How to Report a Home Sale on Your Tax Return

Selling a home has specific obligations with the Internal Revenue Service. For many homeowners, the profit from this transaction can be substantial, so understanding how to report it is part of tax compliance. This guide explains when a sale must be reported, how to calculate the gain or loss, and which forms to use.

Determining If You Need to Report the Sale

First, determine if the sale of your main home must be reported to the IRS. The Section 121 exclusion allows many homeowners to exclude a large portion of the gain from their income, which can mean the sale does not need to be reported.

To qualify for this exclusion, you must meet both an ownership test and a use test. The ownership test requires you to have owned the home for at least two of the five years before the sale date. The use test requires you to have lived in the home as your primary residence for at least two of the five years before the sale. The two-year periods do not have to be continuous.

If you meet these tests, you can exclude up to $250,000 of gain from your income as a single filer. For those married filing a joint return, the exclusion doubles to $500,000, provided at least one spouse meets the ownership test and both meet the use test.

However, you must report the sale on your tax return if you receive Form 1099-S, Proceeds From Real Estate Transactions. This form is issued by the closing agent and reports the sale’s gross proceeds to you and the IRS. You must also report the sale if your profit exceeds the exclusion thresholds.

Calculating Your Home Sale Gain or Loss

If the sale must be reported, you must calculate your gain or loss. The first step is to find the amount realized, which is the final selling price of the home minus any selling expenses. Common selling expenses include:

• Real estate broker’s commissions
• Title insurance
• Legal fees
• Advertising costs

Next, determine your adjusted basis, which is your total investment for tax purposes. Start with the original purchase price and add settlement fees and closing costs from the purchase. The most significant adjustments to your basis come from the cost of capital improvements, which are expenses that add value to your property, prolong its life, or adapt it to new uses.

Capital improvements are distinct from repairs, which only maintain the home’s condition and are not added to your basis. To find your capital gain or loss, subtract the adjusted basis from the amount realized. A loss on the sale of a personal residence is not deductible, but the calculation is still required to confirm the outcome.

Completing the Necessary Tax Forms

The primary form for reporting the sale is Form 8949, Sales and Other Dispositions of Capital Assets. On this form, you will enter the property’s acquisition and sale dates, the sale proceeds, and your calculated basis. If you are excluding gain, you will make specific notations on this form.

In column (f), enter code “H” to indicate the sale of your main home. In column (g), enter the amount of your exclusion as a negative number, which reduces the gain recognized as taxable income. The totals from Form 8949 are then carried over to Schedule D, Capital Gains and Losses. This schedule summarizes all capital asset transactions and calculates your total net capital gain or loss for the year.

Submitting Your Tax Return

The net capital gain or loss from Schedule D is transferred to the corresponding line on your main tax form, Form 1040. This ensures any taxable gain is included in your total income.

If you e-file, your tax software will handle the calculations and form attachments. For those filing by mail, Form 8949 should be attached behind Schedule D, which is then included with your Form 1040 package.

You should keep copies of the closing statements from both the purchase and sale of the home. Also retain receipts for all capital improvements and a copy of the filed tax return to support your calculations.