Your earned income and business profits are taxable income. Taxable income also includes profits from selling your home. Did you know that in some cases, you may not have to pay taxes when you sell your home? Below are ten ways that selling your home can impact your taxes.
- Exclusion of gain from the sale of principal residence. Once you sell your home, you may be able to exclude some or all of the capital gains. There is an eligibility test you’ll go through, so do so to see if this rule will apply to you. Two key eligibility requirements are how you use the home and your ownership of the home. You must have owned the home and used it as your primary residence for the past two of five years before you sell your home.
- There are exceptions. Just as with any other rules, there are exceptions. For instance, a person with a disability, in the military, or involved with the Peace Corps may be excluded from the exclusion of gains. Publication 523 covers this in further detail.
- Limitations on the exclusion of taxes. You can exclude the taxes if the gain of the sale is less than $250,000 for single individuals or if you are married, it’s less than $500,000. The Net Investment Income Tax is not applicable to the excluded gain.
- You may not need to report the home sale. Again, do not report the taxable gain. If you didn’t earn a profit, you may not need to report the sale on your tax return to the IRS.
- Requirements to report the home sale. If you don’t qualify for the exclusion of gain from the sale of your principal residence, you must then report the sale. Even if you qualify, but decline the claim, you must report the sale. If you receive the IRS Form 1099-S: Proceeds from Real Estate Transactions, you’ll need to report the sale of your home. To do this accurately, review first the Questions and Answers on the Net Investment Income Tax that is on the IRS.gov website.
- Frequency limits allowed on the exclusion. Typically, you cannot exclude the gain within two years. Exceptions do apply.
- Only a primary residence qualifies. You can only exclude from the gain on the sale your primary residence or main home. The primary residence is the home you live in the most.
- FTHB credit. See Publication 523 if you claimed the first-time home buyer (FTHB) credit.
- Sold your home for a loss. If you sold your primary residence for a loss, you aren’t eligible to deduct this loss on the tax return.
- Address changes. After selling your home and moving, you’ll need to update your address by completing the Form 8822– Change of Address and turn it into the IRS. You can mail this form in. Also, update your Health Insurance Marketplace plan provider if you move out of the area.
Additional IRS Tax Tips
Visit the IRS Tax Tips page throughout the year to get helpful tips from the IRS. You’ll learn more about your rights as a taxpayer, how to avoid tax scams, and potential deductions/credits to name a few.