Key takeout
Not all homeowners need to report a sale on their tax returns, but if they receive Form 1099-S or exceed IRS limits, they will need to be reported. Ownership and use tests determine whether you can exclude up to $250,000 in profits from taxes ($500,000 for joint filers). Due to special circumstances such as divorce, death, or transfer, you may request a full or partial exclusion. A detailed record of purchase prices, improvements and closure costs is essential for accurate reporting and avoiding penalties.
Selling a home is a major life event. While most of the focus tends to move logistics, close paperwork, and find the next home, many sellers ask: “Do I need to report a house sale on my tax return?”
The answer is not simple yes or no. In many cases, you may not need to borrow taxes or report sales, especially if you have lived in your home as your primary residence for years. However, in other cases, you will need to report a sale, such as not making a significant profit, not meeting IRS residence regulations, or receiving Form 1099-S.
This Redfin Real Estate Article breaks down the tax rules surrounding home sales. This should also be reported with its own example situation and guidance, and exclusion mechanisms.
When you need to report the sale of your home
In certain circumstances, you only need to report the sale of your home on your federal tax return. Let’s explore them in detail:
1. I received Form 1099-S
Upon closing, payment agents may issue revenue from Form 1099-S, real estate transactions. The IRS can also receive copies. If the report fails, you can trigger an IRS notification or an audit.
Example: You will need to submit a form to explain why you have no tax even if you have sold your house for $450,000 and received 1099 seconds, but your profits are completely excluded.
2. Capital gains exceed exclusion
If capital gains exceed the exclusion limit, another situation arises. The elimination of IRS capital gains is $250,000 for single filers and $500,000 for married couples jointly filed. Any profit exceeding that amount must be reported as taxable income.
Example: I bought a house for $200,000, spent $50,000 on renovations, and later sold for $600,000. Your profit is $350,000. If you are single, $250,000 will be excluded, but the remaining $100,000 is taxable and must be reported.
3. You are not eligible for exclusion
If ownership fails and tests are used, you cannot request an exclusion. Common reasons include buying or using the home as a rental property and selling it immediately.
Example: I bought a condo as an investment and lived there for just six months before selling it. You will be taxed on the entire gain as you do not meet the two-year residency rules.
4. Choose not to claim exclusion
Homeowners may strategically delay in claiming exclusions to save it for greater benefits on another property. If you do this, you will need to report the sale even if you are technically entitled to an exclusion.
How to qualify for a gain exclusion
The IRS allows homeowners to exclude some or all of their capital gains if they meet certain criteria. This is often referred to as ownership and usage testing. Ownership testing requires you to own a home for at least two of the five years leading up to sale.
Use tests require you to have lived in the house for at least two of the same five years, but the year does not have to be consecutive. Additionally, you cannot rule out profits at a sale of another home within two years of the current sale. While these standards may sound strict, they provide a clear framework that benefits long-term homeowners.
Special situations that allow for flexibility
Sometimes life doesn’t fit properly in the IRS timeline. You are still eligible for a full or partial exclusion if you sell for:
Divorce or Separation: If a divorce order transfers a house to one spouse, the ownership time from another spouse will still count. Spouse Death: Surviving spouses often claim a full exclusion of $500,000 if the sale occurs within two years. Military or Official Extension Duty: Active Members may suspend a five-year testing period for ownership and use for any period provided under the “qualified official extension duty.”
Partial capital gain exclusion
Partial exclusions apply in situations where life events are forced to be sold earlier than planned. For example, if you have to move to work more than 50 miles away, have to move for health-related reasons, or have experienced major family changes, such as divorce, the IRS can rule out some of your interests, even if you haven’t lived in the house for two years.
For example: Let’s say you only lived in your home for a year before moving to a new job. The IRS may grant half of the exclusions, up to $125,000 for single filers and $250,000 for joint filers.
Selling multiple homes
It is also important to remember that exclusions only apply to your main home. If you own multiple properties, such as a villa or rental, the profits from selling those properties are completely taxed.
