Your Home Sale and Capital Gains Taxes
A common question taxpayers have is, do I need to report the sale of my home on my tax return? While many factors affect this, you generally need to report the sale of your home for any of these reasons:
- You have a gain from the sale and do not qualify to exclude all of it from your taxable income.
- You have a gain from the sale and choose not to exclude it.
- You received a Form 1099-S, Proceeds From Real Estate Transactions, from the sale of your home; when the sales or exchange of certain real estate takes place, the closing organization is required to report the real estate proceeds to the IRS and must provide a copy of the 1099-S to the seller/buyer as well.
Quick instructions: how to report a home sale transaction on your tax return on eFile.com.
- To determine whether the sale or exchange of your main home needs to be reported on your tax return, see the instructions for Schedule D of Form 1040. Generally, a transaction should be reported even if the transaction is not currently taxable. A transaction or sale of a main home may be a reported sale even though the transferor may be entitled to exclude the gain under section 121.
- If the real estate was not the main home, e.g., investment, second home, etc., report the transaction on efileIT Form 4797 Gains/Losses from Sales of Assets, eFileIT Form 6252 Installment Sales, and/or the efileIT Schedule D for the appropriate income tax form. If Box 4 on Form 1099-S is checked and you received or will receive like-kind property, eFileIT Form 8824 must be filed.
- The eFile Tax app will generate and add Form 8949 and Schedule D once the home sale data is entered, as outlined below.
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. But if you are an exception to this, knowing the rules about excluding the profit from your income can help you save on your tax bill.
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 Joint status, the tax-free amount doubles to $500,000.
If either case is applicable, you can exclude this profit from your taxable income. If you sold for a loss, you can't take a deduction for that loss. You can use this exclusion every time you sell a primary residence, as long as you owned and lived in it for 2-5 years before the sale and haven't claimed the exclusion on another home in the last two years. If the profit from your home sale exceeds the $250,000 or $500,000 limit, the excess is reported as a capital gain on eFileIT Schedule D.
In order to treat the gain from the sale of your home as tax-free, or in other words, 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.
- 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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