Changes in use

You can be considered to have sold all or part of your property even though you did not actually sell it. The following are some sample situations:

  • You change all or part of your principal residence to a rental or business operation.
  • You change your rental or business operation to a principal residence.

Every time you change the use of a property, you are considered to have sold the property at its fair market value and to have immediately reacquired the property for the same amount. You have to report the resulting capital gain or loss (in certain situations) in the year the change of use occurs.

If the property was your principal residence for any year you owned it before you changed its use, you do not have to pay tax on any gain that relates to those years. You only have to report the gain that relates to the years your home was not your principal residence.

If you were using the property to earn or produce income before you changed its use, see Real estate, depreciable property, and other properties for information on how to report any capital gain or loss.

Special situations

In certain situations, the rules stated above for changes in use do not apply. The following are some of the more common situations:

Completing your Schedule 3

For information on how to calculate and report the gain, if any, see Sale of your principal residence.

Forms and publications

Related topics

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