Sale or Exchange of Your Home

If you sell or exchange your home, you may be able to exclude up to $250,000 ($500,000 for certain married persons filing a joint return) of the gain on the sale or exchange. In most cases, you must meet the ownership and use tests. However, even if you meet the ownership and use tests, your home sale is not eligible for the exclusion if either of the following is true.

• You acquired the property through a like-kind exchange (1031 exchange) during the past 5 years.

• You are subject to the expatriate tax.

14 Publication 587 (2025)

Ownership and use tests. The ownership and use tests generally require that during the 5-year period ending on the date of the sale:

• You owned the home for at least 2 years (ownership test), and

• You lived in the home as your main home for at least 2 years (use test). The 2 years of residence can fall anywhere within the 5-year period, and it does not need to be a single block of time.

Gain on Sale

If you use property partly as a home and partly for business, the treatment of any gain on the sale varies depending on whether the part of the property used for business is part of your home or separate from it.

Part of Home Used for Business

If the part of your property used for business is within your home, such as a room used as a home office for a business or rooms used to provide daycare, you do not need to allocate gain on the sale of the property between the business part of the property and the part used as a home. In addition, you do not need to report the sale of the business part on Form 4797, Sales of Business Property. This is true whether or not you were entitled to claim any depreciation. However, you cannot exclude the part of any gain equal to any depreciation allowed or allowable after May 6, 1997. See Depreciation , later.

Separate Part of Property Used for Business

You may have used part of your property as a home and a separate part of it, such as an outbuilding, for business.

Use test not met for business part. You cannot exclude gain on the separate part of your property used for business unless you owned and lived in that part of your property for at least 2 years during the 5-year period ending on the date of the sale. If you do not meet the use test for the business part of the property, an allocation of the gain on the sale is required. For this purpose, you must allocate the basis of the property and the amount realized upon its sale between the business part and the part used as a home. You must report the sale of the business part on Form 4797.

Use test met for business part (business use in year of sale). If you used a separate part of your property for business in the year of sale, you should treat the sale of the property as the sale of two properties, even if you met the use test for the business part. You must report the sale of the business part on Form 4797.

To determine the amount to report on Form 4797, you must divide your selling price, selling expenses, and basis between the part of the property used for business and the separate part used as your home. In the same way, if you qualify to exclude any of the gain on the business part

of your property, also divide your maximum exclusion between that part of the property and the separate part used as your home.

Excluding gain on the business part of your prop- erty. You can generally exclude gain on the part of your property used for business if you owned and lived in that part as your main home for at least 2 years during the 5-year period ending on the date of the sale.

Use test met for business part (no business use in year of sale). If you have used a separate part of your property for business (though not in the year of sale) but meet the use test for both the business part and the part you use as a home, you do not need to treat the transaction as the sale of two properties. Also, you do not need to file Form 4797. You can generally exclude gain on the entire property.

Depreciation

If you were entitled to deduct depreciation on the part of your home used for business, you cannot exclude the part of the gain equal to any depreciation you deducted (or could have deducted) for periods after May 6, 1997. This means that when figuring the amount of gain you can exclude, you must reduce the total gain by any depreciation allowed or allowable on the part of your home used for business after May 6, 1997.

If you can show by adequate records or other evidence that the depreciation you actually deducted (the allowed depreciation) was less than the amount you were entitled to deduct (the allowable depreciation), the amount you cannot exclude (and must subtract from your total gain when figuring your exclusion) is the amount you actually deducted.

You do not have to reduce the gain by any depreciation you deducted (or could have deducted) for a separate structure for which you cannot exclude the allocable portion of the gain.

Basis Adjustment

If you used any part of your home for business, you must adjust the basis of your home for any depreciation that was allowable for its business use, even if you did not claim it. If you deducted less depreciation than you could have under the method you properly selected, you must decrease the basis by the amount you could have deducted under that method. If you deducted more depreciation than you should have under the method you properly selected, you must decrease the basis by the amount you should have deducted, plus the part of the excess deducted that actually decreased your tax liability for any year. For more information on reducing the basis of your property for depreciation, see Pub. 551.

Publication 587 (2025) 15

Reporting the Sale

Do not report the 2025 sale of your main home on your tax return unless:

• You received a Form 1099-S, Proceeds From Real Estate Transactions, for the sale or exchange;

• You have a gain and you do not qualify to exclude all of it;

• You have a gain and choose not to exclude it; or

• You have a loss from the sale that is deductible.

Caution: A loss from the sale of your home, or the personal part of your home if it was also used for business or to produce rental income, is not deductible.

If any of these conditions apply, report the gain or loss as explained in the Instructions for Schedule D.

If you used the home for business, you may have to use Form 4797 to report the sale of the business part. See the Instructions for Form 4797.

More Information

This section covers only the basic rules for the sale or exchange of your home. For more information, see Pub. 523.