CARL WATTS & ASSOCIATES

June 18, 2018

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Selling a Home and Taxes
Out of the many reason for which people decide to sell their home, we hope yours are all positive: increased income, larger family, retirement in a more suitable environment, and the like.

No matter the reasons, you should be aware of the tax implications of selling a house.


According to the IRS regulations, taxpayers who sell a home may qualify to exclude from their income all or part of any gain from the sale.

First of all, if the selling price of your home is greater than the price you paid to purchase the home, then you have a profit which is generally considered a capital gain and subject to income tax. However, when you sell your home, you may not have to pay taxes on the money you gain.

Here are the important rules to keep in mind when you sell your home.

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. If you are eligible, the exclusion is up to $250,000 of the gain from your income ($500,000 on a joint return in most cases).

To qualify for the exclusion you must meet both the ownership and use tests which state that during a five-year period ending on the date of the sale, you must have:

Owned the home for at least two years (the ownership test), and

Lived in the home as your main home for at least two years (the use test).

You may be able to exclude gain from the sale of your home even if you have used it for business or to produce rental income if you meet the ownership and use tests.

The required two years of ownership and use during the 5-year period ending on the date of the sale do not have to be continuous nor do they both have to occur at the same time.

You meet the tests if you can show that you owned and lived in the property as your main home for either 24 full months or 730 days during the 5-year period ending on the date of sale.

You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale.



If you and your spouse file a joint return and both meet the use test, you normally will be able to claim the exclusion for married couples even if the ownership test is met by only one of you.

If you do not meet the two tests, you may still be allowed to exclude a reduced amount of the gain realized on the sale of your home. But, you must have sold the home for other specific reasons such as serious health issues, a change in your place of employment, or certain unforeseen circumstances such as a divorce or legal separation, natural or man-made disasters resulting in a casualty to your home, or an involuntary conversion of your home.

Usually, the home you live in most of the time is your main home and can be a house, houseboat, mobile home, cooperative apartment, or condominium.

Only a Main Home Qualifies

If you have more than one home, you can exclude a gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time.

Exceptions May Apply

There are exceptions to the ownership, use, and other rules. One exception applies to persons with a disability. Another applies to certain members of the military. That rule includes certain government and Peace Corps workers.
Exclusion Limit

The most gain you can exclude from tax is $250,000. This limit is $500,000 for joint returns. The Net Investment Income Tax will not apply to the excluded gain.

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 IRS Publication 523, Selling Your Home.


May Not Need to Report Sale

If you have a gain that cannot be excluded, it is, of course, taxable. You must report it on Form 1040, Schedule D, Capital Gains and Losses. You must report the sale if you choose not to claim the exclusion.

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.


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.


Report Your Address Change

After you sell your home and move, 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 (TCJA) apparently did not make any changes to the process of reporting your home sale or to the structure of the capital gains tax system.

However, it did lower the top tax bracket to 37%, which applies to short-term capital gains on assets such as your house that you've held for less than a year.

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.


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.

Do not forget, 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.
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