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Find a locationKey takeaways
- Selling your home can result in a taxable capital gain, though many homeowners qualify for an exclusion.
- A capital gain is the profit made from selling a capital asset you own.
- How long you owned your home determines whether your gain is taxed as short-term or long- term.
- The home sale exclusion lets qualifying home sellers exclude up to $250,000 (or $500,000 if married filing jointly) of gain from tax.
- To qualify for the exclusion, you generally must meet both the ownership test and the use test within 5 years before the sale.
- Calculating your gain or loss starts with your home's basis, not just your original purchase price.
- Certain situations, like a large gain or receiving Form 1099-S, require you to report the sale, even if it's tax free.
- Form 1099-S, Proceeds from Real Estate Transactions, reports the proceeds from your home sale, but doesn't automatically mean you owe tax.
- There's no special capital gains break just for people over 55. However, older homeowners often benefit greatly from the exclusion since they tend to have more equity.
Selling your home almost always comes with a profit, also known as a capital gain. But thanks to the home sale exclusion, most homeowners won't owe tax on it. Here's how the exclusion works, who qualifies, and when you need to report a sale to the IRS.
Is selling your house taxable?
Selling your house may be taxable. Most of the time when you sell your home, you make a profit. This profit is referred to as a capital gain and is subject to tax. If you are selling your main home, you may be eligible for a special exclusion from tax on the gain from the sale.
What is capital gain?
A capital gain is the profit you make when you sell a capital asset you own, like your home, car, or stocks.
Short-term vs. long-term capital gains
Whether your gain is short-term or long-term depends on how long you owned your home before selling. If you owned it for 1 year or less, your gain is considered short term and is taxed at your ordinary income tax rate. If you owned it for more than 1 year, your gain is considered long term and is taxed at a lower capital gains rate, typically 0%, 15%, or 20%, depending on your income and filing status.
The home sale tax exclusion: Up to $250,000 or $500,000 tax free
IRS code section 121 allows taxpayers an exclusion from taxes of up to $250,000 ($500,000 if married filing jointly) in gains when they sell their main home.
How do I know if I qualify for the home sale exclusion?
To qualify for the home sale exclusion, the IRS requires you to meet 2 tests:
- The ownership test: The taxpayer must own their home for at least 2 of the 5 years before the sale.
- The use test: The taxpayer must live in the home for at least 2 of the 5 years before the sale.
If your gain is greater than your exclusion, the excess gain (the amount over the exclusion amount) is taxable as a capital gain.
NOTE: The 2-year tests can be satisfied independently, as long as the 2 years for each test are within the previous 5 years of the sale.
For example, let’s say George bought his house in 2021. He lived in it as his main home until 2023, then rented it out to tenants until he sold it in 2026. The IRS looks at the 5 years leading up to the sale, which in this case is 2021 to 2026. George's ownership test is satisfied because he owned the home for the entire 5-year period. His use test is also satisfied, since he lived there for 2 of those 5 years (2021 to 2023), even though he was renting it out at the time of the sale.
If you didn’t own or live in the home for 2 of the last 5 years, you may still be able to use a prorated exclusion amount in certain cases (e.g., if you move for work).
It’s also important to note that the excludable amount is modified when you use a portion of the home for business purposes.
How to calculate your gain or loss on the home sale
Finding your capital gain or loss is a bit more involved than simply subtracting your purchase price from your sale price.
You first need to find your home's basis, which is your purchase price, plus the cost of major improvements, like a kitchen remodel or a new roof (routine maintenance costs don't count). Then, subtract your basis, plus selling costs, such as agent commissions, from your sale price. If the result is positive, you have a gain. If it's negative, you have a loss.
When you must report the home sale to the IRS
When you file your taxes for the year you sell your house, you may have to claim the gain and exclusion on your tax return if you had a gain and:
- Your gain was greater than $250,000 ($500,000 if filing jointly)
- You were issued a Form 1099-S (the gain likely won't be taxable, but you will have to reconcile it on your tax return by reporting the sale on Form 8949, Sales and Other Dispositions of Capital Assets, and coding for the exclusion (code H) and the exclusion amount.
- You claimed depreciation on your home while you owned it, because you had a home office or rented out all or part of the home.
What is Form 1099-S, and why did I get one?
Form 1099-S reports the gross proceeds from the sale of your home. The closing agent, title company, or attorney who handled your closing will typically issue it and send a copy to the IRS. Receiving one doesn't necessarily mean you owe tax on the sale. It just means the IRS knows the sale happened and expects you to report it on your return, even if your entire gain is covered by the exclusion.
Is there a capital gains tax break for people over 55?
No, there's no longer a capital gains tax break specifically for people over 55. Today's home sale exclusion applies to any qualifying homeowner, regardless of age. Older homeowners often benefit a great deal from the exclusion, since they've typically owned their homes for many years and built up lots of equity.
While selling your home may be taxable, the home sale exclusion means most homeowners don’t have to worry about paying tax on their profits. If you have questions or concerns, or need help with a more complex situation, don’t hesitate to reach out to your local Jackson Hewitt Tax Pro any time of the year. Find tax services near you, then walk in or book now.
About the Author
Sharon Brucker is a Senior Tax Research Analyst at Jackson Hewitt Tax Services who specializes in consumer income tax and estate and trust issues. A Certified Public Accountant (CPA) with a Master of Business Administration (MBA) and more than 35 years of experience, Sharon helps to ensure that the most current IRS tax information is distributed throughout Jackson Hewitt and its franchisees. She also simplifies complex tax laws for Tax Pros and clients alike.
*This content is for general informational purposes only. It is not intended to be comprehensive and should not be construed as professional tax or financial advice for any specific individual tax situation. Taxpayers should always consult a qualified professional for individual guidance. This information constitutes a solicitation under the Treasury Department's Circular 230. Most offices are independently owned and operated.
