Tax Considerations for selling your home

06-01-2022Tax Information

You may qualify to exclude from capital gains from the sale of your primary residence if you meet these criteria:

  1. Ownership test. The homeowner must have owned the home for at least two years of the five-year period ending on the date of the sale.
  2. Use test. The homeowner must have used the home as their main residence for at least two years of the five-year period ending on the date of the sale.

The principal residence exclusion is limited to $250,000 ($500,000 for joint filers) and you may only claim the exclusion once during a two-year period. 

In certain circumstances, taxpayers who fail the two-out-of-five-year ownership and use tests may still be eligible to claim a partial primary residence exclusion if their main reason for the home sale was a change in workplace location, a health issue, or another unforeseeable event.

Homeowners who can exclude all their gain on a home sale do not need to report the sale on their tax return unless a Form 1099-S, Proceeds from Real Estate Transactions, was issued to them.

If you sell your home at a loss, you are not able to deduct the loss.

Taxpayers with multiple homes can exclude gain only from the sale of their principal residence.  You can't exclude any gain from the sale of any other home.

However, if you sell your main home and move to an already owned second home and turn that second home into their principal residence (and satisfy the ownership and use tests for the second home), you can exclude gain on the sale of the second residence.

If you don't qualify to exclude all of the taxable gain from your income, you must report the gain from the sale of their home when you file your tax return. Anyone who chooses not to claim the exclusion must report the taxable gain on their tax return. Taxpayers who receive a Form 1099-S must report the sale on their tax return even if they have no taxable gain.

If you sell their home for less than the amount of their mortgage (short sale), you may be able to exclude the amount discharged or forgiven from income as long as the amount was discharged before January 1, 2026, or a written agreement for the debt forgiveness was in place before January 1, 2026.