Home Sale Tax Rules: What to Know Before You Close

Selling your home can be both exciting and daunting, especially when you start thinking about taxes. With summer being prime time for moving, let’s dive into some important tax facts that the IRS wants you to know. Staying informed can save you headaches and maybe even a bit of cash.

Excluding Gain from Home Sale

Here’s some good news: you might be able to keep Uncle Sam’s hands off your home sale profits. If you sell your primary residence, you could exclude up to $250,000 of the gain from your income, or $500,000 if you’re married and file jointly. This magical tax break is known as the Section 121 Exclusion. To qualify, you need to have owned and lived in the home for at least two of the five years before the sale. Remember, you can only pull this rabbit out of the hat once every two years.

Recap: to qualify for this exclusion, the taxpayer must meet ownership and use tests.

1. Ownership test: The homeowner must have owned the home for at least two years of the five-year period ending on the date of the sale.
2. Use test:The homeowner must have used the home as their main residence for at least two years of the five-year period ending on the date of the sale.
   

Limits on Home Sale Gains

The exclusion is capped at $250,000 for single filers and $500,000 for joint filers.

If life threw you a curveball like a job change, health issues, or another unforeseen event, you might still qualify for a partial exclusion.

If you get a Form 1099-S, make sure to report the sale, even if you have no taxable gain.

Losses from Selling Your Home

If you sell your home at a loss, that loss isn’t deductible.

It’s a tough pill to swallow, but the IRS offers worksheets to help you figure out the adjusted basis of your home, the gain or loss, and how much of the gain can be excluded from your income.

Can You Exclude Tax Gain on Multiple Homes?

Got a vacation home or an investment property? You can only exclude the gain from your primary residence.

However, you can move into your second home, make it your main home for two years, and then qualify to exclude the gains from the sale of that property as well.

Reporting Your Home Sale to the IRS

If you don’t qualify for the full exclusion or choose not to claim it, you need to report the gain on your tax return.

This also applies if you get a Form 1099-S. Report it and avoid any future surprises from the IRS.

Additional Considerations

Special circumstances like divorce, the death of a spouse, or military service might still allow you to benefit from the exclusion or a partial exclusion. Specific rules also apply to inherited properties and homes sold due to health or job-related reasons.

Stay Informed and Save

It’s not the most glamorous part of selling your home, with the right information, you can make smart decisions and potentially save on taxes. Keep yourself informed, consult with a tax professional if needed, and always check the latest IRS guidelines.

For more information:

• IRS: Tax Considerations when Selling Your Home
• Kiplinger: Capital Gains Tax Exclusion for Homeowners
• IRS: Worksheets to help taxpayers calculate the adjusted basis of the home they sold and the gain or loss on the sale.