Many clients have the question, “Do I have to pay taxes on the profit I made selling my home?” As long as you meet certain criteria, you may be able to exclude up to $250,000 in gain from selling your home. If you file a tax return as married filing jointly, you may be able to exclude up to $500,000 in gain.
How do I qualify for this tax exclusion? You must have owned and lived in the home for at least two years during the five years prior to the date of your sale. You must not have excluded the gain from any other home during the two-year period prior to the sale of your home.
Do I have to report the home sale on my return? You generally need to report the sale of your home on your tax return if you received a Form 1099-S. To avoid getting this form, you must give your sales agent some assurances any time before February 15 of the year after the sale that all the profit on the sale is tax-free. We just helped a client respond to an IRS’ notice. He filed his tax return on his own. He received a 1099-S, but did not report the sale of his home in 2015 because he thought he qualified for the tax exclusion. He received a notice asking if he sold the house in that year. He responded “yes.” Then he got the second notice that included a proposed tax due of $382,000. Client was shocked and panicked to receive this notice. He sought us out for help. After we amended his tax return, he got a $5,200 refund back instead of paying a tax due of $382,000.
How to figure the gain on the sale of your home? For tax purposes, you need to pinpoint your adjusted basis to figure out whether or not you have gained or lost in the sale. The adjusted basis is essentially what you’ve invested in the home, which is the original cost plus the cost of capital improvements you’ve made. On the other hand, you need to subtract any depreciation, casualty losses or energy credits that you have claimed to reduce your tax bill while you’ve owned the house.
If you didn’t live in the home the entire time you owned it, you may have to pay tax on part of the gain. If your house went up in value when you were not living in it (for example, when you used the property as a rental house) you cannot exclude gain from the time you rented it out. For determining the amount of the gain you cannot exclude, the property is assumed to have gone up in value evenly over the period of time you owed it.
How to report sale of your home? In addition to reporting the sale of your home on schedule D and recapturing depreciation expenses, you also need to claim any disallowed rental loss if the property was rented out part of the time you owned it. Any disallowed rental loss is carried forward to the next year along with all previous years’ disallowed losses and can be claimed upon sale.
Vivian Chen, CPA