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 (IRS), 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.
IRS Form for Sale of Home
To report the sale of your home and any capital gains to the IRS, include Schedule D with 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. These are known as the ownership test and use test. 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.
When to Report Gains
There are some 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-S or cannot exclude all of your capital gain income, 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 generally not eligible to take it on a second property within that period.
If you sell a second home that is not your primary residence, you must report the sale to the IRS. However, there there are ways to reinvest the proceeds from the sale of a second home that can help avoid capital gains taxes.
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 divorce, or a major unforeseen circumstance, the IRS may 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.
2020 Capital Gains Rates
According to Forbes, for 2020, most single individuals with incomes between $40,000 to $441,500 will fall within the 15 percent capital gains tax bracket. Single individuals earning less than $40,000 will be taxed at zero percent.
Married couples with income below $80,000 will enjoy zero percent rates. Married couples with income above that up to $496,600 will also fall into the 15 percent tax bracket. Both married and single individuals may be taxed at 20 percent capital gains if their income is higher.
- IRS: Topic 701 - Sale of Your Home
- IRS: Publication 523 Selling Your Home
- IRS: Form 8949 Sales and Other Dispositions of Capital Assets
- IRS: Instructions for Schedule D Capital Gains and Losses
- Forbes: What Are The New Capital Gains Rates For 2020?
- IRS: About Form 1040, U.S. Individual Income Tax Return
- Internal Revenue Service. "Tax Topic No. 409: Capital Gains and Losses." Accessed Jan. 2, 2020.
- Internal Revenue Service. "Publication 550: Investment Income and Expenses," Page 19. Accessed Jan. 2, 2020.
- Tax Foundation. "An Overview of Capital Gains Taxes." Accessed Jan. 13, 2020.
- Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2019." Accessed Jan. 2, 2019.
- Internal Revenue Service. "Publication 523: Selling Your Home," Pages 2–7. Accessed Jan. 2, 2020.
- Internal Revenue Service. "Publication 550: Investment Income and Expenses," Page 49. Accessed Jan 2. 2020.
- Internal Revenue Service. "Publication 946: How to Depreciate Property," Pages 3–4. Accessed Jan. 2, 2020.
- Internal Revenue Service. "Publication 550: Investment Income and Expenses," Page 67. Accessed Jan. 2, 2020.
- Internal Revenue Service. "Find Out if the Net Investment Tax Applies to You." Accessed Jan. 2, 2020.
- Internal Revenue Service. "Publication 544: Sales and Other Disposition of Assets," Pages 34–36. Accessed Jan. 2, 2020.
- Internal Revenue Service. "Publication 544: Sales and Other Disposition of Assets," Pages 35–36. Accessed Jan. 2, 2020.
- Internal Revenue Service. "Publication 550: Investment Income and Expenses," Pages 56–57. Accessed Jan. 2, 2020.
- Internal Revenue Service. "About Schedule D (Form 1040)." Accessed Jan. 2, 2020.
- Internal Revenue Service. "Topic No. 412: Lump-Sum Distributions." Accessed Jan. 2, 2020.
- Internal Revenue Service. "Sales and Other Dispositions of Assets," Page 35. Accessed Jan. 2, 2020.
- Internal Revenue Service. "Mutual Funds (Costs, Distributions, etc.) 1." Accessed Jan. 13, 2020.
- Internal Revenue Service. "Publication 538: Accounting Periods and Methods," Pages 14–18. Accessed Jan. 2, 2020.
Monica Dillon has more than 10 years experience in real estate sales, marketing, investing and appraising. She specializes in energy efficiency building practices and renewable energy. Dillon has been syndicated by the National Newspaper Publisher's Association. Her work has also appeared in the "Journal Of Progressive Human Services."