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Having Sold Your Home—What Are the Next Steps? Your Tax Questions, Answered! Understand the Capital Gains Tax on Sale of Home
1. Do I Need to Report the Sale of My Home to the IRS?
If you made a profit, you’ll likely need to report it. The IRS lets you exclude up to $250,000 of gain (or $500,000 if married filing jointly), and this is called tax exclusion on home sale. if you owned and lived in the home for at least two of the last five years. If your profit is below this threshold, you might not owe taxes. However, you’ll still need to report the sale using IRS Form 1099-S if it’s issued to you. If you don’t qualify for the full exclusion (e.g., you rented the property or didn’t meet residency rules), a portion of the gain could be taxable as capital gains.
2. What home sale expenses can I deduct?
You can reduce your taxable gain by deducting selling costs like real estate agent commissions, title fees, and repairs made to prepare the home for sale. Keep receipts for expenses directly tied to the sale. For example, staging costs or legal fees count, but mortgage interest paid during the sale year is reported separately on Schedule A. Major home improvements (like a new roof or kitchen renovation) can also increase your home’s tax basis, which lowers your taxable profit. Track these over the years—they add up!
3. What’s the difference between short-term and long-term capital gains?
If you owned the home for less than a year before selling, profits are taxed as short-term capital gains, which means they’re taxed like ordinary income (up to 37%). Owned it longer? Gains qualify for long-term capital gains rates, which max out at 20% (plus a potential 3.8% net investment income tax for high earners). This is why timing matters—holding for at least a year could save you thousands. Check the IRS guidelines on capital gains to see where you fall.
4. What if I Sold My Home at a Loss?
Unfortunately, losses on the sale of a primary residence aren’t deductible. The home sale tax exclusion only applies to profit from the sale. The IRS sees personal homes as non-investment assets, so even if you sold for less than you paid, you can’t write it off. The exception? If you converted part of your home into a rental or business space, some of the loss might be claimable.
5. How Do I Handle State Taxes?
States have their own rules. California, for instance, follows federal exclusions but taxes capital gains as ordinary income. Other states might offer smaller exclusions or none at all. If you moved states after selling, you may need to file a part-year return.
6. What tax forms do I need?
- Form 1099-S: Provided by the title company or real estate agent, showing the sale price.
- Form 8949 & Schedule D: to report capital gains or losses.
- Records of home improvements: Receipts, invoices, or contracts proving upgrades.
- Closing disclosure: Details sale expenses to deduct.
7. Can I Avoid Taxes By Buying Another Home?
Nope—the old “roll over” gains rule ended in 1997. Today, the exclusion ($250k/$500k) is your main way to avoid taxes. Reinvesting in a new home doesn’t impact your tax liability, but costs like moving expenses (unless you’re military) are no longer deductible under current tax law. However, if you’re selling rental property or a vacation home, a 1031 exchange might defer taxes—but that’s a different ballgame.
8.- What if I Inherited the Home?
Your tax basis is the home’s value on the original owner’s date of death (a “step-up in basis”). For example, if your parents bought the house for $100k and it was worth $500k when they passed, your basis is $500k. Sell it for $510k? You’ll only pay taxes on the $10k gain. Keep the appraisal and death certificate for your records. Inherited property sales often require tax preparation services to navigate.
At People’s Tax Advisors, we specialize in maximizing deductions and credits to get you the maximum refund possible. Let our team handle the complexities of business tax prep, partnership tax prep, or personal returns. Schedule your virtual appointment today!
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