To help you figure the adjusted basis of the home you sold, the gain (or loss) on the sale, and the gain that you can exclude, you can use the worksheets included in the Publication 523.
You have a gain if you sell your house for more than it cost. For tax purposes, you need to pinpoint your adjusted basis to figure out whether or not you have gained or lost in the sale. The adjusted basis is essentially what you've invested in the home; the original cost plus the cost of capital improvements you've made. Capital improvements (such as a new roof, a remodeled kitchen, a swimming pool, or central air conditioning) add value to your home, prolong its life, or give it a new or different use.
The adjusted basis does not include expenditures for just repairing the property. Settlement fees and closing costs also add to the adjusted basis of the property. However fees associated with obtaining a mortgage do not affect the basis of the property, since those fees are charged for getting the loan, not for the purchase of the property.
A reduced exclusion does not mean you can exclude only a portion of your profit. It means you get less than the full $250,000/$500,000 exclusion. For example, if a married couple owned and lived in their home for one year before selling it, they could exclude up to $250,000 of profit (one-half of the $500,000 because they owned and lived in the home for only one-half of the required two years).
May Not Need to Report Sale
If the gain is not taxable, you may not need to report the sale to the IRS on your tax return.
When You Must Report the Sale
If you have a gain that cannot be excluded, it is, of course, taxable. You must report it on Schedule D, Capital Gains and Losses. You must report the sale if you choose not to claim the exclusion. |
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If you receive an informational income-reporting document such as Form 1099-S, Proceeds From Real Estate Transactions, you must report the sale of the home, even if the gain from the sale is excludable.
Form 1099-S is generally issued by the real estate closing agent—a title company, real estate broker or mortgage company. If you don't receive the form, you don't need to report your home sale at all on your income tax return.
Exclusion Frequency Limit
Generally, you may exclude the gain from the sale of your main home only once every two years. Some exceptions may apply to this rule.
First-time Homebuyer Credit
If you claimed the first-time homebuyer credit when you bought the home, special rules apply to the sale.
Home Sold at a Loss
If you sell your main home at a loss, you cannot deduct the loss on your tax return. |
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Report Your Address Change
After you sell your home and move, you have to update your address with the IRS. To do this, file Form 8822, Change of Address. Mail it to the address listed on the form’s instructions.
If you purchase health insurance through the Health Insurance Marketplace, you should also notify the Marketplace when you move out of the area covered by your current Marketplace plan.
The 2017 Tax Cuts and Jobs Act apparently did not make any changes to the process of reporting your home sale or to the structure of the capital gains tax system.
If it turns out that all or part of the money you made on the sale of your house is taxable, you need to figure out what capital gains tax rate applies. |
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- Short-term capital gains tax rates apply if you owned the asset for less than a year. The rate is equal to your ordinary income tax rate, also known as your tax bracket.
- Long-term capital gains tax rates apply if you owned the asset for more than a year. The rates are lower and many people qualify for a 0% tax rate. Everybody else pays either 15% or 20%, depending on filing status and income.
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Regarding states tax, in most states, real estate sales must be reported via state income tax filings when certain conditions apply. As a general rule, the primary condition is that sellers have received a gain on the sale of real estate, which is determined based on the selling price as it relates to the price for which the seller obtained the home. Generally, this is through purchase, but in some cases, sellers must pay the full amount of the selling price because the home was obtained at no cost.
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In a state whose tax is stated as a percentage of the federal tax liability, the percentage is easy to calculate. Some states structure their taxes differently, in this case, the treatment of long-term and short-term gains does not necessarily correspond to the federal treatment.
If you want to make sure you comply with all requirements and take advantage of the exclusion that you are entitled to, help from a tax professional is always your best option. |
