Schedule a meeting online

Book session

Tax-Free Home Sale: When and Why You Need to Report to the IRS

By: Ernie Neve

Selling your home can be an exciting milestone, and one of the perks of homeownership is the potential tax break when you sell. Many homeowners can exclude up to $250,000 of their gain from taxes if they are unmarried (or married, filing separately) and up to $500,000 if they are married and file jointly. But what happens when it’s time to report the sale to the IRS? Let’s break it down.

Qualifying for the Home Sale Exclusion

To claim the full exclusion, you must meet two key criteria:

  1. Ownership and Use Test: You must have owned and lived in your home as your principal residence for an aggregate of at least two of the five years before the sale.

  2. Frequency: The exclusion can only be claimed once every two years.

This exclusion is a fantastic tax benefit of homeownership. In many cases, sellers owe no tax at all when they sell their homes. But what about reporting the sale to the IRS?

Do You Need to Report Your Home Sale?

The answer depends on whether your home sale has already been reported to the IRS by a third party, such as your real estate agent, closing company, mortgage lender, or attorney. These parties may issue Form 1099-S, Proceeds from Real Estate Transactions, which provides details about the sale, including:

  • The gross proceeds from the sale

  • The property address

  • The closing date

Form 1099-S is typically issued at the closing and included in the documents you receive at settlement. If you receive Form 1099-S, you must report the sale on your tax return, even if your entire gain is excluded under the $250,000/$500,000 rule. Failing to do so can lead to the IRS assuming that the entire selling price is taxable gain, which can create unnecessary complications.

When Form 1099-S Is Not Issued

Form 1099-S may not be issued if:

  • Your home sold for less than the applicable $250,000/$500,000 exclusion.

  • You signed a certification at closing stating that you qualified for the exclusion.

If Form 1099-S was not issued, you’re generally not required to report the sale on your tax return. However, voluntarily reporting it can be beneficial. Doing so can help prevent the IRS from applying the six-year statute of limitations for audits, which may apply if more than 25% of gross income is omitted from your return.

How to Report the Sale

If you need to or choose to report the sale, the process is straightforward. You’ll need to:

  1. Complete IRS Form 8949, Sales and Other Dispositions of Capital Assets.

  2. Enter your zero gain on IRS Schedule D with your annual tax return.

Key Takeaways

  • The home sale exclusion can save you from paying taxes on up to $250,000 (or $500,000 for married couples filing jointly) of gain from your home sale.

  • If you receive Form 1099-S, you must report the sale to the IRS, even if the gain is fully excluded.

  • If Form 1099-S is not issued, reporting the sale is optional but may help avoid potential IRS complications.

Selling your home is a significant financial event, and understanding the tax implications can save you time, money, and headaches. If you have questions or need assistance navigating the reporting process, reach out to a tax professional to ensure everything is handled correctly.

Ready to sell your home? Make sure you’re prepared for the tax side of the transaction!