What are the tax consequences of selling a primary residence?

Capital Gains Tax Implications for Selling a Primary Residence

Exclusion Limits

- Single Filers: If you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income.

- Married Filing Jointly: If you file a joint return with your spouse, you may be able to exclude up to $500,000 of the gain.

- Exclusion Requirements: To claim the exclusion, you must meet the ownership and use tests. This means you must have owned and lived in the home as your main residence for at least two years during the five-year period ending on the date of the sale. These two years do not need to be consecutive.

Reporting Requirements

- Form 1099-S: If you receive a Form 1099-S, Proceeds From Real Estate Transactions, you must report the sale of the home even if the gain from the sale is excludable.

- Non-excludable Gain: You must report the sale if you cannot exclude all of your capital gain from income.

- Forms for Reporting: Use Schedule D (Form 1040), Capital Gains and Losses, and Form 8949, Sales and Other Dispositions of Capital Assets, to report the sale.

Special Situations

- Extended Duty Military Personnel: If you or your spouse are on qualified official extended duty in the Uniformed Services, the Foreign Service, or the intelligence community, you may be able to suspend the five-year test period for up to 10 years.

- Installment Sales: If you sold your home under a contract that provides for part of the selling price to be paid in a later year, this is considered an installment sale. You may report the sale under the installment method unless you elect out. The exclusion under Section 121 still applies.

Non-Deductible Losses

- Personal Use Property: Losses from the sale of personal-use property, such as your home, are not deductible.

Additional Considerations

- Multiple Homes: If you have more than one home, you can only exclude the gain from the sale of your main home.

- Business or Rental Use: For information about gain or loss calculations from the sale of a home that you have used for business or to produce rental income, refer to Publication 523.

- Depreciation Recapture: If you rented out your home, you cannot exclude the part of the gain equal to the depreciation you claimed for renting the house.

Net Investment Income Tax (NIIT)

- Applicability: If your modified adjusted gross income is above certain thresholds, you may be subject to the Net Investment Income Tax (NIIT) of 3.8% on your net investment income, which could include the gain from the sale of your home if it is not excluded under Section 121.

Basis and Gain Calculation

- Adjusted Basis: Your adjusted basis is generally your cost in acquiring your home plus the cost of any capital improvements you made, less any casualty losses and other decreases.

- Amount Realized: The amount you realize from the sale is generally the cash or other property you receive plus any indebtedness the buyer assumes or pays off, minus your selling expenses.

- Capital Gain: If the amount realized is more than your adjusted basis, you have a capital gain on the sale.

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Sources:

Topic no. 701, Sale of your home | Internal Revenue Service 2024-08-03

Tax considerations when selling a home | Internal Revenue Service 2024-08-01

Publication 523 (2023), Selling Your Home | Internal Revenue Service 2024-08-04

Capital gains, losses, and sale of home | Internal Revenue Service 2024-08-03

Your Home Page 1 of 25 12:30 - 7-Feb-2024 | Internal Revenue Service 2024-07-30

Questions and Answers on the Net Investment Income Tax 2024-08-03

Sale of Residence - Real Estate Tax Tips | Internal Revenue Service 2024-08-03

What if I sell my home for a loss? | Internal Revenue Service 2024-08-03

Property (Basis, Sale of Home, etc.) 3 | Internal Revenue Service 2024-08-03