IRS Rules on Reporting
Home Sales
Exclusion of Gain:
When you sell your principal home at a gain, you
can exclude all (or a portion) of the gain if you
meet certain occupancy and holding period requirements.
To qualify for this exclusion you must have owned
and occupied the residence for two out of the prior
five years. If you meet those qualifications, and
are filing a joint return with your spouse you
may exclude up $500,000 ($250,000 for a single
individual) of gain from the sale.
If you do not qualify for the exclusion, there
is no deferral privilege and the gain is fully
taxable.
NOTE: A second home, such as
a mountain cabin or lake cottage, doesn't qualify
for the exclusion of gain.
Previously Postponed Gain:
Under prior tax law (generally pre-98), gain from
the sale of a principal residence could be deferred
into your replacement residence. Those gains were
accumulated from home to home as long as each replacement
home cost more than the adjusted selling price
(i.e., sales price less expenses of sale and pre-sale "fix-up" costs)
of the previous home. Although gain deferral from
a principal residence is no longer permitted under
current law, the gains deferred under prior law
into a home currently being sold must be accounted
for.
Sale at a loss:
Losses from the sales of business or investment
properties are normally tax deductible. However,
a loss from the sale of your main home is considered
personal in nature and, therefore, unless the law
changes, it is not allowed as a deduction. This
rule also applies to second homes.
Reporting the sale:
You need to report a home sale even if there is
no tax due on the transaction. You will probably
receive Form 1099-S showing the gross proceeds
from the sale. The IRS will also receive this information
and will match the amount to what's on your return.
If there's a mismatch, you could receive a letter
from the IRS asking why there's a difference.
