceased Spouse Who Satisfied Ownership/Use Requirements

6. Nursing Home

H. Multiple Use Property

I. Split Interests: Life Estate and Future Interests

J. Sale or Exchange

K. Limitations

1. Joint or Separate Return

2. Gain Exceeding $125,000

3. Single-Election Rules

a. Election by Taxpayer

b. Election by Taxpayer's Spouse

c. Additional Election

L. Interaction with Other Code Sections

1. Section 1033

2. Former § 1034

3. Section 1041

4. Section 453

5. Section 1038

M. Election Procedures - General Requirements

1. Time for Election

2. Married Taxpayer

a. Election by Spouse

b. Election for Deceased Spouse

3. Manner of Making Election

a. General Requirements

b. Content of Statement

N. Revocation of Election

1. General Requirements

2. Consent by Spouse to Revocation

3. Required Extension of Statute of Limitations to Make Revocation Effective

VII. Other Considerations in Sale or Exchange of Residence - Deductions; Reacquisitions

A. Depreciation and Maintenance Expenses

1. Vacated Residence Offered Only for Sale

2. Vacated Residence Offered for Rent or Sale

3. Vacated Residence Temporarily Rented, Pending Sale

B. Deduction of Loss on Sale

C. Reacquisition of Principal Residence in Satisfaction of Secured Debt

1. Section 1038 Generally

2. Reacquisition and Resale of Principal Residence

D. Understated Interest

1. Capital Gains v. Interest

2. Gift Loan

3. Employer Provided Loans

VIII. Credits Available to Homeowners

Introductory Material

A. Residential Energy Credits

1. Nonbusiness Energy Property Credit

a. In General

b. Computation of Credit

(1). In General

(2). Limitations

c. Definitions

(1). Qualified Energy Efficiency Improvement

(2). Residential Energy Property Expenditures

d. Allocation of Credit

e. When Expenditure Made

f. Manufacturer's Certification

2. Residential Energy-Efficient Property Credit

a. In General

b. Computation and Definitions

(1). In General

(2). Limitations

(3). Qualified Solar Electric Property Expenditure

(4). Qualified Solar Water Heating Property Expenditure

(5). Qualified Fuel Cell Property Expenditure

(6). Qualified Small Wind Energy Property Expenditure

(7). Qualified Geothermal Heat Pump Property Expenditure

(8). Labor and Installation Costs

c. Allocation of Credit

d. When Expenditure Made

e. Limitation Based on Tax Liability

B. Home Mortgage Interest Credit

1. In General

2. Computation of Credit

a. In General

b. Certificate Credit Rate

(1) In General

(2) Consequence of Failure to Satisfy 25% Requirement

c. Certified Indebtedness Amount

(1) In General

(2) Qualified Home Improvement Loan

(3) Qualified Rehabilitation Loan

(4) Nonqualified Indebtedness

d. Limitations

3. Mortgage Credit Certificate

a. Definition

(1) In General

(2) Qualified Home Improvement

(3) Qualified Rehabilitation

b. Qualified Form

(1) In General

(2) Required Information

c. Period in Effect

d. Public Notice for Issuance

e. Revocation

f. Reissuance

4. Qualified Mortgage Credit Certificate Program

a. In General

b. Program Establishment Requirement

c. Election Requirement

(1) In General

(2) Revocation

(3) State Certification

d. Modified Qualified Mortgage Bond Requirements

(1) In General

(2) Modifications

(3) Residence Requirement

(4) Three-Year Requirement

(5) Purchase Price Requirement

(6) Income Requirement

(7) Targeted Areas Requirement

(8) New Mortgage Requirement

(9) Failure to Satisfy Requirements

e. Impermissible Mortgage Requirement

f. Particular Lender Requirement

g. Transferability Requirement

h. Developer Requirement

i. Permissible Fees Requirement

5. Limitations

a. Excess Credit Rate

b. Related Mortgagees

6. Reporting Requirements

C. First-Time D.C. Homebuyer Credit

1. In General

2. Income Limitation

3. First-Time Homebuyer

4. Special Rules, Basis Adjustments and Reporting

D. First-Time Homebuyer Credit, Including Long-Time Residents

1. In General; Amount of Credit; Credit Eligibility

2. Definitions and Special Rules

3. Limitations

a. Dollar Limitations

b. Modified Adjusted Gross Income Limitation

4. Exceptions

5. Recapture

6. Election to Take Credit in Previous Year

7. Joint Ownership Between Unmarried Taxpayers

8. Claiming the Credit

E. Computational Limitations and Carryovers

1. In General

2. Home Mortgage Interest Credit

3. First-Time D.C. Homebuyer Credit

4. Residential Energy Property Credit

Working Papers

Table of Worksheets

Worksheet 1 [Reserved]

Worksheet 2 H.R. Rep. No. 426, 99th Cong., 1st Sess. 296â€"301 (1986)

Worksheet 3 S. Rep. No. 313, 99th Cong., 2d Sess. 802â€"08 (1986)

Worksheet 4 Conf. Rep., H.R. Rep. No. 841, 99th Cong., 2d Sess. II 151â€"57 (1986)

Worksheet 5 Conf. Rep., H.R. Rep. No. 103-213, 103rd Cong., 1st Sess. 103 (1993)

Worksheet 6 H.R. Conf. Rep. 220, 105th Cong., 1st Sess. 330 (1997)

Worksheet 7 Rev. Proc. 87-15, 1987-1 C.B. 624

Worksheet 8 Rev. Rul. 87â€"22, 1987â€"1 C.B. 146

Worksheet 9 Rev. Proc. 94â€"27, 1994â€"1 C.B. 613

Worksheet 10 Rev. Proc. 2007-12, 2007-4 I.R.B. 354

Worksheet 11 HUD Settlement Statement with Annotations

Worksheet 12 Sample Client Letter: Sale/Exchange of Residence Under § 121 (General Summary)

Worksheet 13 Sample Client Letter: Sale/Exchange of Residence Under § 121 (Ownership and Use Test)

Worksheet 14 Sample Client Letter: Moving Expenses Under § 217

Worksheet 15 Sample Client Letter: First-Time Homebuyer Credit

Worksheet 16 Summary of Personal Energy Conservation Credits

Worksheet 17 Unforeseen Circumstances Qualifying for Fractional Home-Sale Exclusion of Gain Under § 121(c)