Purchases Under Rollover Replacement Rule

Under the tax laws that were in effect before May 7, 1997, you could avoid capital gains tax on the sale of your home if, within two years before or after the sale, you purchased and lived in another main home that cost more than the sales price of the old home.

If you took advantage of this rule in previous years, the gain on the sale of your earlier homes was deferred, not wiped out. The amount of gain you would otherwise have recognized (and paid tax on) was deducted from the cost of your replacement home, so the basis of your current home is likely to be lower than your cost.

If this is your story, you'll need to look back into your tax records for the IRS Form 2119, Sale of Your Home, that was filed in the year you sold your most recent earlier home. That form (which became obsolete for sales after 1997) required you to compute the adjusted basis of the replacement home, which is what you must use as the initial basis.

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