Capital Gains on Sale of a Home

A couple selling their home and taking their section 121 exclusion with TaxSlayer

Selling a home? 

A capital gain is a profit made from the sale of any capital asset where the sales price exceeds your original investment. Capital gains are taxed at a different – oftentimes higher – rate than your ordinary income. Fortunately, when you sell your primary home for a capital gain, you may be able to exclude part of the income from tax. 

Reporting capital gains on a home sale  

If you sell your home and receive form 1099-S, Proceeds from Real Estate Transactions, you are required to report the sale of your home – even if you are eligible to take the maximum exclusion. 

When you file your return with TaxSlayer, the information about your home sale and capital gains will be entered on Schedule D, Capital Gains, and Losses, on Form 1040 and Form 8949, Sales and Other Dispositions of Capital Assets.  

For more information on reporting the sale of your home, read IRS Publication 523. 

Capital gains exclusion 

The Section 121 Exclusion allows you to exclude up to $250,000 (or $500,000 if you are filing jointly) of your capital gains income from tax 

If you don’t meet the criteria for the Section 121 Exclusion, you may still be able to exclude a portion of your gains. For example, if the main reason you sold your home was for a new job, a new office location, a health issue, or an unpredictable event, you will probably be able to exclude a portion of the gain from your sale. 

How to qualify for the exclusion  

You must pass two tests: the ownership test and the use test. If you have owned and lived in your main home for at least two out of the five years before selling it, you will most likely pass both tests and qualify to take the maximum exclusion. You do not have to meet the tests in the same two-year period. But you must meet both criteria during the five years directly before selling your home. 

If you have multiple homes and have excluded a capital gain from the sale of another home in the two years leading up to the sale of your home, you will not qualify for the exclusion. For more information on the eligibility requirements, refer to IRS Publication 523. 

Military exceptions to the 5-year use test 

If you or your spouse is in the Uniformed Services, the Foreign Service, or part of the intelligence community, you can qualify to defer the five years for up to ten years. 

To be considered eligible for this extension, you must either be at a duty station that’s 50 miles or more from your main home or be living in government housing on official government orders. 

Installment sale 

An installment sale is a home sale with a contract stating that all or a portion of the selling price will be paid in a later year, not immediately. If this applies to you, you will need to report the sale unless you elect out. Reporting the sale means you will be able to defer some of the gains. If you do this, the Section 121 exclusion can still be used. For more information on installment sales, refer to IRS Publication 537. 

The information in this article is up to date through tax year 2020 (taxes filed 2021). 

This article is intended to provide general information to the public and does not provide personalized tax, investment, legal, or business advice. You should seek the assistance of a professional for advice on taxes, investments, and any other financial, legal, or business matter pertinent to your individual situation.

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