Avoid Taxes on Selling House in USA

Tax tips for taxpayers to consider when selling their home

The IRS has some good news for taxpayers who are selling their home. When filing their taxes, they may qualify to exclude all or part of any gain from the sale from their income. Here are some things that homeowners should think about when selling a home:

This publication also has worksheets for calculations relating to the sale of your home. It will show you how to:

1. Determine if you have a gain or loss on the sale of your home,
2. Figure how much of any gain is taxable, and
3. Report the transaction correctly on your tax return.

Does Your Home Sale Qualify for the Exclusion of Gain?

The tax code recognizes the importance of home ownership by allowing you to exclude gain when you sell your main home. To qualify for the maximum exclusion of gain ($250,000 or $500,000 if married filing jointly) you must meet the Eligibility Test , explained later. To qualify for a partial exclusion of gain, meaning an exclusion of gain less than the full amount, you must meet one of the situations listed in Does Your Home Qualify for a Partial Exclusion of Gain? , later.

Before considering the Eligibility Test or whether your home qualifies for a partial exclusion, you should consider some preliminary items.

Transfer of your home to a spouse or an ex-spouse.

Generally, if you transferred your home (or share of a jointly owned home) to a spouse or ex-spouse as part of a divorce settlement, you are considered to have no gain or loss. You have nothing to report from the transfer and this entire publication doesn’t apply to you. However, there is one exception to this rule. If your spouse or ex-spouse is a nonresident alien, then you likely will have a gain or loss from the transfer and the tests in this publication apply.

Home’s date of sale.

To determine if you meet the Eligibility Test or qualify for a partial exclusion, you will need to know the home’s date of sale, meaning when you sold it. If you received Form 1099-S, Proceeds From Real Estate Transactions, the date of sale appears in box 1. If you didn’t receive Form 1099-S, the date of sale is either the date the title transferred or the date the economic burdens and benefits of ownership shifted to the buyer, whichever date is earlier. In most cases, these dates are the same.

Sale of your main home 

You may take the exclusion, whether maximum or partial, only on the sale of a home that is your principal residence, meaning your main home. An individual has only one main home at a time. If you own and live in just one home, then that property is your main home. If you own or live in more than one home, then you must apply a “facts and circumstances” test to determine which property is your main home. While the most important factor is where you spend the most time, other factors are relevant as well. They are listed below. The more of these factors that are true of a home, the more likely that it is your main home. 

• The address listed on your:
  1. U.S. Postal Service address,
  2. Voter Registration Card,
  3. Federal and state tax returns, and
  4. Driver’s license or car registration.

• The home is near:
  1. Where you work,
  2. Where you bank,
  3. The residence of one or more family members, and
  4. Recreational clubs or religious organizations of which you are a member.

Finally, the exclusion can apply to many different types of housing facilities. A single-family home, a condominium, a cooperative apartment, a mobile home, and a houseboat each may be a main home and therefore qualify for the exclusion.

Eligibility Test

The Eligibility Test determines whether you are eligible for the maximum exclusion of gain ($250,000 or $500,000 if married filing jointly).

Eligibility Step 1—Automatic Disqualification

Determine whether any of the automatic disqualifications apply.

Your home sale isn’t eligible for the exclusion if ANY of the following are true.

• You acquired the property through a like-kind exchange (1031 exchange), during the past 5 years. See Pub. 544, Sales and Other Dispositions of Assets.
• You are subject to expatriate tax. For more information about expatriate tax, see chapter 4 of Pub. 519, U.S. Tax Guide for Aliens.

If any of these conditions are true, the exclusion doesn’t apply. Skip to Figuring Gain or Loss , later.

Eligibility Step 2—Ownership

Ownership and use

To claim the exclusion, the taxpayer must meet ownership and use tests. During a five-year period ending on the date of the sale, the homeowner must have owned the home and lived in it as their main home for at least two years.

For a married couple filing jointly, only one spouse has to meet the ownership requirement.

You’re eligible for the exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale. You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale. Generally, you’re not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home. Refer to Publication 523 for the complete eligibility requirements, limitations on the exclusion amount, and exceptions to the two-year rule.

