If a homeowner is selling the home that they reside in, the tax laws allow for the profit to usually be excluded from the profit that has been made on the home. Many times the sale of the home doesn't even need to be reported to the IRS, making the moving after a sale a much easier.
When calculating a profit, one needs to subtract the adjusted tax basis in the home from the sale proceeds to determine whether there was a profit or a loss on the home. The adjusted basis can be calculated by evaluating the amount the home was originally worth plus any major improvements that have been made to the home.
Any profit over $500,000 can be deducted if the taxes are filed jointly between a married couple, or $250,000 if the person filing is single. If a loss was taken on the home, the loss is not deductible. This exclusion can be made for any home that is sold, as long as the individual has lived in the home for two years and not sold another home in the last two years. If there is still profit left after the home-sale exclusion, the extra money needs to be reported on Schedule D with other capital gains and losses.
Although the sale of a home often does not need to be reported, there are some requirements that must be met to determine if this is the case. The first requirement is ownership. The homeowner must have owned the home for a full two years during the past five years of the sale. Also for two years during the last five, the owner must have used the home as their primary residence. This must also be the only home within a two year time period that a home-sale exclusion has been claimed by the owner. If a couple is married, they must also file a joint tax return, one or both of the spouses must have owned the house for the specified time, and one or both spouses must have lived in the house for the specified period of time.
If a homeowner does not meet the requirements needed for the exclusion, the profit will need to be reported as short or long term capital gain. This will depend on how long the homeowner has lived in the home. If it has been less than one year, it will be short term capital gain and long term if the owner has lived there for more than one year.
Part of the exclusion may also be used if the sale of the home is due to things such as an employment change, health circumstances, or other unexpected events such as divorce, multiple births from the same pregnancy, or an engagement that has been called off when the couple bought the home together.
The sale of a home does not usually need to be reported on a tax return. The only time it does is when the homeowner has been given a Form 1099-S, Proceeds from Real Estate Transactions, by the real estate agent at the time of closing the sale. To be exempt from claiming the sale on a tax return, one must provide proof that they meet the required criteria.
