How Do I Report the Sale of My Home on My Taxes?

Selling a home can have tax implications, and understanding how to report the sale correctly is important to avoid unexpected liabilities. The IRS requires homeowners to determine whether they owe taxes on any profit and to file the appropriate forms.

To do this properly, you’ll need to calculate your gain or loss, check if you qualify for exemptions, and ensure accurate reporting.

Determining Primary Residence Criteria

The IRS allows homeowners to exclude a portion of their home sale profits from capital gains taxes if the property qualifies as a primary residence. The home must pass the ownership and use tests, which assess how long you have owned and lived in the property.

The ownership test requires that you have owned the home for at least two of the five years before the sale. This period does not need to be continuous, meaning you could have rented it out for part of the time as long as you meet the two-year threshold. The use test mandates that the home was your main residence for at least two of the last five years.

Exceptions exist for individuals who had to move due to job relocations, health issues, or military service. The Military Family Tax Relief Act allows service members to suspend the five-year period for up to ten years if they are stationed away from home, making it easier for them to qualify for the exclusion.

Figuring Out the Adjusted Basis

The adjusted basis of your home is the amount you originally paid for it, plus certain costs that increase its value, and minus any deductions or credits that reduce it.

Start with the original purchase price, which includes the amount paid for the home and closing costs such as title insurance, legal fees, and recording fees.

Certain improvements increase your adjusted basis. Qualifying improvements must add value, extend the home’s useful life, or adapt it to a new use. Examples include adding a new roof, remodeling a kitchen, or installing central air conditioning. Routine repairs, such as fixing a leaky faucet or repainting a room, do not count since they are considered maintenance rather than capital improvements. Keeping detailed records of these expenses is important, as they can significantly reduce your taxable gain.

Some events lower your adjusted basis. If you received subsidies, tax credits, or insurance reimbursements for home improvements, those amounts must be subtracted. Likewise, if you claimed a home office deduction or depreciation for rental use, those amounts reduce your basis. This is particularly relevant if you converted part of your home into a rental property or used it for business purposes.

Calculating the Gain or Loss

The profit or loss from selling your home is determined by subtracting the adjusted basis from the sale price. The sale price includes the total amount received from the buyer, including any additional compensation such as seller-paid closing costs. If the buyer assumes your mortgage or any outstanding liens, those amounts also contribute to the total sale price.

Certain selling expenses can reduce the taxable gain. The IRS allows deductions for costs directly associated with the transaction, including real estate agent commissions, legal fees, advertising expenses, and title transfer taxes. If you provided seller concessions, such as covering the buyer’s loan origination fees or home inspection costs, those amounts may also be deductible. However, mortgage payoff amounts and home equity loan balances are not considered selling expenses.

A loss occurs when the adjusted basis exceeds the sale price, but personal-use property, including primary residences, does not qualify for a deductible capital loss under IRS rules. Even if market conditions force a homeowner to sell at a lower price than originally paid, the loss cannot be used to offset other taxable income. This differs from investment properties, where losses may be deductible against capital gains or even ordinary income.

Exemptions on Capital Gains

For homeowners who qualify, the Section 121 exclusion allows up to $250,000 of capital gains ($500,000 for married couples filing jointly) to be excluded from taxable income. This exclusion can be used multiple times as long as at least two years have passed since last claiming it. If a home is co-owned by unmarried individuals, each person may exclude up to $250,000 of their share of the gain, provided they individually meet the eligibility requirements.

Partial exclusions are available under Treasury Regulation 1.121-3 for individuals who sell their home before meeting the required ownership and use periods due to unforeseen circumstances. Qualifying reasons include job relocations exceeding 50 miles, health-related moves recommended by a physician, or significant financial hardships. The reduced exclusion is calculated by multiplying the standard $250,000 or $500,000 limit by the percentage of the two-year period actually met. For example, a single taxpayer who owns and lives in a home for one year before selling due to a job transfer may exclude up to $125,000 (50% of $250,000).

Reporting These Figures on Tax Forms

Once the gain or loss has been determined and any applicable exclusions accounted for, the next step is properly reporting the sale on your tax return.

If the entire gain is excluded under Section 121, reporting may not be necessary unless a Form 1099-S, Proceeds from Real Estate Transactions, was issued by the closing agent. If this form was received, the sale must be reported on Form 8949, Sales and Other Dispositions of Capital Assets, and then carried over to Schedule D (Form 1040), Capital Gains and Losses. If a portion of the gain is taxable, it must be included in total capital gains calculations on Form 1040.

For those who do not qualify for the full exclusion, the taxable portion of the gain is subject to long-term capital gains tax rates if the home was owned for more than a year. These rates range from 0%, 15%, or 20%, depending on taxable income thresholds. If the home was held for one year or less, the gain is taxed as ordinary income, which can result in a higher tax burden. Special rules apply for depreciation recapture if the home was used as a rental, requiring the recaptured amount to be taxed at a maximum rate of 25%.

Keeping Organized Records

Maintaining thorough documentation is important for accurately reporting the sale and substantiating any exclusions or deductions claimed. The IRS recommends keeping records related to the home’s purchase, improvements, and sale for at least three years after filing the tax return for the year of the sale, though longer retention may be necessary in certain cases.

Documents to retain include the closing disclosure or settlement statement from both the purchase and sale, receipts for capital improvements, property tax records, and any Form 1099-S received. If depreciation was claimed due to rental or business use, records of prior tax returns and depreciation schedules should also be kept. These documents provide evidence of the adjusted basis and can help resolve any discrepancies if the IRS requests further information.