It's important to understand how selling your home might affect your tax return. When filing taxes, you might qualify to exclude all or part of any gain from the sale of your house from your income. when you sell or otherwise give up ownership of a home. If you meet certain conditions, you may exclude the first $250,000 of gain from the sale of your home from your income and avoid paying taxes on it. The exclusion is increased to $500,000 for a married couple filing jointly. To qualify for the Section 121 exclusion, you must meet both the ownership test and the use test.
However, there are many other tax issues that may come up.
Here are some key points to consider when selling your home:
Preliminary Factors Before Determining Eligibility
Sale of Your Main Home
You can only have one main home - your primary residence - at a time. If you own and live in just one home, then that property is your main home. If you own or live in more than one home, you must apply a "facts and circumstances" test to determine which one is your main home.
The exclusion can apply to many different types of housing facilities that may be considered main homes, including single-family homes, condominiums, cooperative apartments, mobile homes, and houseboats.
The most important factor is where you spend the most time, but other factors are also relevant.
The more of the following factors that apply to your home, the more likely that it is your main home.
The address is listed on your:
U.S. Postal Service address
Voter Registration Card
Federal and state tax returns and
Driver's license or car registration
The home is near:
Where you work
Where you bank
The residence of one or more family members
Recreational clubs or religious organizations where you are a member
Home’s Date of Sale
You will need to know the home's date of sale. If you received Form 1099-S, Proceeds From Real Estate Transactions, the date of sale appears in box 1. If you didn’t receive Form 1099-S, the date of sale is either the date the title transferred, or the date the economic burdens and benefits of ownership shifted to the buyer, whichever date is earlier. In most cases, those dates are the same.
Transfer of Your Home to a Spouse (or Ex-Spouse)
If you transferred your home (or your share of a jointly owned home) to a spouse or ex-spouse as part of a divorce settlement, you are generally considered to have no gain or loss. You have nothing to report from the transfer and this entire publication doesn’t apply to you. There is one exception to this rule: if your spouse or ex-spouse is a nonresident alien, then you likely will have a gain or loss from the transfer, and the tests in this publication apply.
Determining Eligibility (Ownership and Use Tests)
Automatic disqualifications:
The sale of your home isn’t eligible for the exclusion if ANY of the following are true:
You acquired the property through a like-kind (1031) exchange during the past 5 years.
You are subject to expatriate tax.
To qualify for the Section 121 exclusion, you must meet both the ownership test and the use test.
Ownership
You're eligible for the exclusion if you owned the home for at least two years during a five-year period ending on the date of the sale.
For a married couple filing jointly, only one spouse has to meet the ownership requirement.
Use
Determine whether you meet the residence requirement. If you owned the home and used it as your residence for at least 24 months of the previous 5 years, you meet the residence requirement. The 24 months of residence can fall anywhere within the 5-year period, and it doesn't have to be a single block of time: All that is required is a total of 24 months (730 days) of residence during the 5-year period.
Unlike the ownership requirement, each spouse must meet the residence requirement individually for a married couple filing jointly to get the full exclusion.
If you were ever away from home, determine whether that time counts toward your residence
requirement. A vacation or other short absence counts as time you lived at home even if you
rented out your home while you were away.
If you become physically or mentally unable to care for yourself, and you use the home as your
principal residence for 12 months in the 5 years preceding the sale or exchange, then any time
you spent living in a care facility such as a nursing home counts toward the 2-year residence
requirement as long as the facility has a license from a state to care for people having your
condition.
Determine whether you meet the look-back requirement. If you didn't sell another home during the 2-year period before the date of sale (or, if you did sell another home during this period, but didn't take an exclusion on the gain earned from it), you meet the look-back requirement. You're generally not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home.
You can only take the exclusion once in a 2 year period. You're generally not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home.
You can meet the ownership and use tests during different 2-year periods if you meet both tests during the 5-year period ending on the date of the sale.
Exceptions to the Eligibility Test
If any of the following apply to you, refer to IRS Publication 523 (2020) - Selling Your Home to see if it affects your qualification:
A separation or divorce occurred during ownership of the home.
The death of a spouse occurred during ownership of the home.
The sale involved vacant land.
You owned a remainder interest, meaning the right to own a home in the future, and you sold that right.
Your previous home was destroyed or condemned.
You were a service member during the ownership of the home.
You acquired or are relinquishing the home in a like-kind exchange.
If you didn’t meet the Eligibility Test then while you don't qualify for the maximum exclusion, you may still qualify for a Partial Exclusion if the main reason for your home sale was a work or health related move, or an unforeseeable event.
Other Facts and Circumstances
Don't lose hope! Even if your situation doesn’t match any of the requirements above, you still may qualify for an exception if you can demonstrate the primary reason for sale, based on facts and circumstances, is work related, health related, or unforeseeable.
Some factors are:
The situation causing the sale arose during the time you owned and used your property as your residence.
You sold your home not long after the situation arose.
You couldn’t have reasonably anticipated the situation when you bought the home.
You began to experience significant financial difficulty maintaining the home.
The home became significantly less suitable as a main home for you and your family for a specific reason.
Gains and Losses
If you sell your main home and have a gain from the sale, you may be able to exclude up to $250,000 of that gain from your income. If you file a joint return with your spouse, you might be able to exclude up to $500,000.
Homeowners who are excluding all the gain do not need to report the sale on their tax return.
To figure the gain or loss on the sale of your main home, you must know the selling price, the amount realized, and the adjusted basis.
Subtract the adjusted basis from the amount realized to get your gain or loss.
