The United States tax code is complex. Many taxpayers have trouble figuring out what does and doesn’t need to be reported as income, particularly if the money is related to the sale of personal property. In many cases, the value of a person’s home goes up in the years after they buy. When this occurs, there is a financial gain from the sale, creating a profit. If you’re asking yourself, “Is money from the sale of your house considered income?” here’s what you need to know.
Is Money from the Sale of Your House Considered Income?
While this question may seem simple, the answer can be complex. Typically, home sellers don’t have to report the profit from selling a home as income because they qualify for an exemption. However, that isn’t always the case.
Whether any money you made needs to be reported on your income taxes generally depends on a few factors, including:
- Did you sell your primary residence or a secondary property?
- If it was a primary residence, how long did you live in the property?
- Did you experience a gain or a loss?
- If it was a gain, how large was that gain?
- Have you excluded a gain from your income in the past two years?
- What is your tax filing status?
Generally speaking, if you owned the house and it was your primary residence for at least two years within the five years prior to the sale date, you will be able to exclude $250,000 (for single filers) to $500,000 (for joint filers) in profit from your income. That means it’s essentially tax-free.
However, even if the conditions above apply, if you excluded profits from a past home sale from your income within the two-year period proceeding the current house’s sale date, you may not be eligible.
Are There Any Special Exceptions?
Yes, there are some special exceptions that may make a person eligible for the exclusion, even if they don’t meet all of the conditions above. For example, if you acquired the house through a divorce settlement, you may not have had to live in the home for two of the past five years. As long as your ex-spouse occupied the property as a primary residence for two of the last five years, their time in the house counts for you.
Additionally, short absences from the property may still count as part of the two-year requirement. For example, if you took a month-long vacation, your official residence may have remained your home. This can occur even if you rented out the property while you were away.
Finally, military members and certain government employees may not have to abide by the five-year use-test. If you or your spouse were on official orders to another location as part of their service, suggesting you were relocated at least 50 miles from the property and residing in government housing while gone, that time counts towards the two years.
What About Gains Above $250,000 or $500,000?
Even if you qualify for the exemption above, profits above the $250,000 or $500,000 mark (depending on your filing status) are taxable. The extra amount is considered a capital gain, and has to be reported on Schedule D.
Are Partial Exemptions Available?
For those who don’t meet the two years requirement, a reduced exclusion may be available. However, they are only available to individuals who weren’t able to meet that criterion for specific reasons.
If you lived in the residence for less than two years due to a change in employment, health situation, or unforeseen circumstances, such as multiple births from a single pregnancy or a divorce, you might get a reduced exclusion.
What If My Home Sale Doesn’t Qualify for an Exclusion?
If your home sale doesn’t qualify for a full or partial exclusion, then you have to report the sale. For example, second home sales usually aren’t eligible, as well as many home sales that occur in less than two years. If there was a capital gain, you will owe taxes on that profit.
The amount you owe depends on several factors, including:
- How long you owned the property
- The gain amount
- Your capital gains rate
For properties owned less than one year, the profits may be considered a short-term gain. If you’ve had the house for more than one year, it could be a long-term gain. Each of those scenarios alters how much you owe.
With short-term gains, your marginal tax rate applies, just like with ordinary income. Long-term gains are subject to your capital gains rate, which comes in at 0 percent, 15 percent, or 20 percent, depending on your income level (and the associated capital gains tax bracket).
Do You Have to Report All Home Sales on Tax Returns?
Technically, you don’t have to report all home sales. However, if you receive an IRS Form 1099-S or aren’t eligible to exclude the gains from the sale from your income, then you generally need to report it.
A Form 1099-S is usually generated by real estate closing agents, with a copy going to you and a copy going to the IRS. However, the IRS doesn’t require them to create this form. You may be able to stop this document from being generated if you can show the agent that your profits qualify for the exclusion.
Even if you are eligible for the exemption and you get a 1099-S, that doesn’t mean you suddenly owe taxes. Instead, you’ll just want to include the details in your filing and have documents ready to show the IRS that the gains are excludable.
If you fail to include the information from the 1099-S, the IRS may notice that details about the document are missing. This can trigger a variety of troublesome situations, as there is a mismatch between the IRS database and what you reported.
Do you struggle to figure out what does and doesn’t need to be on your taxes? Share your thoughts in the comments below.
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Tamila McDonald has worked as a Financial Advisor for the military for past 13 years. She has taught Personal Financial classes on every subject from credit, to life insurance, as well as all other aspects of financial management. Mrs. McDonald is a former AFCPE Accredited Financial Counselor and has helped her clients to meet their short-term and long-term financial goals.