Example 1.

Mary bought a home on May 1, 2001. She used it as her main home until August 27, 2004. On August 28, 2004, she went on qualified official extended duty with the Navy. She didn’t live in the house again before selling it on August 1, 2017. Mary chooses to use the entire 10-year suspension period. Therefore, the suspension period would extend back from August 1, 2017, to August 2, 2007, and the 5-year test period would extend back to August 2, 2002. During that period, Mary owned the house all 5 years and lived in it as her main home from August 2, 2002, until August 28, 2004, a period of more than 24 months. She meets the ownership and use tests because she owned and lived in the home for at least 2 years during this test period.

Example 2.

John bought and moved into a home in 2007. He lived in it as his main home for 3½ years. For the next 6 years, he didn’t live in it because he was on qualified official extended duty with the Army. He then sold the home at a gain in 2016. To meet the use test, John chooses to suspend the 5-year test period for the 6 years he was on qualified official extended duty. This means he can disregard those 6 years. Therefore, John’s 5-year test period consists of the 5 years before he went on qualified official extended duty. He meets the ownership and use tests because he owned and lived in the home for 3½ years during this test period.

Eligibility Step 3—Residence

Determine whether you meet the residence requirement.

If you owned the home and used it as your residence for at least 24 months of the previous 5 years, you meet the residence requirement. The 24 months of residence can fall anywhere within the 5-year period, and it doesn’t have to be a single block of time. All that is required is a total of 24 months (730 days) of residence during the 5-year period. Unlike the ownership requirement, each spouse must meet the residence requirement individually for a married couple filing jointly to get the full exclusion.

If you were ever away from home,

you need to determine whether that time counts towards your residence requirement. A vacation or other short absence counts as time you lived at home (even if you rented out your home while you were gone).

If you become physically or mentally unable to care for yourself,

you only need to show that your home was your residence for 12 months out of the 5 years leading up to the date of sale. In addition, any time you spent living in a care facility (such as a nursing home) counts toward your residence requirement, so long as the facility has a license from a state or other political entity to care for people with your condition.

Eligibility Step 4—Look-Back

Determine whether you meet the look-back requirement.

If you didn’t sell another home during the 2-year period before the date of sale (or, if you did sell another home during this period, but didn’t take an exclusion of the gain earned from it), you meet the look-back requirement. You may take the exclusion only once during a 2-year period.

Eligibility Step 5—Exceptions to the Eligibility Test

There are some exceptions to the Eligibility Test. If any of the following situations apply to you, read on to see if they may affect your qualification. If none of these situations apply, skip to Step 6.

• A separation or divorce occurred during the ownership of the home. See Separated or divorced taxpayers .
• The death of a spouse occurred during the ownership of the home. See Widowed taxpayers .
• The sale involved vacant land. See Vacant land next to home .
• You owned a remainder interest, meaning the right to own a home in the future, and you sold that right. See Remainder interest .
• Your previous home was destroyed or condemned. See Home destroyed or condemned—considerations for benefits .
• You were a service member during the ownership of the home. See Service, Intelligence, and Peace Corps personnel .
• You acquired or are relinquishing the home in a like-kind exchange. See Like-kind/1031 exchange .

Separated or divorced taxpayers.

If you were separated or divorced prior to the sale of the home, you can treat the home as your residence if:

• You are a sole or joint owner, and
• Your spouse or former spouse is allowed to live in the home under a divorce or separation agreement and uses the home as his or her main home.

If your home was transferred to you by a spouse or ex-spouse (whether in connection with a divorce or not), you can count any time when your spouse owned the home as time when you owned it. However, you must meet the residence requirement on your own.

Widowed taxpayers.

If you are a widowed taxpayer who doesn’t meet the 2-year ownership and residence requirements on your own, consider the following rule. If you sell your home within 2 years of the death of your spouse and you haven’t remarried at the time of the sale, then you may include any time when your late spouse owned and lived in the home, even if without you, to meet the ownership and residence requirements. 

