It’s important
for taxpayers to understand how selling their home may affect their tax return. When filing
their taxes, they may qualify to exclude all or part of any gain from the sale
from their income.
Here are
some key things homeowners should consider when selling a home:
Ownership
and use
To claim
the exclusion, the taxpayer must meet ownership and use tests. During a
five-year period ending on the date of the sale, the homeowner must have owned
the home and lived in it as their main home for at least two years.
Gains
Taxpayers
who sell their main home and have a gain from the sale may be able to exclude
up to $250,000 of that gain from their income. Taxpayers who file a joint
return with their spouse may be able to exclude up to $500,000. Homeowners
excluding all the gain do not need to report the sale on their tax return.
Losses
Some
taxpayers experience a loss when their main home sells for less than what they paid for it. This loss is not deductible.
Multiple
homes
Taxpayers
who own more than one home can only exclude the gain on the sale of their main
home. They must pay taxes on the gain from selling any other home.
Reported
sale
Taxpayers
who don’t qualify to exclude all the taxable gain from their income must report
the gain from the sale of their home when they file their tax return. Anyone
who chooses not to claim the exclusion must report the taxable gain on their
tax return. Taxpayers who receive Form 1099-S, Proceeds from Real Estate Transactions
must report the sale on their tax return even if they have no taxable gain.
Possible
exceptions
There are exceptions to these rules for some individuals, including
persons with a disability, certain members of the military, intelligence
community and Peace Corps workers.
Worksheets
Worksheets included in Publication 523, Selling Your Home can help taxpayers figure the adjusted basis of the home sold, the gain or loss on the sale and the excluded gain on the sale.
(Source: IRS Issue Number: Tax Tip 2021-83 )