Selling your home gives you an opportunity to realize financial gain from your efforts to maintain and grow your home investment. Depending on how much your home has appreciated or how many capital improvements you've made, you may stand to profit significantly. In the view of the Internal Revenue Service, these capital gains on a home sale are reportable and taxable under certain circumstances. Finding the right forms to report your home sale and any gains, and understanding when this is necessary, will help you determine if you owe the IRS money at tax time.
If you have recently sold your home, you can use IRS Form 8949 to report the sale of your property and all relevant details. Any capital gains you received as part of the sale can be reported on Schedule D of IRS Form 1040.
IRS Form for Sale of Home
To report the sale of your home and any capital gains, use Schedule D of your 1040 tax return and Form 8949. Use Schedule D to report any gains or a loss from the sale. Use Form 8949 to report the date you purchased and sold the home, the original cost, the adjusted cost basis when you sold it, and the amount of the sale. In certain situations, the IRS may not require you to report the sale if you're eligible to exclude the gains from taxes.
If you've had the property for at least a year, you'll pay capital gains tax on the house sale using the long term capital gains rate. Otherwise, you'll pay short term capital gains tax at your ordinary income tax rate, which is often higher. If the home hasn't appreciated, you can take a long or short term capital loss.
If you've lived in the home in two of the five years preceding its sale, you can exclude up to $250,000 in gains as a single person, or up to $500,000 if you're married and file your taxes jointly with your spouse. To calculate any gains on the sale, you'll have to first determine your initial and adjusted cost basis of the house. Once you know the adjusted cost basis, subtract it from the sale price of the house to determine any gains.
There are two cases in which the IRS requires you to report gains on the sale of your home: If you don't meet the occupancy test or you received a 1099-R, you must report any gains on Schedule D and Form 8949. Additionally, if you've sold a primary home in the last two years and used the gain exclusion, you are not eligible to use it on this property.
Exceptions to Gain Exclusion Rules
In certain situations, you may still be able to exclude a reduced amount of gains even if you don't meet the occupancy rule or sold another primary home in the last two years and excluded gains. If you sold your home because of an illness, a change in employment, or an unforeseen circumstance, the IRS will allow you to exclude a portion of your gains. If you spent a portion of the five-year ownership test period outside the U.S. as a Peace Corps volunteer, or on official duty as a member of the military, a member of the foreign service, or an employee of the intelligence community, the IRS will allow you to suspend that period when you sell your home and exclude gains under the occupancy exclusion rules.
2018 Tax Law Changes
Capital gains rules around real estate are largely unchanged under the Tax Cuts and Jobs Act. Form 1040 is being redesigned, so make sure you work with the latest version of the form when you file your taxes.
Capital gains tax brackets are also staying roughly the same, though they're being separated from ordinary income tax brackets. Ordinary income rates are coming down, though if you've owned a home for at least a year this won't affect you, since you'll pay taxes at the long term capital gains rate.
2017 Tax Law
Use the old 1040 form and related schedules to file for 2017, even if you're filing after the new form is released. Use the 2017 income tax brackets to determine your capital gains and ordinary income tax rates.
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