Your Home Sale and Capital Gains Taxes

A common question people have about taxes is whether they need to report the sale of their home on their tax return. The answer depends on several factors, but generally, you will need to report the sale if:

A. You made a profit from selling your home and don’t qualify to exclude that profit from your taxable income. For example, if your gain exceeds the allowable exclusion amount, you need to report the excess.

B. You made a profit from the sale and decide not to use the exclusion to avoid paying taxes on it.

C. You received a Form 1099-S, which reports the proceeds from the sale of real estate. This form is sent by the closing organization to both the IRS and the seller/buyer when certain real estate transactions occur.

In any of these cases, it’s important to include the sale of your home in your tax return to ensure everything is accurately reported.

Do I Pay Taxes When Selling My Home?

You should report your home sale on your taxes since gains from an investment (property) are taxable. If the home was your primary residence, you can reduce the amount of taxes you pay, but for a second home or investment property, the profits will be taxable.

To figure out if you need to report the sale or exchange of your main home on your tax return, check the instructions for Schedule D of Form 1040. You should report the transaction even if it’s not currently taxable. This is true even if you can exclude the gain from taxes under section 121.

If the property sold was not your main home, such as an investment or second home, you’ll need to report it differently. Use Form 4797 for reporting gains or losses from sales of assets, Form 6252 for installment sales, and Schedule D for the right income tax form. Additionally, if Box 4 on Form 1099-S is checked and you received or will receive like-kind property, you must eFileIT Form 8824.

How to File with Form 1099-S?

Many people who have sold their homes don’t have to report the transaction to the IRS; for most taxpayers, the profit on a home sale is usually tax-free.

Whether or not you have to pay taxes on the profit you make selling your home depends on how long you owned and lived in the home before the sale and how much profit you made.

• If you owned and lived there for 2-5 years before the sale, then up to $250,000 of profit is tax-free.
• If you are married and file with the married filing jointly status, the tax-free amount doubles to $500,000.

You can exclude profit from your taxable income if you meet certain conditions. If you sell for a loss, you can't deduct that loss. You can use the exclusion each time you sell your primary residence, provided you've owned and lived in it for 2-5 years and haven't claimed the exclusion on another home in the past two years. If your profit exceeds $250,000 (or $500,000 for married couples), the excess is reported as a capital gain on eFileIT Schedule D.

Am I Eligible to Exclude My Home Sale Profit?

In order to treat the gain from the sale of your home as tax-free or exclude it from your taxable income, you must meet the following requirements:

• You must have owned the home for at least two years (730 days or 24 full months) during the five years prior to the date of your sale. It doesn't have to be continuous, nor does it have to be the two years immediately preceding the sale. You would still qualify under this test if you lived in a house for a decade as your primary residence and then rented it out for two years before the sale.
• You must have used the home you are selling as your principal residence for at least 2 of the five years prior to the date of sale.
• You have not excluded the gain on the sale of another home within two years prior to this sale.

If you are married and want to use the $500,000 exclusion:

• You must file a joint return
• At least one spouse must meet the ownership requirement (owned the home for at least two years during the five years prior to the sale date, see above).
• Both you and your spouse must have lived in the house for 2 of the five years leading up to the sale.

Are there Special Exclusions?

If you don't meet all of the requirements listed above, there are special rules that may allow you to claim either a full exclusion or a partial exclusion.

• If you acquire a home as part of a divorce settlement, you can count the time your former spouse owned the place as time you owned the home to pass the 2-5 years test.
• For the use requirement, you can count short temporary absences as time lived in the home, even if you rented the home to others during these absences.
• If you or your spouse is granted use of a home as part of a divorce or separation agreement, the spouse who doesn't live in the home can still count the days of use that the other spouse lives in that home.
• If either spouse dies and the surviving spouse has not remarried prior to the date the home is sold, the surviving spouse can count the period the deceased spouse owned and used the property toward the ownership and use test.

For more information, see IRS Publication 523 - Selling Your Home.

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