Summer is “moving season” for many people, as they sell one home and move to another. As the warm weather beckons, individuals and families seize the opportunity to sell their homes and embark on new chapters of their lives. However, amidst the excitement, it’s crucial to understand the tax implications that come with selling a home.
Thankfully, the Internal Revenue Service (IRS) offers an exclusion that allows taxpayers to exclude all or part of the gain from the sale of their home from their income. In this article, we will delve into the key considerations and requirements homeowners should keep in mind to make the most of this valuable tax benefit.
Home Sale Exclusion Ownership and Use Tests
To be eligible for the home sale exclusion, taxpayers must meet both the ownership and use tests.
To qualify for the home sale tax exclusion, during the five-year period leading up to the sale, the homeowner must have:
- Owned the property
- Lived in the home as their primary residence for at least two years
Capital Gains on Selling Your Home
Homeowners who sell their primary residence for a capital gain may be eligible to exclude up to $250,000 of the gain from their income when filing their tax return. For married taxpayers filing jointly, the exclusion amount doubles to $500,000.
It’s important to note that if the entire gain is excluded, homeowners are not required to report the sale on their tax return unless they receive a Form 1099-S, Proceeds from Real Estate Transactions.
Home Sale Losses
Unfortunately, if homeowners sell their main home for less than its original purchase price—resulting in a loss—this loss is not tax-deductible.
Losses from the sale of a personal residence are generally not recognized for tax purposes.
Multiple Homes Not Elligible
Taxpayers who own more than one home can only exclude the gain on the sale of their primary residence.
Any other home sales may be subject to taxes on the gain realized. It’s important to keep this in mind when considering the tax implications of selling multiple properties.
Reporting Your Home Sale
Taxpayers who don’t meet the criteria to exclude the entire gain from their income must report the gain from the sale of their home on their tax return.
Additionally, individuals who receive a Form 1099-S must report the sale, even if they have no taxable gain. Ensuring accurate reporting is essential to avoid any potential issues with the IRS.
Forgiven Mortgage Debt
In general, forgiven or canceled mortgage debt is considered taxable income. Homeowners who have had their mortgage debt forgiven due to a mortgage workout, foreclosure, or other circumstances must report this as income on their tax return.
However, there is an exception for qualified principal residences. If the debt was discharged before January 1, 2026, or if a written agreement for debt forgiveness was in place before that date, homeowners may be able to exclude the forgiven debt from their income.
Home Sale Exclusion Exceptions
The IRS provides exceptions to these rules for certain individuals, including those with disabilities, specific members of the military or intelligence community, and Peace Corps workers.
These individuals may have alternative or additional tax benefits available to them, so it’s important to consult with a tax professional to understand their specific eligibility.
Understand Tax Implications of Selling Your Home
Selling a home can be a significant financial event, and understanding the tax implications is crucial for maximizing benefits. The IRS exclusion allows homeowners to exclude all or part of the gain from the sale of their home from their income, provided they meet the ownership and use tests.
By considering these rules, homeowners can potentially exclude up to $250,000 or $500,000 of their gain from taxation. However, it’s essential to accurately report the sale and consider other factors such as multiple homes and mortgage debt. For specific circumstances or possible exceptions, reach out to our team of tax pros.
For more information, visit this IRS Resource: Selling Your Home, Publication 523.
If you have questions, contact us to discuss your situation.
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