Selling the Family Home? Tax Rules on the Sale and Transfer of Assets

Selling the family home and wondering how the sale is going to affect your taxes? The good news is for most homeowners, when it comes time to sell, the profit is now tax-free. To qualify for the tax-free exclusion of profit from the sale of your home, you do need to meet certain qualifications discussed below.

Qualifications for Tax-free Profit on the Sale of your Home

To meet the requirements for the tax-free exclusion of the profit from the sale of your home, you need to meeting the following three qualifications:

  1. own the home for at least two full years (ownership test); and
  2. lived in the home for two out of the past five years before the sale (time lived in the home does not need to be continuous); and
  3. not have taken the exclusion on another home within two years prior to the sale of this home.

You must meet all three requirements to qualify. The exclusion is limited to $250,000 or less for single filers or $500,000 or less for married couples filing together. If you meet these qualifications, there is no limit to how many times you can use this exclusion.

If you earn more profit on the sale of your home than the excluded amount (either $250,000 or $500,000), the excess above the amount excluded is reported as a capital gain on your tax return.

If you sell your home at a loss, sadly, personal losses are not deductible on your tax return.

Example. Joy and David purchased the land for their home for $150,000 and built their home for $400,000. They lived in the home for two years, rented it out for a year and half, and then listed it for sale. They closed six months later for $750,000.

Because they owned the home for over two years and lived in the home for at least two out of the past five years, if they have not taken the exclusion on the sale of another home in the past two years and they file as married filing jointly, they would qualify for an exclusion of $500,000 ($250,000 each).

Their profit would be calculated as selling price minus land price and construction cost or $750,000 (selling price) - $150,000 (land price) - $400,000 (construction costs) = $200,000. Because Joy and David are well below the $500,000 exclusion limit for couples filing jointly, they can save themselves time because they do not need to do any further math. If they were close to exceeding the exclusion limit, they could deduct other costs such as: closing costs to purchase and sell the property, certain improvements, and some major repairs.

If you do not have a taxable gain, you do not have to report the sale of your home on your tax return. However, it is highly encouraged that you report it to ensure the statute of limitations starts running. (Note: The IRS cannot challenge a properly-filed return after three years.) Also, if you receive Form 1099-S reporting the sale of your home, you should file it on your tax return to avoid any follow-up letters from the IRS.

For additional information on the sale of your home, see IRS Topic No. 701 - Sale of Your Home and IRS Publication 523 - Selling Your Home. For additional information on how the IRS calculates the amount you have invested in your home (basis) to determine your profit, see IRS Topic No. 703 - Basis of Assets and IRS Publication 551 - Basis of Assets.

Special Circumstances may Apply

If you are concerned you do not meet the qualifications for the exclusion of profit from the sale of your home, special circumstances may apply.

Special circumstances apply for:

  • divorcees;
  • widow(er)s; and
  • members of the military or Foreign Service.

Military and Foreign Service members can qualify to waive the requirement that they live in the home for two of the past five years, if they were on qualified official duty for more than ninety (90) days at a station more than fifty (50) miles from their home or living in government housing due to orders.

Tax Form 1099-S

When selling the family home, most people will receive Form 1099-S. However, not everyone will. If you do not, do not be alarmed. The agent or closing attorney may have thought the sale of your home was not a taxable event. Even if you do not receive Form 1099-S and the sale of your home is not taxable, you should still report it on your tax return. If you do not receive Form 1099-S and the sale of your home is taxable, it is still your responsibility to report the sale accurately on your tax return.

If you do receive Form 1099-S, you should report it on your tax return, as this form is reported to the IRS as well. Reporting it on your tax return will help ensure your tax return matches the documents received by the IRS and stop them from following up with a letter asking you to amend your tax return to include the sale of the home.

The Bottom Line

The average sales price of homes in the US is $340,000 and $170,000 in Ohio. This means for most homeowners if they meet the IRS requirements or qualify for an exception to those requirements, they do not owe any taxes on the sale of their home. Single filers can claim an exclusion from profit of $250,000 and married couples filing jointly are allowed to claim $500,000 - twice the amount of single filers.

If you are planning on selling the family home or have already sold your home, schedule an appointment today with the accounting and tax preparation professionals at Gudorf Tax Group. They will review the tax implications, if any, with you and help you plan accordingly. Also, they will ensure it is reported on your tax return accurately.