Tax Questions, Answered: The Tax Implications Of Selling Your Home

September 01, 2014 : Lynn Ebel

Ed note: Congratulations, you just sold your home! That profit burning a hole in your pocket may be free-and-clear from taxes, but – yes, there’s a but – not always. The Tax Institute looks at some of the exceptions you need to know about.

Question:

I’ve been waiting years to sell my home. Now that the housing marketing where I live has recovered a bit, I’m planning to list it. Given the improvements we’ve made, I anticipate we will make quite a bit of money on the sale. Will I have to include the amount that we make on our tax return?

Answer:

There’s good news and bad news.

The good news is that if you make a profit on the sale of your home, the gain may not be taxable. Of course, there are exceptions and rules to consider, though.

You must have owned the home and used it as your main residence for at least two of the five years before the date of sale in order to exclude the capital gains from the sale. There are exceptions to these ownership and use rules, for example if you are in the military or have a disability. You also cannot have used the exclusion for any residence sold within the last two years of the current sale. Also, there are limits for “nonqualified” use. You can get details in IRS Publication 523, Selling Your Home.

The bad news (for some) is that the most gain you can exclude is $250,000 or $500,000 for joint returns. If you can’t exclude all or part of the gain, you will have to report the home sale on your tax return. Also, if you receive Form 1099-S, it should be reported with your tax return.
Also worth noting: 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.

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Lynn Ebel

Lynn Ebel

The Tax Institute, H&R Block

Lynn Ebel, JD, LLM, is manager of The Tax Institute's research department. Lynn specializes in real estate tax issues, including property transfers, passive activity losses, and bankruptcy issues.