Key Takeaways
- Not every homeowner has to report a sale on their tax return, but if you receive Form 1099-S or your gain exceeds IRS limits, reporting is required.
- The ownership and use tests determine whether you can exclude up to $250,000 ($500,000 for joint filers) in profit from your taxes.
- Special situations like divorce, death, or relocation may still allow you to claim a full or partial exclusion.
- Detailed records of purchase price, improvements, and closing costs are essential for accurate reporting and avoiding penalties.
Selling a home is a major life event. While most of the focus tends to be on moving logistics, closing paperwork, and finding your next home, many sellers are left asking: “Do you have to report the sale of a home on your tax return?”
The answer isn’t a simple yes or no. In many cases, especially if you lived in the home as your primary residence for years, you may not owe any taxes or need to report the sale. But in other cases — such as when you make a significant profit, don’t meet the IRS’s residency rules, or receive a Form 1099-S — you’ll need to report the sale.
This Redfin real estate article breaks down the tax rules surrounding home sales, from when you must report to how exclusions work, with examples and guidance for unique circumstances.
When you must report the sale of your home
You are only required to report the sale of your home on your federal tax return in certain situations. Let’s explore them in detail:
1. You received Form 1099-S
At closing, the settlement agent may issue Form 1099-S, Proceeds from Real Estate Transactions.The IRS also receives a copy, which means they’ll expect to see this transaction on your return. If you fail to report it, you could trigger an IRS notice or audit.
Example: If you sold your home for $450,000 and received a 1099-S, but your gain is fully excludable, you still must file the form to explain why no tax is owed.
2. Your capital gain exceeds the exclusion
Another situation arises if your capital gain exceeds the exclusion limit: The IRS capital gain exclusion is $250,000 for single filers and $500,000 for married couples filing jointly. Any gain above that amount must be reported as taxable income.
Example: You purchased a home for $200,000, spent $50,000 on renovations, and later sold it for $600,000. Your gain is $350,000. If you’re single, $250,000 is excluded, but the remaining $100,000 is taxable and must be reported.
3. You don’t qualify for the exclusion
If you fail the ownership and use tests, you cannot claim the exclusion. Common reasons include selling too soon after buying or using the home primarily as a rental property.
Example: You bought a condo as an investment, lived in it for only six months, and then sold it. Because you don’t meet the two-year residency rule, your entire gain is taxable.
4. You choose not to claim the exclusion
Sometimes homeowners strategically delay claiming the exclusion to save it for a larger gain on another property. If you do this, the sale must be reported, even if you technically qualify for the exclusion.
How to qualify for the gain exclusion
The IRS allows homeowners to exclude part or all of their capital gain if they meet certain criteria. This is often referred to as the ownership and use test. The ownership test requires that you have owned the home for at least two of the five years leading up to the sale.
The use test requires that you lived in the home as your primary residence for at least two of those same five years, though the years do not need to be consecutive. Additionally, you cannot have excluded gain on the sale of another home within the two years prior to the current sale. These criteria may sound strict, but they provide a clear framework that benefits long-term homeowners.
Special circumstances allowing flexibility
Sometimes life doesn’t fit neatly into IRS timelines. You may still qualify for a full or partial exclusion if you sold due to:
- Divorce or separation: If a divorce decree transfers the home to one spouse, ownership time from the other spouse still counts.
- Death of a spouse: The surviving spouse can often claim the full $500,000 exclusion if the sale occurs within two years.
- Military service or official extended duty: Active-duty members may suspend the five-year test period for ownership and use for up to ten years during any period served on “qualified official extended duty”.
Partial capital gains exclusion
Partial exclusions apply in situations where life events force you to sell sooner than planned. For example, if you relocated for a job more than fifty miles away, needed to move for health-related reasons, or experienced major family changes such as divorce, the IRS may allow you to exclude part of your gain even if you didn’t live in the home for the full two years.
Example: Suppose you lived in your house for only one year before relocating for a new job. The IRS might grant you half the exclusion, up to $125,000 for single filers or $250,000 for joint filers.
Selling multiple homes
It’s also important to remember that exclusions apply only to your main home. If you own multiple properties, such as a vacation home or rental, the gain from selling those properties is fully taxable.
The IRS determines your primary residence based on where you live most of the time, where your mail is delivered, and even where you are registered to vote. For example, selling your main home and a vacation lake cabin in the same year means only the main home can qualify for the exclusion; the cabin’s profit must be reported and taxed.
Mortgage debt and foreclosure
Complications also arise when mortgage debt is involved. If part of your mortgage was forgiven or canceled — whether through a foreclosure, short sale, or loan modification — the forgiven amount may be considered taxable income. While certain laws, such as the Mortgage Forgiveness Debt Relief Act, provide exceptions, not every case qualifies.
Example: If $50,000 of your mortgage is forgiven in a short sale, you may need to report that as income unless excluded by law.
