The information in this article is up to date through tax year 2023 (taxes filed in 2024).
Did you sell your home this year? If so, you may be curious how this will affect your tax return. Through the sale of a home, you will either experience a capital gain or a loss, which impacts your tax liability. However, the IRS offers a tax break that may allow you to significantly reduce or completely remove this tax liability. Continue reading to find out how to report the sale of your home and if you qualify for the exclusion.
Do I pay taxes when I selling a home?
Yes, you will pay taxes when you sell your home. Your home is considered a capital asset, therefore you will only pay taxes based on the capital gain or capital loss from the sale. 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 – often 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.
How to report capital gains on sale of a home
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 automatically 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:
- Ownership Test: You must have owned the home for at least two out of the five years before selling it. For couples filing married jointly, at least one spouse must meet the ownership requirement.
- Use Test: The residence must have been used as your primary home for at least two out of the five years prior to the sale.
You do not have to meet the tests in the same two-year period and the days do not have to be continuous. But you must meet both criteria during the five years directly before selling your home.
If you have multiple homes and have excluded capital gains 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.
