Tax-Free Home Sale: When and Why You Need to Report to the IRS
You’re probably aware that when you sell your home, you may exclude up to $250,000 of your gain from tax if you’re unmarried (or married, filing separately) and $500,000 if you are married and file jointly.
To claim the whole exclusion, 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. You can claim the exclusion once every two years.
The home sale exclusion is one of the great tax benefits of home ownership. Many home sellers owe no tax at all when they sell their homes.
If a home sale is tax-free due to the exclusion, do you need to report the sale to the IRS on your tax return? It depends.
Your home sale may have already been reported to the IRS by your real estate agent, closing company, mortgage lender, or attorney. The IRS has a special information return for this purpose: Form 1099-S, Proceeds from Real Estate Transactions. This form lists the gross proceeds from the sale, the property address, and the closing date.
Typically, the 1099-S is issued at the home sale closing and is included in the closing documents you receive at settlement. If you received a Form 1099-S, you must report the sale on your tax return, even if your entire gain is tax-free due to the $250,000/$500,000 exclusion. Failure to do so will result in the IRS assuming that the selling price is the taxable gain (that’s a mess).
Form 1099-S need not be filed if your home sold for less than the applicable $250,000/$500,000 exclusion and you sign a certification stating that you qualified for the exclusion. You generally do this at the closing.
If Form 1099-S was not issued, the IRS does not require you to report the sale on your return. But doing so anyway can be a good idea because it can prevent the IRS from asserting that the six-year statute of limitations on audits should apply because you omitted more than 25 percent of gross income from your return.
Reporting the sale of a principal residence is not difficult. You must file IRS Form 8949, Sales and Other Dispositions of Capital Assets, with your annual return and enter your zero gain on IRS Schedule D.
If you want to discuss the sale of your home, please call me on my direct line at 408-778-9651.
By Leon Clinton