Many people selling a house worry about a big tax bill, and many of them will owe nothing, because federal tax law lets most homeowners keep a large amount of gain on a main home tax-free. Others are surprised the other way, usually because the house was a rental, was inherited, or was not lived in long enough. This guide walks through the federal rules the IRS publishes so you know what questions to bring to your tax professional.
How your gain is figured
Your gain is not simply the sale price minus what you paid. The IRS starts with the amount realized, which is the sale price minus selling expenses such as agent commissions, advertising and legal fees. From that it subtracts your adjusted basis: generally what you paid, plus certain closing costs from your purchase such as owner's title insurance, recording fees and transfer taxes, plus the cost of capital improvements like a new roof or an addition. Routine repairs and maintenance do not count. That is why old receipts matter. A house bought decades ago may show a large gain on paper, but documented improvements can shrink it.
The $250,000 and $500,000 exclusion
If you sell your main home, you may be able to exclude up to $250,000 of gain from income, or up to $500,000 on a joint return. To qualify, you generally must have owned the home for at least 24 months and lived in it as your main home for at least 24 months during the 5 years before the sale. The two years do not have to be continuous, and the ownership and use periods do not have to be the same months. You also cannot have excluded gain on another home sale in the two years before this one. For the full $500,000, one spouse has to meet the ownership test and both have to meet the use test.
Selling before you hit two years
Falling short of the two-year tests does not always mean losing the exclusion. IRS Publication 523 allows a partial exclusion when the main reason for selling is a job change at least 50 miles farther away, a health reason, or an unforeseeable event. Its examples of unforeseeable events include the home being destroyed or condemned, a disaster, a death, a divorce or legal separation, multiple births from one pregnancy, and becoming eligible for unemployment compensation. The partial amount is based on how much of the 24 months you did meet. A surviving spouse who has not remarried may still be able to use the $500,000 limit if the home is sold within two years of the spouse's death.
Rentals, home offices and inherited houses
Some gain cannot be excluded even on a main home. Depreciation you were allowed after May 6, 1997, for renting the house or using part of it for business, is taxed when you sell. Periods after 2008 when the house was not your main home, such as years it was rented out before you moved in, can also reduce the exclusion. Inherited houses work differently: the basis is generally the fair market value on the date of death, so a house sold soon after it is inherited often shows little gain. Because an inherited house is usually not the heir's main home, the exclusion often does not apply. Losses on a personal home are not tax deductible.
When you have to report the sale
According to the IRS, you must report the sale on your tax return if you cannot exclude all of the gain, and also if you receive Form 1099-S, even when the entire gain is excludable. Reportable gain goes on Form 8949 and Schedule D. Gain on a house you owned more than one year is long-term, which is generally taxed at lower federal rates than short-term gain on a house owned a year or less. Your state may have its own income tax rules for home sales. Because the right answer depends on your records, your filing status and how the house was used, have an accountant or tax preparer review your numbers before you file.
How a cash sale fits in
When you compare offers, look at what you actually keep. A cash offer from us will usually be lower than what the house might sell for after repairs and a full listing, because we take on the repairs, holding costs and resale risk. On the other hand, there are no commissions or seller fees from us, and our written offer lists every cost so you can see your net. We buy houses as-is in all 50 states and work with title companies and attorneys to close in days or weeks. We do not give tax advice, so share any offer with your tax professional before you sign.