How to report the sale on your tax return
When you do need to report a sale, the process involves using Form 8949 and Schedule D. On Form 8949, you’ll record the details of the sale, including the purchase price, selling price, and improvements made. Schedule D summarizes your capital gains and losses for the year. To do this accurately, you must gather relevant information:
Information you’ll need
Tip: Keep receipts and contracts for every home improvement. Without proof, you can’t adjust your cost basis.
How to avoid receiving a form 1099-S
If your sale qualifies for a full exclusion, your closing agent doesn’t have to issue Form 1099-S if you provide certification stating that:
- The home was your primary residence. This means you lived in the property as your main home for at least two of the last five years leading up to the sale. The IRS typically defines “primary residence” as the place where you spend most of your time, receive mail, and are registered to vote, so it’s important to be able to prove this if questioned.
- The sale price was $250,000 or less ($500,000 for joint filers). Staying under this threshold ensures that any potential gain can fall within the IRS exclusion limits. Even if you invested in improvements that boosted your profit, as long as your final sale price fits within these limits and you qualify otherwise, you likely won’t need to report the sale.
- The entire gain is excludable. This means your profit does not exceed the maximum amount allowed by the IRS for single or joint filers. When the gain is fully excludable, there’s no taxable portion left to report, which streamlines your return and reduces the likelihood of triggering IRS scrutiny.
This prevents the IRS from expecting the sale to appear on your return in the first place. However, if the sale exceeds these limits, the form will almost always be issued.
Do an IRS section 1031 exchange
For investment properties rather than primary residences, another option is the IRS Section 1031 exchange. This rule allows you to defer paying capital gains taxes if you reinvest the proceeds from the sale into another like-kind property of equal or greater value.
It’s a popular tool for real estate investors who want to keep building their portfolios without facing immediate tax liabilities. The rules are strict, however: you must identify a replacement property within forty-five days and close on it within one hundred eighty days, or the exchange fails.
How to calculate capital gains tax
Calculating capital gains tax may sound intimidating, but the formula is straightforward. Use the following steps to calculate your capital gain:
- Cost basis = purchase price + improvements – depreciation
- Proceeds = selling price – selling costs
- Gain = proceeds – cost basis
- Apply exclusions and tax rates
Example: If you bought a home for $250,000, invested $40,000 in renovations, sold it for $500,000, and paid $25,000 in selling expenses, your cost basis is $290,000, your proceeds are $475,000, and your gain is $185,000. As a single filer, this falls below the $250,000 exclusion limit, meaning no reporting is required.
Property and transfer taxes
Beyond federal capital gains, sellers must also consider local property taxes and transfer taxes. Property taxes are prorated, so you are only responsible for the portion of the year you owned the home. Once the sale closes, the buyer takes over.
Transfer taxes, on the other hand, are imposed by states or municipalities whenever property changes ownership. Rates vary widely. In some areas, transfer tax may be a flat fee, while in others, like New York City, it can range from 1% to over 1.4% of the sale price, adding thousands to your closing costs.
Keep detailed records for future reference
Maintaining thorough records protects you during an audit and ensures accurate reporting.
Keep copies of:
- Settlement statements (HUD-1 or Closing Disclosure)
- Receipts for renovations or repairs
- Closing costs and real estate commissions
- Mortgage payoff statements
- Annual property tax bills
Tip: Create a digital folder with scanned receipts, photos of improvements, and closing documents.
FAQ’s about reporting a home sale on your tax return
What documents do I need for taxes if I sold a house?
At tax time, gather these documents to make accurately calculating your gain a breeze:
- Form 1099-S (if issued)
- Settlement statement showing sale price and costs
- Proof of improvements (receipts, permits, contracts)
- Mortgage statements showing payoff amounts
- Property tax records
Does selling a house count as income for Social Security?
No. The money received from selling a house is not considered “earned income” and does not reduce Social Security benefits. However, capital gains may increase your adjusted gross income, which can affect how much of your Social Security is taxable. For retirees with large gains, this can push more of their benefits into the taxable range.
If you sell your house, do you have to pay taxes?
It depends on the size of your gain, whether you qualify for exclusions, and if the home was your main residence. In many cases, homeowners don’t owe taxes on the sale of their primary residence. But if you sold a rental, second home, or investment property, taxes are much more likely.
Do I pay taxes if I sell my house and buy another?
Not anymore, the IRS used to allow a “rollover” into a new property to avoid taxes, but this rule ended in 1997. Today, buying another home does not shield you from taxes. The only way to avoid paying is by qualifying for the ownership and use exclusion.
Are there tax implications to selling a house below market value?
If you sell below market value, such as selling to a family member at a steep discount, the IRS may treat the difference as a gift. If the “gift” exceeds the annual exclusion amount ($19,000 in 2025), you must file a gift tax return.