Also, you may be able to increase your exclusion amount from $250,000 to $500,000. You may take the higher exclusion if you meet all of the following conditions.

1. You sell your home within 2 years of the death of your spouse;
2. You haven’t remarried at the time of the sale;
3. Neither you nor your late spouse took the exclusion on another home sold less than 2 years before the date of the current home sale; and
4. You meet the 2-year ownership and residence requirements (including your late spouse’s times of ownership and residence if need be).

Service, Intelligence, and Peace Corps personnel.

If you or your spouse are a member of the Uniformed Services or the Foreign Service, or an employee of the intelligence community in the United States, you may choose to suspend the 5-year test period for ownership and residence when you’re on qualified official extended duty. This means you may be able to meet the 2-year residence test even if, because of your service, you didn’t actually live in your home for at least the 2 years during the 5-year period ending on the date of sale.

Qualified extended duty.

You are on qualified extended duty if:

• You are called or ordered to active duty for an indefinite period, or for a definite period of more than 90 days.
• You are serving at a duty station at least 50 miles from your main home, or you are living in government quarters under government orders.
• You are one of the following:
  1. A member of the armed forces (Army, Navy, Air Force, Marine Corps, Coast Guard);
  2. A member of the commissioned corps of the National Oceanic and Atmospheric Administration (NOAA) or the Public Health Service;
  3. A Foreign Service chief of mission, ambassador-at-large, or officer;
  4. A member of the Senior Foreign Service or the Foreign Service personnel;
  5. An employee, enrolled volunteer, or enrolled volunteer leader of the Peace Corps serving outside the United States; or
  6. An employee of the intelligence community, meaning:
     1. The Office of the Director of National Intelligence, the Central Intelligence Agency, the National Security Agency, the Defense Intelligence Agency, the National Geospatial-Intelligence Agency, or the National Reconnaissance Office;
     2. Any other office within the Department of Defense for the collection of specialized national intelligence through reconnaissance programs;
     3. Any of the intelligence elements of the Army, the Navy, the Air Force, the Marine Corps, the Federal Bureau of Investigation, the Department of Treasury, the Department of Energy, and the Coast Guard;
     4. The Bureau of Intelligence and Research of the Department of State; or
     5. Any of the elements of the Department of Homeland Security concerned with the analyses of foreign intelligence information.

Period of suspension.

The period of suspension can’t last more than 10 years. Together, the 10-year suspension period and the 5-year test period can be as long as, but no more than, 15 years. You can’t suspend the 5-year period for more than one property at a time. You can revoke your choice to suspend the 5-year period at any time.

Vacant land next to home.

You can include the sale of vacant land adjacent to the land on which your home sits as part of a sale of your home if ALL of the following are true.

• You owned and used the vacant land as part of your home.
• The sale of the vacant land and the sale of your home occurred within 2 years of each other.
• Both sales either meet the Eligibility Test or qualify for partial tax benefits, as described earlier.

Also, if your sale of vacant land meets all these requirements, you must treat that sale and the sale of your home as a single transaction for tax purposes, meaning that you may apply the exclusion only once.

However, if you move your home from the land on which it stood (meaning you relocate the actual physical structure), then that land no longer counts as part of your home. For example, if you move a mobile home to a new lot and sell the old lot, then you can’t treat the sale of the old lot as the sale of your home.

Home destroyed or condemned—considerations for benefits.

If an earlier home of yours was destroyed or condemned, you may be able to count your time there towards the ownership and residence test.

If your home was destroyed, see Pub. 547, Casualties, Disasters, or Thefts. If your home was condemned, see Pub. 544, Sales and Other Disposition of Assets.

Remainder interest.

The sale of a remainder interest in your home is eligible for the exclusion only if both of the following conditions are met.

• The buyer isn’t a “related party.” A related party can be a related person or a related corporation, trust, partnership, or other entity which you control or in which you have an interest.
• You haven’t previously sold an interest in the home for which you took the exclusion.

Like-kind/1031 exchange.

If you sold a home that you acquired in a like-kind exchange, then the following test applies.

