For the most part, selling a home in the U.S. may qualify for an exemption from taxes owed from the gain from the sale. While every situation can vary when selling a home, the Internal Revenue Code 121 (IRC 121), in its arcane manner, provides the outline of the two main exemptions homeowners have when determining if they qualify for the exemption and having to report the sale.
These exemptions may allow the seller to avoid paying taxes on the home sale. There are three main exemptions but all are based upon whether the seller had used the home sold as their primary residence. If the property was seldom or never used as the sellers primary residence, then, there are no exemptions to help reduce the taxable amount from the net gain of sale.
- Full exemptions are $500,000 - to qualify, the sellers must be married legal owners and have lived in the home for at least 24 months in a five year period from the date of sale. The 24 month period does not need to be consecutive and cannot be away from the primary residence for more than 1 year.
- Partial exemptions are $250,000 - to qualify, the sellers need not be married, but still need to have the requirements of a full exemption
- Unqualified exemptions -these may apply if the property sold was used for other than a primary residence within a 5-year period from date of sale. A rental is one example where the owner occupies the home for a period of time. There is a specific formula for this. It gets complicated.
As far as reporting the home sale to the IRS, if you do not receive a 1099-S form regarding the sale and the exemption qualified for is more than the home sale price (or, the home sale price is less than the qualified exemption), you are under no obligation to report it to IRS. If you do receive the 1099-S form, you MUST report it.
Taxes are usually based either on the selling price of the home or the net gain from it after allowable deductions like selling costs that include RE Agent fees, documentation fees etc. So, a home that sold for $400K, after deductions, the net gain might be $380K from sale. If you bought the home for $200K, your gain is $180K, since that is your Basis (value when you bought it). In any case, if you qualified for a married, $500K exemption, there are no taxes. If your exclusion was only $250K, then taxable is 150K at minimum.
The usual percentage rate to calculate taxes owed on the sale varies from state to state, some states are 3%.- 12%.
While the above is in nutshell, it does provide some basic information as to what is required to qualify. You are urged to read IRC 121 online or consult a CPA who knows the nuances of home sale exemptions and whether you qualify or not.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.