Do You Have to Report the Sale of a Home on Your Taxes? IRS Rules Explained

Reporting the sale of your home on your federal tax return is not always mandatory. You are generally required to report the sale if you receive a Form 1099-S from the settlement agent or if your capital gain exceeds the IRS exclusion limits of $250,000 for single filers or $500,000 for married couples filing jointly. Understanding the ownership and use tests is critical to determining your tax liability.

When Are You Required to Report a Home Sale?

The IRS mandates reporting under specific conditions. If the agency receives documentation of a transaction, they will expect to see it on your return.

• Receipt of Form 1099-S: This form, Proceeds from Real Estate Transactions, is issued by the closing agent. Even if your gain is fully excludable, you must report the sale to reconcile the form and avoid triggering an IRS notice.
• Gain Exceeds the Exclusion Limit: Any profit above the $250,000/$500,000 threshold is taxable and must be reported. Your cost basis—the original purchase price plus the cost of improvements—is key to this calculation.
• Ineligibility for the Exclusion: If you do not meet the ownership and use tests (owning and using the home as your primary residence for at least two of the last five years), the entire gain is taxable. This often applies to rental properties or homes sold shortly after purchase.

How to Qualify for the Capital Gains Exclusion

The IRS allows homeowners to exclude significant profit from taxation if they meet specific criteria, known as the ownership and use test.

• Ownership Test: You must have owned the home for at least two years in the five-year period leading up to the sale.
• Use Test: You must have lived in the home as your primary residence—your main dwelling—for at least two years within that same five-year period. These years do not need to be consecutive.

You cannot claim the exclusion if you have excluded gain from the sale of another home within the two years prior to the current sale.

What Are the Special Circumstances for a Partial Exclusion?

Life events may prevent you from meeting the two-year requirement, but the IRS offers flexibility. You may qualify for a partial exclusion if the sale is due to:

• A change in employment location (over 50 miles).
• Health reasons.
• Unforeseen circumstances, such as divorce or multiple births from the same pregnancy.

For example, if you lived in the home for one year before a job-related move, you may be eligible for half the exclusion, or up to $125,000 for a single filer.

How Do You Calculate Your Taxable Gain?

Accurate calculation requires detailed records of your purchase, improvements, and selling expenses. The formula is straightforward:

1. Cost Basis: Purchase Price + Cost of Improvements
2. Amount Realized: Selling Price - Selling Expenses (e.g., agent commissions)
3. Capital Gain: Amount Realized - Cost Basis

Example: You bought a home for $300,000, invested $50,000 in a kitchen remodel, and sold it for $700,000, paying $42,000 in selling costs.

• Cost Basis: $300,000 + $50,000 = $350,000
• Amount Realized: $700,000 - $42,000 = $658,000
• Capital Gain: $658,000 - $350,000 = $308,000

A single filer could exclude $250,000, leaving a taxable gain of $58,000.

What Practical Steps Should You Take?

Maintain meticulous records. Keep all documents in a dedicated file, including:

• The closing disclosure from your purchase and sale.
• Receipts for all capital improvements (renovations that add value), not routine repairs.
• Form 1099-S if issued.

Understand the role of Form 1099-S. You can often avoid receiving this form by certifying to the closing agent that the sale is fully excludable. However, if your sale price is above the exclusion thresholds, the form will likely be issued.

Consider state and local taxes. Beyond federal capital gains tax, you may be responsible for transfer taxes, a fee imposed by local governments when property title changes hands. Rates vary significantly by state.

For investment properties, explore a 1031 exchange. This IRS rule allows you to defer capital gains tax by reinvesting the proceeds into a similar property under strict timelines.

Based on our experience assessment, the most common pitfall is poor record-keeping. Without receipts for improvements, you cannot accurately calculate your cost basis and may overpay on taxes. Start a digital folder with scans of all relevant documents as soon as you consider selling.