Selling a Home? Here Are the Tax Implications You Need to Understand

For most people, selling a home is a major life event that takes time, planning, and careful consideration. And, as with most big changes in life, it can have some tax implications. 

If your home is your most significant and valuable asset, you may view selling it as a lucrative opportunity to make a profit — which it can be. 

However, did you know that the IRS considers your home a capital gain? That means your profit could be subject to a costly surprise: capital gains taxes. 

There is good news. If you have a capital gain from the sale of your main home, you may qualify for significant exclusions.  

Since the 1997 passage of the Taxpayer Relief Act, many homeowners are exempt from capital gains taxes on their profits from a home sale. In fact, most people don’t even need to report the sale of their home to IRS at all.

Nevertheless, exceptions and special circumstances could leave you on the hook for a tax bill. That’s why it’s crucial to understand how these rules apply to your circumstances and what steps you can take to lower your potential tax liability. 

This article will explore the tax implications of selling a home and how you can make the most out of this opportunity.

What happens with profit from the sale of a home?

Whether or not you must pay taxes on your profit and how much of that profit is taxable depends on how long you have owned the home, whether or not you are married, and how much money you made on the sale. (Unfortunately, if you sell the home at a loss, you cannot deduct that amount.)

You can exclude up to $250,000 (or $500,000 if married) from capital gains tax if:

  • You have owned the home you are selling for at least two years, whether continuous or noncontinuous, during the five years ending on the date of the sale, 
  • The home has been your principal residence (or the single main home where you ordinarily live most of the time) for at least two years during the same period, and 
  • You did not exclude gain from the sale of another home during that time. 

If you are part of a married couple and you and your spouse both satisfy all requirements outlined above and file a joint return for the year, the exclusion doubles to $500,000 of profit. Even if one of you does not meet all the requirements, you can still exclude the total of exclusions that each of you would qualify for if you were not married.

That sounds like great news, but there is a catch. The higher your profit, the less significant those exclusions become. The $250,000 and $500,000 thresholds have not been updated since 1997, while median home sale prices have skyrocketed in that time. 

If you are a long-term homeowner and the value of your home has risen dramatically, this may leave you in a frustrating position.  For example, if you are single and you sell your home for $250,000 in profit, you can exclude 100% of your profit from capital gains taxes. On the other hand, if you make $1,000,000 in profit, you must still adhere to the same limit, meaning you can only write off 25% of your profit, or $250,000.

That said, there are still ways for sellers in such a position to lower their taxable profits. 

How can I avoid capital gains tax on a home sale?

If your sale price exceeds the exemptions, one way to reduce taxation on your profits is by reducing the profits themselves. You can accomplish this by increasing the property basis — generally defined as the amount of your capital investment in the property for tax purposes. To put it another way: the cost to you.

Therefore, you may be able to add improvements to the property such as additions, landscaping, insulation, plumbing, and more to the original purchase price, thus increasing basis and lowering your taxable profits. 

If the property is not your primary residence, but is instead an investment or business owned property, you may be able to postpone capital gains through a 1031 exchange.

Essentially, instead of selling a property for capital in this type of transaction, you trade it in exchange for another qualifying property. Generally, when you make a like-kind exchange, you can defer recognizing any gains or losses on your tax returns until you sell or dispose of the property received. However you can only do this for investment properties.  

We dove deeper into like-kind exchanges in a recent blog post, which you can read by clicking here

Is the sale of a house reported to the IRS?

If your profits are less than or equal to the applicable exclusion limit, you do not have to report the sale of your home to the IRS.

However, you must report the sale using Form 8949, Sale and Other Dispositions of Capital Assets, if:

If you do receive a Form 1099-S or other informational income-reporting document, you must report the sale even if your profits are eligible for total exclusion.

To learn more about the rules on reporting your sale on your income tax return, refer to Publication 523.

Special circumstances

We’ll conclude with some more good news: If you do not meet the previously outlined ownership and residence requirements, there are special circumstances in which you may nevertheless qualify for a full or partial exclusion.