You can’t claim the exclusion if:

1. Either a. or b. applies:

a. You acquired your home in a like-kind exchange (also known as a section 1031 exchange), or

b. Your basis in your home is determined by reference to a previous owner’s basis, and that previous owner acquired the property in a like-kind exchange (for example, the owner acquired the home and then gave it to you); and

2. You sold the home within 5 years of the date your home was acquired in the like-kind exchange.

For more information about like-kind exchanges, see Pub. 544.

If you relinquished your home in a like-kind exchange, then you should determine if you qualify to exclude gain as you would if you sold the home. Under certain circumstances, you may meet the requirements for both the exclusion of gain from the exchange of a main home and the nonrecognition of gain from a like-kind exchange. For more information, see Revenue Procedure 2005-14, 2005-7 I.R.B. 528, available at IRS.gov/irb/2005-07_IRB#RP-2005-14.

Eligibility Step 6 Final Determination of Eligibility

If you meet the ownership, residence, and look-back requirements, taking the exceptions into account, then you meet the Eligibility Test. Your home sale qualifies for the maximum exclusion. Skip to Worksheet 1, later.

If you didn’t meet the Eligibility Test, then your home isn’t eligible for the maximum exclusion, but you should continue to Does Your Home Qualify for a Partial Exclusion of Gain? Click here .

Gains 

Taxpayers who sell their main home and have a gain from the sale may be able to exclude up to $250,000 of that gain from their income. Taxpayers who file a joint return with their spouse may be able to exclude up to $500,000.  
Homeowners excluding all the gain do not need to report the sale on their tax return.

Losses 

Some taxpayers experience a loss when their main home sells for less than what they paid for it. This loss is not deductible.

Does Your Home Qualify for a Partial Exclusion of Gain?

If you don’t meet the Eligibility Test, you may still qualify for a partial exclusion of gain. You can meet the requirements for a partial exclusion if the main reason for your home sale was a change in workplace location, a health issue, or an unforeseeable event.

Work-Related Move

You meet the requirements for a partial exclusion if any of the following events occurred during your time of ownership and residence in the home.

• You took or were transferred to a new job in a work location at least 50 miles farther from the home than your old work location. For example, your old work location was 15 miles from the home and your new work location is 65 miles from the home.
• You had no previous work location and you began a new job at least 50 miles from the home.
• Either of the above is true of your spouse, a co-owner of the home, or anyone else for whom the home was his or her residence.

Health-Related Move

You meet the requirements for a partial exclusion if any of the following health-related events occurred during your time of ownership and residence in the home.

• You moved to obtain, provide, or facilitate diagnosis, cure, mitigation, or treatment of disease, illness, or injury for yourself or a family member.
• You moved to obtain or provide medical or personal care for a family member suffering from a disease, illness, or injury. Family includes your:
  1. Parent, grandparent, stepmother, stepfather;
  2. Child (including adopted child, eligible foster child, and stepchild), grandchild;
  3. Brother, sister, stepbrother, stepsister, half-brother, half-sister;
  4. Mother-in-law, father-in-law, brother-in-law, sister-in-law, son-in-law, daughter-in-law;
  5. Uncle, aunt, nephew, or niece.
• A doctor recommended a change in residence for you because you were experiencing a health problem.
• The above is true of your spouse, a co-owner of the home, or anyone else for whom the home was his or her residence.

Unforeseeable Events

You meet the standard requirements if any of the following events occurred during the time you owned and lived in the home you sold.

• Your home was destroyed or condemned.
• Your home suffered a casualty loss because of a natural or man-made disaster or an act of terrorism. (It doesn’t matter whether the loss is deductible on your tax return.)
• You, your spouse, a co-owner of the home, or anyone else for whom the home was his or her residence:
  1. Died;
  2. Became divorced or legally separated;
  3. Gave birth to two or more children from the same pregnancy;
  4. Became eligible for unemployment compensation;
  5. Became unable, because of a change in employment status, to pay basic living expenses for the household (including expenses for food, clothing, housing, medication, transportation, taxes, court-ordered payments, and expenses reasonably necessary for making an income).

An event is determined to be an unforeseeable event in IRS published guidance.

