Please consult a qualified tax adviser before making any decisions about reporting gains or losses on your tax return. The overall rules are straightforward, but there are many nuances at the edges that may rule you in or out of excluding your gains. Here are the fundamentals:
Selling your main home usually doesn’t affect your taxes. If you have a loss on the sale, you can’t deduct it from income. If you make a profit, you can often exclude it.
However, to exclude the profit — which is a capital gain — you must pass these two tests:
- Ownership test — You must own the home for at least two of the last five years, ending on the date of sale.
- Use test — You must live in/use the home as your main home for at least two of the last five years, ending on the date of sale. For sales of homes after Dec. 31, 2008, periods of non-qualified use might reduce your exclusion amount. A period of non-qualified use is any period when one of these people don’t use the home as a main home:
- Your spouse
- Your former spouse
You can’t use this exclusion for any home sold in the two-year period. The two-year period ends on the date of the current sale.
The ownership and use periods don’t have to be continuous. You pass the tests if you show that you owned and lived in the home for either:
- 24 full months
- 730 days in the past five years
You can count short, temporary absences as periods of use. (Ex: vacations or seasonal absences) This applies even if you rent out the home in your absences.
Amount of exclusion
The income from the sale of your home is tax-free if all of these apply:
- You (and your spouse, if married) meet the ownership and use tests.
- You and your spouse (if married) file married filing jointly or married filing separately.
- You have a gain of:
- $500,000, if married filing jointly
Your gain might be more than the exclusion amount for your filing status. If so, only the excess amount is taxable. Ex: You and your spouse make a profit of $562,000. Only $62,000 is taxable.
You can claim the $500,000 exclusion on a joint return if all of these apply:
- You and your spouse are married and file as married filing jointly.
- Either you or your spouse meets the ownership test.
- Both spouses meet the use test.
- Neither you nor your spouse excluded gain from the sale of another home in the two-year period ending on the date of the sale.
Tax Reporting Requirements
If you received Form 1099-S you must report the sale even if you have no taxable gain to report.
If you have a taxable gain on the sale of your main home that you can’t exclude, report the entire gain on Form 8949.
If you have a loss on the sale of your main home and received a Form 1099-S, report the loss on Form 8949. You’ll do this even though the loss isn’t deductible.
You can use your HUD-1 settlement statements from both the home’s sale and the home’s purchase to help determine:
- Your adjusted basis in the home
- Amount of gain or loss on the sale
You can also use documents about your home improvements to help figure your adjusted basis in the home.
Getting a reduced exclusion
You might qualify for a reduced exclusion if the living conditions of a qualified individual changes. This applies even if you:
- Don’t pass the use and ownership tests
- Have used the exclusion within two years of selling your current home
You can usually claim a reduced exclusion if you sell your main home for one of these reasons:
- You relocated for new employment
- A family member living in your home has a disease, illness, or injury.
- Unforeseen circumstances arose.
Periods of non-qualified use will also reduce the amount you can exclude.
These circumstances have many, many rules. Consult a tax adviser if you think you might qualify.
To learn more, see Publication 523: Selling Your Home.
You’re only allowed to exclude gain on the sale of a home once every two years. This is true unless the reduced gain exclusion rules apply. You usually can’t exclude the gain on the sale of a home if both of these apply:
- You sold another home at a gain within the past two years.
- You excluded all or part of that gain during the two-year period ending on the date of the sale.
If you can’t exclude the gain, include the entire amount in your taxable income.
Business or rental use
If you meet the ownership and use tests, you might be able to exclude gain from the sale of a home you rented or used for business. You might use part of your home to conduct business. If so, you don’t need to allocate the gain to the business portion of the home.
A full exclusion applies when you sell the home. This is true except for allowed and allowable depreciation you’ve claimed since May 6, 1997. You can’t exclude the gain that’s equal to depreciation deductions you claimed for periods after May 6, 1997. This applies if you claimed depreciation deductions for:
- Renting out your home
- Using your home for business
The property might be rental property at the time of the sale. If so, report the sale on Form 4797: Sales of Business Property.
And as always…Please consult a qualified tax adviser before making any decisions about reporting gains or losses on your tax return