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Have you heard of this? You might not have to pay taxes on the gain if you sell your home and make a profit. Yes, this is true, and it is a huge savings. If you are single, you can claim up to 250,000 in tax-free gains, and if you are married, you can claim 500,000. It's just one of many tax facts to keep in mind when you're selling your house.
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Here are 10 important tax tips you should know if you sell your home:
Tax Tip #1:
If you have a capital gain from the sale of your home, you may be eligible to exclude your gain from tax. Start and check to see if you meet the IRS ownership and residence requirements.
The ownership requirement is met if you owned the home for at least 24 months (2 years) out of the last 5 years before it was sold (closed). When filing jointly, only one spouse must meet the ownership requirements.
The Residence requirement states that within the previous five years, you must have owned the home and lived there for at least 24 months. Ensure that you meet the residency requirement. A 24-month residency can fall anywhere within a 5-year period, and it does not have to be consecutive. It doesn't have to be one block of time. During the 5-year period, a total of 24 months (730 days) of residence is required. In contrast to ownership requirements,
To qualify for the full exclusion, each spouse must meet the residence requirement individually.
READ: 7 Key Tips for Selling Your Home
Tax Tip #2:
There are some exceptions when it comes to the rules governing the ownership and use of your home. Certain exceptions apply to persons with disabilities, as well as military personnel and some government and Peace Corps workers. See IRS Publication 523, Selling Your Home, for details.
Tax Tip #3:
You can exclude up to a $250,000 gain from the sale of your home (or up to $500,000 if you’re married filing jointly). Note that the Net Investment Income Tax will not apply to your excluded gain.
Tax Tip #4:
If the gain from selling your home is not taxable, you may not be required to report it on your Federal tax return. (See Tax Tip #5 for more information.)
Tax Tip #5:
If you cannot exclude all or part of the gain, you must report the home sale to the IRS on your tax return. Even if you choose not to claim the exclusion, you are required to report the sale on your tax return. This is also true if you get IRS Form 1099-S, Proceeds From Real Estate Transactions. If you report the home sale to the IRS, it’s a good idea to read through the Q&A on the Net Investment Income Tax.
Tax Tip #6:
In general, you are only allowed to exclude the gain from the sale of your main home once every 2 years.
READ: 10 Home Selling Mistakes You Should Avoid
Tax Tip #7:
If you own more than one home, you can only exclude the gain from the sale of your primary residence. As the name implies, your "primary residence" is where you spend the majority of your time.
Tax Tip #8:
If you claimed the First-Time Homebuyer Tax Credit when you bought the home, there are special rules that apply to the sale. See IRS Publication 523 for details about those rules.
Tax Tip #9:
If you sell your main home at a loss, you cannot deduct it on your Federal tax return.
Tax Tip #10:
After you sell your home and move elsewhere, make sure to update your address with the IRS. You can do this by filing IRS Form 8822, Change of Address
READ: How Your Home’s Value Affects Your Property Taxes
Conclusion
If you haven’t filed your 2023 taxes, use E-file to prepare and file your Federal tax return. The tax software will do most of the hard work for you. If you choose to file a paper tax return, you can use the Worksheets in IRS Publication 523 to help you.
For additional information about the sale of a home, refer to IRS Publication 523. You can call 800-TAX-FORM (800-829-3676) to order the publication by mail.
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Frequently Asked Questions
How much of my home sale profit can I exclude from taxes?
If you are single, you can exclude up to $250,000 in gains from the sale of your home, while married couples filing jointly can exclude up to $500,000. Importantly, the Net Investment Income Tax does not apply to any gain that qualifies for this exclusion. This can represent significant tax savings for homeowners who meet the eligibility requirements.
What are the ownership and residency requirements to qualify for the home sale exclusion?
To meet the ownership requirement, you must have owned the home for at least 24 months (2 years) out of the last 5 years before the sale. The residency requirement states that you must have lived in the home for a total of 24 months (730 days) within that same 5-year period, and those months do not need to be consecutive. When filing jointly, only one spouse needs to meet the ownership requirement, but each spouse must individually meet the residency requirement to claim the full exclusion.
Does a home sale always need to be reported on a federal tax return?
If your gain is fully excludable from taxes, you may not be required to report the sale on your federal tax return. However, if you cannot exclude all or part of the gain, or if you receive IRS Form 1099-S (Proceeds From Real Estate Transactions), you are required to report the sale regardless. Even if you choose not to claim the exclusion, the sale must still be reported on your return.
Can the home sale gain exclusion be used every year?
No — in general, you are only allowed to exclude the gain from the sale of your main home once every two years. Additionally, the exclusion only applies to your primary residence, meaning the home where you spend the majority of your time. If you own multiple properties, gains from the sale of a second home or investment property do not qualify for this exclusion.
What happens if a home is sold at a loss or if the First-Time Homebuyer Tax Credit was previously claimed?
If you sell your main home at a loss, that loss cannot be deducted on your federal tax return. If you previously claimed the First-Time Homebuyer Tax Credit on the home being sold, special rules apply to the sale, and you should consult IRS Publication 523 for specific guidance. After selling your home and relocating, you should also file IRS Form 8822 to update your address with the IRS.
About the Author
CPA
Jacob Dayan 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.