Selling Your Home: Do You Need to Report It to the IRS?
Selling a primary residence can create a significant gain, but much or even all of that gain may be excluded from federal income tax.
In general, qualifying homeowners may exclude up to $250,000 of gain, or up to $500,000 for certain married couples filing jointly.
But whether you must report the sale on your tax return depends on the circumstances.
Do You Qualify for the Home Sale Exclusion?
To qualify for the full exclusion, you generally must satisfy two primary requirements:
Ownership test: You owned the home for at least two of the five years before the sale.
Use test: You used the property as your main home for at least two of those five years.
You generally also cannot have claimed the exclusion on another home sale during the prior two-year period.
Special rules apply to married couples and certain other situations.
When Do You Have to Report the Sale?
If your entire gain qualifies for the exclusion and you did not receive Form 1099-S, you generally do not need to report the sale on your federal income tax return.
However, you generally must report the sale if:
You receive Form 1099-S, even if the entire gain is otherwise excludable, or
Your gain exceeds the amount you are eligible to exclude.
When reporting is required, you generally report the transaction using Form 8949 and Schedule D.
Don't Overlook Your Cost Basis
The taxable gain is not simply the difference between what you originally paid for the home and what you sold it for.
Your adjusted basis may include the original purchase price plus certain capital improvements and other qualifying costs.
Examples may include additions, substantial remodeling, a new roof, or other improvements that add value or extend the useful life of the property.
Maintaining records of significant improvements can therefore become especially valuable when a home has appreciated substantially.
Prior Rental or Business Use Can Complicate the Calculation
Additional rules can apply when a home was previously used as rental property or for business purposes.
In particular, depreciation claimed or allowable for certain periods generally cannot be excluded under the home-sale exclusion and may result in taxable gain.
Periods when the property was not used as your principal residence can also affect the exclusion in some circumstances.
What If You Don't Meet the Two-Year Requirement?
You don't always need a full two years of ownership and use.
A partial exclusion may be available when you sell the home for certain qualifying reasons, such as a change in employment, health issues, or other unforeseen events.
The amount of the available exclusion depends on the facts and how long you satisfied the applicable ownership and use requirements.
Final Thoughts
A large home-sale profit does not necessarily mean a large tax bill.
Before selling, it's worth reviewing your expected gain, adjusted basis, home improvements, prior rental or business use, and eligibility for the home-sale exclusion.
For highly appreciated properties, doing this before the sale can provide a much clearer picture of the potential after-tax result.
Planning to Sell a Highly Appreciated Home?
If you're considering a significant home sale, proactive tax planning can help determine how much of the gain may be excluded and whether other tax considerations apply.
Weissgarber CPA works with individuals on proactive tax planning for significant real estate and financial transactions.
This article is for general informational purposes only and does not constitute tax, legal, or investment advice. Tax outcomes depend on individual circumstances and applicable law.