For example: 

  • Surviving spouse: If you are a surviving spouse who has not remarried before the sale of a home, the IRS considers you to have owned and used the home as a primary residence during the deceased spouse’s ownership and use period. 
  • Home transferred from spouse: If you acquire a home in a transfer from your spouse (or former spouse if the transfer was incident to divorce), the IRS considers you to have owned the home during any period of time your spouse (or former spouse) owned it.
  • Divorced individuals: The IRS considers you to have used a home as a principal residence during any period when: 
    • You owned the home, and
    • Your spouse or former spouse is allowed to live in it under a divorce or separation instrument and uses the home as a principal residence. 
  • Inherited home: If you inherit a home, you are generally not eligible for gain exclusion unless you meet the ownership and use tests for the inherited home.

In certain qualifying circumstances, you may also be able to claim a partial exclusion if the primary reason for the sale is due to a change in employment, health, or unforeseen circumstances. 

The bottom line

If you are considering selling your home, you no doubt have a lot on your mind. It’s a complex undertaking — but that is precisely why it’s so important to make sure you have considered all the tax implications. 

Of course, the best way to avoid an unpleasant surprise at tax time is to seek the counsel of professional tax experts (like us).

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Jeff Coyle, CPA

Jeff Coyle, CPA, Partner of Rosenberg Chesnov, has been with the firm since 2015. He joined the firm after 20 years of business and accounting experience where he learned the value of accurate reporting, using financial information as a basis for good business decisions and the importance of accounting for management.

He is a diligent financial professional, able to manage the details and turn them into relevant business leading information. He has a strong financial background in construction, technology, consulting services and risk management. He also knows what it takes to create organizations having built teams, grown companies and designed processes for financial analysis and reporting.

His business experience includes:

Creating and preparing financial reporting, budgeting and forecasting.
Planning and preparation of GAAP and other basis financial statements.
Providing insight on financial results and providing advice based on those results.

Jeff also has a long history of helping individuals manage their taxes and plan their finances including:

Income tax planning and strategy.
Filing quarterly and annual taxes.
Audit support.
General financial and planning advice.
Prior to joining the firm in 2015, Jeff was in the private sector where he held senior financial and management positions including Controller and Chief Financial Officer. He has experience across industries, including construction, technology and professional services which gives him a deep understanding of business.

Jeff graduated from Montclair State University, he is a CPA and member of the American Institute of Certified Public Accountants, New York State Society of Certified Public Accountants and New Jersey State Society of Public Accountants.

Jody H. Chesnov, CPA

Jody H. Chesnov, CPA, Managing Partner of Rosenberg Chesnov, has been with the firm since 2004.  After a career of public accounting and general management, Jody knows the value of good financials.  Clarity, decision making, and strategy all start with the facts – Jody has been revealing the facts and turning them into good business results for more than three decades.

He takes a pragmatic approach to accounting, finance and business. His work has supported many companies on their path to growth, including helping them find investors, manage scaling and overcome hurdles.  His experience and passion for business reach beyond accounting and he helps businesses focus on what the numbers mean organizationally, operationally and financially.

He has a particular expertise in early-stage growth companies.  His strengths lie in cutting through the noise to come up with useful, out of the box, solutions that support clients in building their businesses and realizing their larger visions.

Prior to joining the firm in 2004, Jody was in the private sector where he held senior financial and management positions including General Manager, Chief Financial Officer and Controller.  He has experience across industries, which gives him a deep understanding of business.

Jody graduated with a BBA in Accounting from Baruch College, he is a CPA and member of the American Institute of Certified Public Accountants and New York State Society of Certified Public Accountants.

In addition to delivering above and beyond accounting results, Jody is a member of the NYSCPA’s Emerging Tech Entrepreneurial Committee (ETEC), Private Equity and Venture Capital Committee and Family Office Committee.  

He is an angel investor through the Westchester Angels, and has served as an advisor for many startup companies and as a mentor through the Founders Institute.

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