In most cases, gains from sales are taxable. But did you know that if you sell your home, you may not have to pay taxes? Here are ten important facts to keep in mind if you plan to sell your home this year, including ten key tax facts about home sales that could save you money.
Exclusion of Gain
You may be able to exclude part or all of the gain from the sale of your home. This rule may apply if you meet the eligibility test, which involves your ownership and use of the property. You must have owned and lived in it as your main home for at least two of the five years before the date of sale.
Exceptions May Apply
Some situations allow flexibility. Individuals with disabilities may qualify for special treatment. Members of the military, government employees, and Peace Corps workers may also receive extended time windows or relief from certain requirements. IRS Publication 523, Selling Your Home, explains these exceptions in detail and is a helpful guide when preparing for a sale. Publication 523, Selling Your Home.
Exclusion Limit
The maximum amount of gain you can exclude from taxes is $250,000 for individuals and $500,000 for married couples filing jointly. The Net Investment Income Tax does not apply to excluded gain.
You May Not Need to Report the Sale
If you meet the eligibility rules and your entire gain is excluded, you may not need to report the sale on your tax return. For many homeowners, this keeps the process simple.
When You Must Report the Sale
You must report the sale on your tax return if you cannot exclude all or part of the gain. You also must report it if you choose not to claim the exclusion, or if you receive Form 1099-S, Proceeds From Real Estate Transactions. If you do need to report the sale, review the IRS’s Questions and Answers on the Net Investment Income Tax.
Exclusion Frequency Limit
You can use the home sale exclusion only once every two years. If you sold another home recently and already used the exclusion, you may not qualify again until two years have passed. Certain hardships or special circumstances may allow exceptions.
Only a Main Home Qualifies
If you own multiple properties, you may only exclude the gain on the sale of your primary residence. Your main home is generally the place where you live most of the year, receive mail, register to vote, and spend the majority of your time.
First-Time Homebuyer Credit
If you used the first-time homebuyer credit when you purchased your home, special repayment or recapture rules may apply when you sell. IRS Publication 523 explains how this credit affects your sale and whether you must repay any portion.
Home Sold at a Loss
If you sell your main home for less than what you paid, you cannot deduct the loss on your tax return. Personal-use property does not qualify for loss deductions, even in a declining market.
Report Your Address Change
Update your address
After selling your home, update your address with the IRS by filing Form 8822, Change of Address. This ensures you receive important tax documents without delays. If you purchased health insurance through the Health Insurance Marketplace, also notify the Marketplace if your move places you outside your existing coverage area.
Understanding these rules helps you make informed decisions, avoid penalties, and keep more of your profit. Before selling, review IRS Publication 523 and consider speaking with a tax professional to ensure you qualify for every benefit available. If you purchased health insurance through the Health Insurance Marketplace, also notify the Marketplace when you move outside your current coverage area.