When you sell your house, income taxes are often the last thing on your mind. It's important to consider whether you will owe taxes on the sale, however. Profits on home sales are considered taxable gains, but a significant amount of this gain is excluded from tax.
Figuring Cost Basis
Capital gains or losses are the difference between the sale price of your home and cost basis. Cost basis includes the purchase price, certain closing costs and expenses for repairing or improving your home.
Capital Gains Exclusion
The Internal Revenue Service allows you to exclude a predetermined amount of capital gains on the sale of you primary residence. You must have owned and used the house as your main home for a total of two of the last five years. The two years do not have to be consecutive.
Multiple Home Sales
You cannot exclude gain on the sale of your home if you excluded gain on another home within the past two years. Exceptions apply if the second home sale was due to a job change, health or unforeseen circumstances. In these cases, you may be able to exclude a reduced amount of capital gains.
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Sale of a Rental Home
Gain from the sale of a rental home is subject to the same requirements for sale of a primary home. If you do not qualify for the exclusion, the gain on the sale of the rental is fully taxable.
Where to Report Gains
If you qualify for exclusion of capital gains, you do not have to report the sale of your home to the IRS. If you do not qualify, you must report the gain on your main home on Schedule D of your IRS Form 1040. Gains on rental homes are reported on Form 4797.