Tax Insights

Your Guide to State, Local, Federal, Estate + International Taxation

Tax rules for selling your home

Now that the housing market is beginning to rebound, you may be considering putting your current personal residence on the market. But what do you need to know before you call your real estate agent? First, does the residence qualify as your “main” home? And secondly, will the sale result in a gain or a loss?

You cannot deduct a loss from the sale of your main home, and generally, you are eligible to exclude all or part of the gain from the sale of your main home if you owned and used it as your main home for a period totaling at least two years out of the five years prior to its sale. The ownership test generally requires that you own the home directly, not through an entity. For example, you wouldn’t qualify for the ownership test if the home was owned by a limited partnership or an irrevocable trust. But you would qualify for the ownership test if the home was owned by a single-member LLC that is disregarded for tax purposes or by a grantor trust and you are the grantor of the trust.

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If you have a loss on the sale of your main home and you received a Form 1099-S from the sale, report the sale on your Form 1040, Form 8948 using the applicable code in column F, even though the loss is not deductible.

If you have a gain from the sale of your main home and you meet the ownership and use tests described above, you may be able to exclude up to $250,000 of the gain from your income or $500,000 on a joint return, in most cases. This exclusion may be claimed each time that you sell your main home, but generally no more often than once every two years.

If you do not meet the ownership and use tests to qualify for the $250,000 or $500,000 exclusion, you may still qualify for a reduced maximum exclusion. But you must have sold your home for a specific reason such as a serious health issue, a change in your place of employment, certain unforeseen circumstances such as divorce or legal separation, natural or manmade disaster resulting in a casualty to your home or an involuntary conversion of your home.

You do not need to report the sale of your main home on your tax return unless you received a Form 1099-S or have gain and part of the gain is taxable. If you do have a taxable gain, report it on Form 1040, Form 8948.

If you have more than one home, you can exclude gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time, but other factors may be relevant in determining which is your main home. This includes your place of employment; the main home of your family members; the address you use on your income tax returns, on your driver’s license, and on your auto and voter registration; your mailing address for bills and correspondence; the location of your bank; and the location of your religious organizations and recreational clubs.

 

Pamela Wheeler, EA