Tax Implications of Selling a Home

With most homes these days selling for very good prices, it’s important that sellers understand the current income tax rules as they apply to the sale of a primary residence.

Some important things to know:

A single taxpayer may exclude up to $250,000 of gain on the sale of a primary residence and married couples who file jointly may exclude up to $500,000.

You must have owned and lived in the home for at least two of the last five years to be entitled to the exclusion, and the exclusion is only allowed once every two years.

In Colorado, the title company who handles the closing paperwork will issue a single taxpayer a form 1099-S (Proceeds from Real Estate Transaction) when the sale price of a home is more than $250,000. Married couples who file jointly will receive a 1099-S when the sale price is more than $500,000. The title company only reports the sale – with the 1099-S going to the seller(s) and the same information being reported to the Internal Revenue Service (IRS). The title company does not get involved in any calculations of what may or may not actually be taxable to the seller(s). 

Keep in mind that it’s the profit on the sale that may be taxable, not the actual sale price. The determination of how much gain applies is calculated when tax returns are completed early the next year. It is then up to the individual taxpayer(s) to address the sale on their tax return.  Receiving a 1099-S form does NOT mean the entire amount is taxable. It does mean the sale must be addressed by the seller(s) on their tax return for the year the home was sold.    

A very simple calculation of the possible taxable gain on the sale of a home is:  Your sale price MINUS your costs to sell, MINUS the costs when you bought the home, MINUS any improvements you made, MINUS your exclusion amount.

The same calculation for those who like more detail is: Your sale price MINUS the costs to sell your home (things like real estate commissions, an owner’s title insurance policy, title company fees, and any other expenses to sell your home), MINUS your cost basis (what you paid for the home when you bought it, plus closing costs you paid at the time of purchase (not including lender fees), plus the cost at purchase to set up utilities, plus the cost of any “improvements” you made to the home since you bought it – things like an addition or finished basement, a new roof, a new HVAC system, a new deck, new landscaping, a swimming pool, new windows or doors, new siding, new insulation, a new kitchen, remodeled baths, new flooring, etc.), MINUS your allowed exclusion amount ($250,000 for a single taxpayer or $500,000 for a couple filing a joint return).  

If there is a profit, as calculated using IRS rules, that amount is taxed as capital gains. 

A loss on the sale of your primary residence is not tax deductible.

These are Internal Revenue Service (IRS) rules. A taxpayer wanting more information should visit the IRS website at www.irs.gov and search for Sale of Home. You’ll find basic information under Topic 701 (Sale of Your Home) and complete details in Publication 523 (Selling Your Home). That longer publication also includes two worksheets that may be helpful.  When your tax return is prepared the transaction is addressed on Form 8949, Sales and Other Dispositions of Capital Assets, which carries over to Form 1040, Schedule D, Capital Gains and Losses. The basic concepts are simple. Filling out the IRS forms is not! 

For those of us that are a little older, we may recall something about a tax rule that said a seller didn’t need to worry about a gain on the sale of a principal residence as long as the owner bought another home with twenty-four months (the Rollover Residence Replacement Rule), or that a seller over the age of 55 could take a one-time exclusion on the entire gain from the sale of a home (IRS Code Section 121). I’m asked about these two things frequently.  Those two tax codes are no longer applicable. They were replaced with a different set of rules under the Taxpayer Relief Act of 1997.

You should also know that there are different rules that apply to the sale of an investment property or vacation home, if the owner has not lived in the home for at least two of the last five years, if a seller claimed the exclusion within the last years, if the home was destroyed or condemned, or if the home was sold using seller financing. If a seller has used the home office deduction for working from home there may be an adjustment needed for that. There are also special rules for those in the military, the foreign service, or the intelligence community, and if a seller was required to move for work or for health reasons, or due to certain personal events, a partial exclusion may be available.  

Disclaimer: I am not a Certified Public Account (CPA) or IRS Enrolled Agent (EA). The information above is intended only as a brief overview and the information applies to the sale of a primary residence only.  In ALL situations I strongly recommend a seller contact a tax professional and understand any potential tax implications prior to listing a home for sale.

This information is provided as a courtesy by Lynne Hannifan, HomeSmart ELITE Group,  8/12/2021