What Happens If I Sell My House and Don’t Buy Another?

Selling a home without immediately buying another, whether for downsizing, transitioning to renting, or other lifestyle changes, raises important financial questions. The primary concerns are understanding the potential tax consequences and how to manage the proceeds from the sale of your primary residence.

Determining Your Tax Obligation

When you sell a property for more than you paid for it, the profit is a capital gain subject to federal taxes. The tax rules for a primary residence, however, offer a benefit that can reduce or eliminate this tax through the home sale exclusion, a provision in Internal Revenue Code Section 121. This allows eligible taxpayers to exclude a substantial amount of the gain from their income.

To qualify for the maximum exclusion, you must meet both an ownership and a use test. The ownership test requires that you have owned the home for at least two of the five years leading up to the sale date. The use test requires that you have lived in the home as your primary residence for at least two of those same five years. These two years do not need to be continuous. For single filers, the exclusion amount is up to $250,000 of the gain, while for those married filing a joint return, the amount increases to $500,000.

You begin with the gross selling price of the home. From this amount, you subtract any selling expenses, which include real estate agent commissions, advertising costs, legal fees, and escrow fees. The result is the “amount realized” from the sale.

Next, you must determine your home’s “adjusted basis.” The starting point is the original purchase price, to which you add the cost of any capital improvements made during your ownership. Capital improvements are projects that add value to the home, prolong its life, or adapt it to new uses, such as a new roof or a room addition.

The final gain is calculated by subtracting this adjusted basis from the amount realized. If this gain is less than your eligible exclusion amount, you will owe no federal tax on the sale. If the gain exceeds your exclusion limit, only the excess amount is considered a taxable capital gain. A loss on the sale of your primary residence is not tax-deductible.

Required Tax Filings

You may be required to report a home sale to the IRS even if it results in no tax liability, and you must do so if you receive a Form 1099-S. This form, “Proceeds from Real Estate Transactions,” is issued by the closing company and reports the gross proceeds from the sale to both you and the IRS.

The details of the transaction are first entered on Form 8949, “Sales and Other Dispositions of Capital Assets.” On this form, you will report the property’s sale price, its cost basis, the resulting gain or loss, and indicate that the gain is excludable.

The totals from Form 8949 are then transferred to Schedule D, “Capital Gains and Losses.” If a portion of your gain is taxable because it exceeds the exclusion limit, that taxable amount will be calculated here and carried over to your main Form 1040.

Financial Planning with the Proceeds

After settling any potential tax obligations, the net proceeds from your home sale present a significant opportunity to advance your financial goals.

A foundational step for many is to create or bolster an emergency fund. Financial experts often recommend holding three to six months’ worth of living expenses in a liquid, easily accessible savings account to cover unexpected costs without derailing your budget.

Addressing high-interest debt is another powerful use for these funds. Paying off credit card balances, personal loans, or other costly debts can provide an immediate and guaranteed return on your money by eliminating interest payments.

For long-term goals, investing the proceeds is a common strategy. Contributing to tax-advantaged retirement accounts like a Traditional or Roth IRA can be a starting point. If you have already maximized these contributions, opening a taxable brokerage account provides a flexible way to invest in a diversified portfolio of stocks, bonds, and other assets tailored to your risk tolerance and time horizon.