Selling Your Home: Do You Need to Report It to the IRS?
When selling your primary residence, you may exclude up to $250,000 of gain ($500,000 if married filing jointly) from taxes. But does this mean you can skip reporting the sale? Not necessarily. Here's what you need to know to stay compliant and avoid potential IRS scrutiny.
Key Factors to Consider
Exclusion Rules
To claim the exclusion, you must meet the following conditions:
Ownership and Use: You must have owned and lived in the home as your primary residence for at least two of the past five years before the sale.
Frequency of Exclusion: You cannot have claimed the exclusion on another home sale in the previous two years.
Reporting Requirements
When a Form 1099-S Is Issued:
If the closing agent issues a Form 1099-S (a tax document reporting the sale proceeds), you are required to report the sale on your tax return, even if the entire gain is excluded and no taxes are owed.When No Form 1099-S Is Issued:
If no 1099-S is issued, reporting the sale is not strictly required, but doing so is highly recommended. Filing a report ensures that the IRS receives complete and accurate information, reducing the likelihood of a future audit or inquiry.
How to Report the Sale
To report the sale of your home:
File IRS Form 8949: Use this form to report the details of the sale, such as the sale price, the cost basis, and the gain or loss.
Complete Schedule D: Include the information from Form 8949 on Schedule D (Capital Gains and Losses) of your tax return.
Zero-Gain Transactions: Even if the gain is fully excluded, record the transaction to ensure compliance and to explain why no tax is owed.
Special Cases
If you sold your home due to unforeseen circumstances (e.g., a job change, health reasons, or other qualifying events), you may qualify for a partial exclusion of the gain, even if you don’t meet the full two-year ownership and use requirements.
Takeaways
Always Report When in Doubt: Reporting the sale of your home, even when no tax is owed, is a best practice to avoid potential complications with the IRS.
Keep Good Records: Retain documentation of your purchase price, improvements, and sale details, as these will support your reported cost basis.
Consult a Professional: If you’re unsure about your tax obligations or how to file, working with a CPA or tax professional can help ensure accuracy.
By understanding the rules and reporting requirements, you can take the necessary steps to comply with IRS regulations and minimize any tax-related headaches.