Do I Report the Sale of a Home, & How Much in Taxes Will I Have to Pay?

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While in recent years the housing market has fallen on tough times, most people selling their homes have a net gain -- that is, they sold their homes for more than they paid for them. With most assets, this gain would be a taxable capital gain; and up until 1997, that was the case for most residences as well. Currently, however, you may not have to report the sale to the IRS at all.

General Guidelines

  • When you sell your primary residence, you can make up to $250,000 on the sale and keep it -- tax free. There is no reporting requirement to the IRS and no capital gains tax. If you are married, you can double the gain amount -- up to $500,000 tax free.

Residency Requirement

  • You qualify for this special tax treatment if you lived in the home for at least two of the past five years that you owned it. If you are married, you and your spouse must fulfill the residency requirement, but you do not have to have been married the entire time, nor do both names need to be on the deed for any particular period prior to the sale. You do not have to do your two years consecutively -- any group of periods that add up to 24 months will suffice -- and you may use the property as a rental property in between those times.

Frequency

  • There is no limit on the number of houses you can sell, and each house renews the $250,000 per-person tax-free capital gain. You cannot sell more than one house in any two-year period, however, and you must meet the residency requirements for each property.

Calculating Your Gain

  • Your capital gain is your selling price less the cost of the home and any capital improvements, like remodeling, you made while you owned it. If you rolled money into the cost of this home from the sale of another home prior to 1997, you also have to subtract this amount from the selling price. Whatever is left over is your capital gain.

Taxes

  • If your capital gain is over the $250,000 exclusion (per person), then you will be required to pay tax at the capital gain rate for the excess amount. See IRS Publication 523 (IRS.gov) for full details on how to report this gain.

Exceptions

  • If you were forced to sell your home due to a medical problem, change in employment or other unexpected circumstance, you may qualify for a prorated exclusion. This exclusion allows you a percentage of the $250,000 based on how long you were physically in the home. IRS Publication 523 provides details on calculating the prorated exclusion.

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