Reporting the sale of your home on the tax return
The sale of your home generally needs to be reported on your tax return. This article will walk you through the information we'll need from you, which we will use to identify certain costs that will reduce the gain from the sale of your home. You may also download our handy fillable PDF worksheet to easily capture the information needed to report the sale of your home by clicking the following link below.
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Here's the four major items we'll need from you related to the sale of your home:
Capital Gains Exclusion (Code Section Section 121)
You may qualify for a special capital gains exclusion on the sale of your home. By applying Section 121 of the IRS revenue code, single taxpayers can exclude up to $250,000 and married (jointly) filers can exclude up to $500,000 from the gains on the sale of their home from taxable income. Following are three tests you (and your spouse, if married) must meet in order to qualify for this special exclusion:
If you're married and want to use the $500,000 exclusion, you also need to confirm with us the following:
In certain cases, part of your profit may be excludable if you don't pass the two-out-of-five-years tests. A reduced exclusion is available if you sell your house before passing ownership, use and time tests, including change of employment, change of health, or
other unforeseen circumstances, such as a divorce or multiple births from a single pregnancy. If you have any of these circumstances, please let us know and we'll consult with you.
Sometimes is might make sense to turn down the government's generosity and not claim the exclusion. Specifically, you might want to pay tax on a home sale if it preserves the exclusion to protect more profit on another home that you plan to sell within two years. Remember, although you can use the exclusion any number of times during your life, you can't use it more than once every two years.
Once we have this information we will do the work to calculate the actual realized gain, and then apply the Section 121 exclusion if you qualify.
Click the link below to download a fillable PDF worksheet to easily capture the necessary information needed to report the sale of your home.
- The original purchase price and date of your home. In some cases, we can retrieve this information as part of online public records. If not, we'll ask you to dig up a copy of the Settlement Statement (this was previously referred to as a HUD statement)
- Costs to spruce up the house for sale: If you paid to stage the home or put in any expense to spruce it up for sale, you can include these as an expense of the sale, which reduces the gain.
- A copy of the HUD-1 Settlement Statement. This is the legal size document that was issued to you when you closed on the sale. (click here to see an example of a HUD statement). Once you provide us with a copy of the HUD statement, we'll examine it to report all the qualifying direct expenses you incurred to sell the house.
- The total cost of all capital improvements you've made to the house. Capital improvements include anything that added value to your home, prolonged its life or gave it a new or different use. The cost you paid, including labor, materials and sales tax count, too. The best way to get started it to create a simple Excel worksheet or Word document and create three columns to record each improvement: Date, Description and Amount paid. Next, think back of all the improvements you made during your ownership and write those down (see a list below). Refer to all save invoices, receipts, county permits, etc. to record the cost you paid. If you can’t locate receipts for certain items, try your best to estimate the cost you paid. Once you have these tallied up, send us the total dollar amount of all capital improvements. We don't need any receipts from you; however, ensure that you retain all receipts for your records in case of an IRS examination. To help you get started, following is a list of the types of improvements that typically qualify:
- Kitchen Renovation: Upgrading appliances, countertops, cabinets, and flooring to enhance functionality and aesthetics.
- Bathroom Remodel: Updating fixtures, vanities, tiles, and adding features like a new bathtub or walk-in shower.
- Roof Replacement: Installing a new roof to improve insulation, energy efficiency, and overall structural integrity.
- HVAC System Upgrade: Installing a new heating, ventilation, and air conditioning system to improve comfort and energy efficiency.
- Window Replacement: Upgrading windows for better insulation, noise reduction, and energy savings.
- Flooring Replacement: Installing hardwood, laminate, tile, or other flooring materials to enhance the appearance and durability of a home.
- Exterior Siding Replacement: Replacing old siding with new materials, such as cedar, brick, or fiber cement, to improve curb appeal and protect against the elements.
- Deck or Patio Addition: Building a new outdoor space for relaxation and entertainment.
- Basement Finishing: Converting an unfinished basement into usable living space, such as a home office, gym, or additional bedroom.
- Attic Conversion: Transforming an attic into a bedroom, office, or other functional space.
- Home Addition: Adding extra rooms, such as a sunroom, family room, or guest suite, to expand the living area.
- Garage Renovation: Converting a garage into a living space, home office, or recreational area.
- Swimming Pool Installation: Adding a pool for recreation and relaxation.
- Landscaping and Outdoor Improvements: Enhancing the outdoor space with features like a new patio, walkway, garden, or outdoor kitchen.
- Solar Panel Installation: Adding solar panels to the roof to generate renewable energy and reduce utility bills.
- Home Security System: Installing a comprehensive security system, including alarms, cameras, and smart locks.
- Wiring and Electrical Upgrades: Updating the electrical system to accommodate modern technology and ensure safety.
- Plumbing Upgrades: Replacing outdated plumbing fixtures and pipes to improve functionality and efficiency.
- Accessibility Improvements: Installing ramps, chair lifts, elevator, wider doorways, and other features to make the home more accessible for individuals with mobility challenges.
- Smart Home Upgrades: Incorporating smart home technology, such as a smart thermostat, lighting, and home automation systems.
Capital Gains Exclusion (Code Section Section 121)
You may qualify for a special capital gains exclusion on the sale of your home. By applying Section 121 of the IRS revenue code, single taxpayers can exclude up to $250,000 and married (jointly) filers can exclude up to $500,000 from the gains on the sale of their home from taxable income. Following are three tests you (and your spouse, if married) must meet in order to qualify for this special exclusion:
- Ownership: You must have owned the home for at least two years (730 days or 24 full months) during the five years prior to the date of your sale. It doesn't have to be continuous, nor does it have to be the two years immediately preceding the sale.
- Use: You must have used the home you are selling as your principal residence for at least two of the five years prior to the date of sale.
- Timing: You have not excluded the gain on the sale of another home within two years prior to this sale.
If you're married and want to use the $500,000 exclusion, you also need to confirm with us the following:
- At least one spouse must meet the ownership requirement (owned the home for at least two years during the five years prior to the sale date).
- Both you and your spouse must have lived in the house for two of the five years leading up to the sale.
In certain cases, part of your profit may be excludable if you don't pass the two-out-of-five-years tests. A reduced exclusion is available if you sell your house before passing ownership, use and time tests, including change of employment, change of health, or
other unforeseen circumstances, such as a divorce or multiple births from a single pregnancy. If you have any of these circumstances, please let us know and we'll consult with you.
Sometimes is might make sense to turn down the government's generosity and not claim the exclusion. Specifically, you might want to pay tax on a home sale if it preserves the exclusion to protect more profit on another home that you plan to sell within two years. Remember, although you can use the exclusion any number of times during your life, you can't use it more than once every two years.
Once we have this information we will do the work to calculate the actual realized gain, and then apply the Section 121 exclusion if you qualify.
Click the link below to download a fillable PDF worksheet to easily capture the necessary information needed to report the sale of your home.
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