Other Facts and Circumstances

Even if your situation doesn’t match any of the standard requirements described above, you still may qualify for an exception. You may qualify if you can demonstrate the primary reason for sale, based on facts and circumstances, is work-related, health-related, or unforeseeable. Important factors are:

• The situation causing the sale arose during the time you owned and used your property as your residence.
• You sold your home not long after the situation arose.
• You couldn’t have reasonably anticipated the situation when you bought the home.
• You began to experience significant financial difficulty maintaining the home.
• The home became significantly less suitable as a main home for you and your family for a specific reason.

Multiple homes

Taxpayers who own more than one home can only exclude the gain on the sale of their main home. They must pay taxes on the gain from selling any other home.

Reporting the Sale

Taxpayers who don’t qualify to exclude all of the taxable gain from their income must report the gain from the sale of their home when they file their tax return. Anyone who chooses not to claim the exclusion must report the taxable gain on their tax return.  Taxpayers who receive Form 1099-S Proceeds From Real Estate Transaction Click here  must report the sale on their tax return even if they have no taxable gain.

Additionally, you must report the sale of the home if you can’t exclude all of your capital gain from income. Use Form 1040, Schedule D.pdf, Capital Gains and Losses and Form 8949.pdf, Sales and Other Dispositions of Capital Assets when required to report the home sale.

Refer to Publication 523 for the rules on reporting your sale on your income tax return.

Mortgage debt 

Generally, taxpayers must report forgiven or canceled debt as income on their tax return. This includes people who had a mortgage workout, foreclosure, or other canceled mortgage debt on their home. Taxpayers who had debt discharged after Dec. 31, 2017, can’t exclude it from income as qualified principal residence indebtedness unless a written agreement for the debt forgiveness was in place before January 1, 2018.

Possible exceptions

There are exceptions to these rules for some individuals, including persons with a disability, certain members of the military, intelligence community and Peace Corps workers.

Suspension of the Five-Year Test Period

If you or your spouse are on qualified official extended duty in the Uniformed Services, the Foreign Service or the intelligence community, you may elect to suspend the five-year test period for up to 10 years. An individual is on qualified official extended duty if for more than 90 days or for an indefinite period, the individual is:

• At a duty station that’s at least 50 miles from his or her main home, or
• Residing under government orders in government housing.

Refer to Publication 523 Click here for more information about this special rule to suspend the 5-year test.

Installment Sales

If you sold your home under a contract that provides for all or part of the selling price to be paid in a later year, you made an installment sale. If you have an installment sale, report the sale under the installment method unless you elect out. Even if you use the installment method to defer some of the gain, the exclusion of gain under Section 121 remains available. Refer to Publication 537 Click here, Installment Sales, Form 6252.pdf, Installment Sale Income, and Topic No. 705, Installment Sales, for more information on installment sales.

Worksheets

Worksheets included in Publication 523 Click here  can help taxpayers figure the adjusted basis of the home sold, the gain or loss on the sale, and the excluded gain on the sale.

Business or Rental Use of Home

This section applies only if you used a portion of your home for business or rental purposes during your ownership. This type of usage may affect your gain or loss calculations. For more information about using any part of your home for business or as a rental property, see Pub. 587, Business Use of Your Home, and Pub. 527, Residential Rental Property.

How Much Is Taxable?

If you qualify for an exclusion on your home sale, up to $250,000 ($500,00 if married and filing jointly) of your gain will be tax-free. If your gain is more than that amount, or if you qualify only for a partial exclusion, then some of your gain may be taxable. This section contains step-by-step instructions for figuring out how much of your gain is taxable. See Worksheet 3, later, for assistance in determining your taxable gain.

If you determined in Does Your Home Sale Qualify for the Exclusion of Gain? , earlier, that your home sale doesn’t qualify for any exclusion (either full or partial), then your entire gain is taxable. If you don’t have a gain, you owe no tax on the sale. In either case, you don’t need to complete Worksheet 3 and you can skip to Reporting Your Home Sale , later.

Capital Gain and losses

Topic No. 409 covers general capital gain and loss information.

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