How to Exclude Gain on Home Sale for Taxes

If you sell your main home at a gain, and have lived in it for at least two years during the five-year period ending on the date of sale, you can exclude the gain from taxable income up to a maximum exclusion of $500,000 for married persons filing a joint return, and $250,000 exclusion for a single person. Gains on the sale of stock in a cooperative housing corporation would also qualify if the ownership and use tests are met.

Instructions

Difficulty: Moderate

1. Calculate the actual gain by subtracting the purchase price from the sale price, then subtracting expenses from improvements you made as an owner. Also subtract real estate broker fees and other expenses you paid during the sales process.
2. Verify that you meet the ownership and use tests and if you have lived in the home for less than the required two years. Health problems, a change in place of employment or other unforeseen circumstances quality you for a reduced maximum exclusion on the gain. Calculate the reduced exclusion using Internal Revenue Service (IRS) Pub 523.
3. Report the home sale on Schedule D of Form 1040 only if you have a taxable gain or partly excluded gain. If 100 percent of the gain is excluded, do not report it on your tax return. When gains are partly excludable, report the entire gain on Schedule D and then on the line directly below show the excluded gain as a loss in brackets and write "Section 121 Exclusion" as an explanation.
4. Compute the tax due on any taxable portion of the gain on sale of your home using the lower rates for a long term gain if the home was owned for over one year. The capital gain tax is added to the regular tax on other taxable income.

Tips & Warnings

• If the sale of your home results in a loss, the loss is not deductible.