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Selling your home is often a triumph – but it can also be a stressful and complicated process. Don’t forget to consider the tax implications for your real estate transactions.
If you sell your home, you may be able to exclude from your income all or part of the gain from that sale. Here are some things to keep in mind when you’re selling a home:
Ownership & Use of the Home
In order to qualify for the exclusion, the homeowner must pass the IRS ownership and use tests. During a 5-year period that ends on the date of sale, the homeowner must have owned the home for at least 2 years and lived in the home (as their main home) for at least 2 years.
Gain From a Home Sale
If you sell your main home and you have a gain from the sale (i.e. you sell it for more than you purchased it), you may be able to exclude the gain from your tax return. Qualifying taxpayers can usually exclude up to $250,000 from their income (for single filers), or $500,000 for joint filers. Those who qualify to exclude the entire gain are not required to report the home sale on their income tax return.
Loss From a Home Sale
If you sell your home for less than what you paid for it, that is considered to be a “loss” and is not tax-deductible.
Reporting a Home Sale
If you cannot exclude the gain from your income, you are required to report the home sale on your tax return. If you choose not to claim the exclusion, you must report the gain on your tax return. If you receive Form 1099-S (Proceeds from Real Estate Transactions) as part of the transaction, you must report the home sale on your tax return.
Reporting Mortgage Debt
Some people are required to report their forgiven/cancelled debt as income on their tax return. Usually this includes taxpayers who underwent a mortgage workout, foreclosure, or other process in which a lender forgave/cancelled mortgage debt on their home. Individuals who had a written agreement for debt forgiveness in place before January 1, 2017 may be eligible to exclude the forgiven amount from their income.
Exceptions
The IRS grants exceptions for certain taxpayers – including individuals with a disability, certain members of the U.S. military, intelligence community, and Peace Corps workers.
First-Time Homebuyer Tax Credit
If you claimed the First-Time Homebuyer Tax Credit to buy your home, you should note that special rules apply to the sale. The IRS has a First-Time Homebuyer Credit Account Look-up tool that can be used to retrieve account information (such as the total amount of your tax credit or repayment amount).
Multiple Homes
If you own more than 1 (one) home, you are only allowed to exclude the gain on the sale of your main home. The IRS will require you to pay taxes on the gain from selling any other home.
IRS Worksheets & Publications
Publication 523 (Selling Your Home) – Includes worksheets to help you determine the adjusted basis of the home sold, the gain or loss on the home sale, and the excluded gain on the home sale.
IRS Tax Topic 611: Repayment of the First-Time Homebuyer Credit
IRS Tax Topic 701: Sale of Your Home
IRS Tax Topic 703: Basis of Assets
IRS Tax Map: Selling Your Home
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Frequently Asked Questions
How much of the gain from selling my home can be excluded from my taxes?
Qualifying taxpayers can exclude up to $250,000 of gain from the sale of their main home if they file as single, or up to $500,000 if they file jointly. If you qualify to exclude the entire gain, you are not required to report the home sale on your income tax return at all.
What are the ownership and use requirements to qualify for the home sale gain exclusion?
To qualify for the exclusion, you must pass both the IRS ownership and use tests within a 5-year period ending on the date of sale. Specifically, you must have owned the home for at least 2 years and lived in it as your main home for at least 2 years during that period.
Can a loss on the sale of a home be claimed as a tax deduction?
No, if you sell your home for less than what you originally paid for it, the resulting loss is not tax-deductible. This rule applies regardless of how significant the loss may be.
When is a home sale required to be reported on a tax return?
You must report the home sale on your tax return if you cannot exclude the gain from your income, if you choose not to claim the exclusion, or if you receive Form 1099-S (Proceeds from Real Estate Transactions) as part of the transaction. Failing to meet the ownership and use tests would be a common reason you might be unable to claim the exclusion.
Are there tax consequences if a lender forgave mortgage debt on my home?
Yes, taxpayers who had mortgage debt forgiven or cancelled through a mortgage workout, foreclosure, or similar process are generally required to report that forgiven amount as income on their tax return. However, individuals who had a written agreement for debt forgiveness in place before January 1, 2017, may be eligible to exclude the forgiven amount from their income.
About the Author
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Nick Charveron is a tax professional at IRS.com with expertise in U.S. federal and state tax law. Their articles are written to help taxpayers understand complex tax topics in plain English.