Selling price −Selling expenses Amount realized −Adjusted basis Gain or loss
A positive number indicates a gain; a negative number indicates a loss.
Losses
If you experience a loss because your main home sells for less than what you paid for it, the loss is not deductible.
Basis Adjustments—Details and Exceptions
Many, but not all, costs associated with the purchase and maintenance of your home are included in the basis of your home, such as fees and closing costs; construction; costs owed by the seller but paid by you; and improvements.
Basis, gain and loss are also affected if your home was acquired through a trade; received in divorce, inherited, or as a gift; foreclosed on; destroyed or condemned; or used for business or as a rental.
For details on determining basis and a breakdown of which costs are included in basis and other factors that affect the calculation of gain or loss, see IRS Pub. 551, Basis of Assets.
Multiple Homes
If you own more than one home, you can only exclude the gain on the sale of your main home. You must pay taxes on the gain from selling any other home.
Reported Sale
If you don't qualify to exclude all of the taxable gain from your income, you need to report the gain from the sale of your home when you file your tax return.
Other Factors That Affect How You Report the Sale of Your Home
Aside from calculating and correctly reporting any taxable gain, you may need to determine whether it is in your best long-term interest to exclude the gain even if you are eligible to do so; how to take deductions relating to your home sale; and how to report income other than the gain that you may have received from your home sale, as well as special circumstances that apply to some home sellers.
Reporting the Capital Gain
If you have gain that can’t be excluded, you must generally report it on Form 8949, Sales and Other Dispositions of Capital Assets, and Schedule D (Form 1040), Capital Gains and Losses. Report the sale on Part I or Part II of Form 8949 as a short-term or long-term transaction, depending on how long you owned the home.
If you receive an informational income-reporting document such as Form 1099-S, Proceeds From Real Estate Transactions, you must report the sale of the home even if the gain from the sale is excludable.
You may be able to temporarily defer capital gains invested in a Qualified Opportunity Fund (QOF). You may also be able to permanently exclude capital gains from the sale or exchange of an investment in a QOF if the investment is held for at least 10 years.
Effective December 22, 2017, section 1400Z-2 provides a temporary deferral of inclusion in gross income for capital gains invested in Qualified Opportunity Funds, and permanent exclusion of capital gains from the sale or exchange of an investment in the Qualified Opportunity Fund if the investment is held for at least 10 years.
If you must pay tax on the gain from the sale of your home, the gain may be a long-term capital gain. You must own the home longer than one year for the gain to qualify as a long-term capital gain.
Short-term capital gains tax rates are equal to your ordinary income tax rate, also known as your tax bracket.
Long-term capital gains tax rates are much less onerous; many people qualify for a 0% tax rate. Everybody else pays either 15% or 20%. It depends on your filing status and income.
If you have an installment sale, report the sale under the installment method unless you elect out. If you use the installment method to defer some of the gain, the exclusion of gain under Section 121 still remains available.
Recording the Sale on the Correct Forms
There may be different forms to use depending on whether it was an installment sale; if you made separate gain/loss calculations for business and residence portions; if you’re a nonresident or resident alien who doesn’t have a social security number and need to apply for an ITIN.
You also may have to increase withholding or make estimated tax payments if you have a taxable gain.
Taking Deductions Relating to the Sale
When reporting deductions relating to the sale of your home, depending on your circumstances, you may need to figure your real estate tax deductions differently.
There is no tax deduction for transfer taxes, stamp taxes, or other taxes, fees, and charges you paid when you sold your home. However, if you paid these amounts as the seller, you can treat these taxes and fees as selling expenses. If you pay these amounts as the buyer, include them in your cost basis of the property.
If you didn’t already deduct all your mortgage points on an earlier tax return, you may be able to deduct them on your tax return for the year of sale.
If you sell your house at a loss, it is considered a personal loss. You cannot take a deduction.
Reporting Ordinary Income from the Sale
Other income aside from the gain that may need to be reported include amounts received from selling personal property; amounts received for sales of expired options to purchase your property; and applicable canceled or forgiven mortgage debt.
* Extension of the exclusion of canceled or forgiven mortgage debt from income. The exclusion of income for mortgage debt canceled or forgiven was extended, through December 31, 2025.
* Special rules for capital gains invested in Qualified Opportunity Funds. Effective December 22, 2017, section 1400Z-2 provides a temporary deferral of inclusion in gross income for capital gains invested in Qualified Opportunity Funds, and permanent exclusion of capital gains from the sale or exchange of an investment in the Qualified Opportunity Fund if the investment is held for at least 10 years.
Handling Any Special Circumstances
Finally, you may have to determine if you qualify for any exceptions and if you have to pay back, or "recapture", all or some of any homebuyer credits or federal mortgage subsidies.
The various calculations, exceptions and special circumstances; along with the number of forms can get complex depending on your particular situation. In addition, you will need to determine which records you need to keep from the sale and for how long.
If you have questions about tax issues relating to the sale of your home, or if you need help preparing your tax return(s), please contact us at CWSEAPA PLLC and we'd be happy to give you a free 30 minute consultation. We'd love to help you, and we have special expertise in real estate taxation, so you are in good hands. Email craig@craigwsmalleyea.com .
Resources:
IRS Publication 523, Selling Your Home, - worksheets and help you to figure the adjusted basis of the home sold, the gain or loss on the sale, and the excluded gain on the sale. It also provides the latest information and developments, such as legislation enacted after it was published.
IRS Topic No. 409 covers general capital gain and loss information.
IRS Instructions for Form 8949