The IRS mostly determines your primary residence based on where you live, where your email will be delivered, and where you are registered to vote. For example, selling a Maine home and Vacation Lake cabin in the same year means that only the Maine home can qualify for exclusion. Cabin profits must be reported and taxed.
Mortgage debt and foreclosure
Complications can also occur if mortgage obligations are involved. If a portion of your mortgage is allowed or cancelled – the amount allowed through foreclosure, short sale, or changes to the loan, may be considered taxable income. Certain laws, such as the Mortgage Remuneration Debt Relief Act, provide the exception that not all cases are eligible.
For example: If $50,000 on a mortgage is allowed in short sales, you may need to report it as income unless excluded by law.
How to report a sale on your tax return
If you need to report a sale, use Form 8949 and Schedule D for the process. Record sales details, including purchase price, sales price, and improvements, on Form 8949. Schedule D summarises capital gains and losses for the year. To do this accurately, you need to gather relevant information.
Necessary information
Tip: Keep all your family improvement receipts and contracts. Without proof, the cost base cannot be adjusted.
How to avoid receiving Form 1099-S
If your sale qualifies for a complete exclusion, and you provide certifications that state it, your closure agent does not need to issue Form 1099-S:
The house was your main residence. This means you have lived as your main home for at least two of the past five years leading up to sale. The IRS usually defines a “primary residence” as a place where you spend most of your time, receive emails and are registered to vote, so it’s important to be able to prove this when asked. The selling price was under $250,000 ($500,000 for joint filers). Staying below this threshold ensures that potential benefits fall within the IRS exclusion limit. As long as the final selling price meets these restrictions and is eligible if you invest in profitable improvements, you won’t need to report a sale. The entire gain is excluded. This means your interests will not exceed the maximum amount that the IRS allows for a single or joint filer. If gains can be completely excluded, there is no remaining taxable portion to report. This streamlines returns and reduces the chances of triggering IRS scrutiny.
This means that the IRS does not expect the sale to be displayed on return in the first place. However, if the sale exceeds these limits, the form will almost always be issued.
Run IRS Section 1031 Exchange
For investment properties rather than primary residence, another option is IRS Section 1031 Exchange. This rule allows you to pay capital gains tax if you reinvest the proceeds from the sale into another similar property of equal or greater value.
This is a popular tool for real estate investors who want to continue building their portfolios without facing immediate tax obligations. However, the rules are strict. Replacement properties must be identified within 45 days and closed within 180 days or the replacement must fail.
How to calculate capital gains tax
While the calculation of capital gains tax may sound intimidating, the equation is simple. Use the following steps to calculate the capital gains:
Cost-based = Purchase Price + Improvement – Depreciation = Selling Price – Sales Cost-based Profit = Revenue – Cost-based Exemptions and Tax Rates
For example: If you buy a house for $250,000, invest $40,000 in a renovation, sell it for $500,000, and pay $25,000 for sale, then your cost basis is $290,000, revenue is $475,000, and profit is $185,000. As a single filer, this is below the $250,000 exclusion limit. This means no reports are required.
Property and Transfer Tax
Beyond federal capital gains, sellers must consider local property taxes and transfer taxes. Property tax is proportional, so you are only responsible for a portion of the year you owned the home. Once the sale is over, the buyer will take over.
Transfer tax, on the other hand, is imposed by the state or local authority whenever the property changes its ownership. Rates vary widely. In some regions, transfer taxes can be flat rates, but like in New York City, you can add thousands of additional to your closure costs, ranging from 1% to 1.4% of the selling price.
Keep detailed records for future reference
Maintaining thorough records will protect you during an audit and ensure accurate reporting.
Keep a copy:
Settlement Statement (HUD-1 or Closing Disclosure) Receipts for Renovations or Repairs Closing Costs and Real Estate Board Mortgage Payment Statement Annual Property Tax Bill
Tip: Create a digital folder with scanned receipts, improvement photos and closed documents.
FAQ for reporting home sales on tax returns
What kind of tax documents do I need when I sell my house?
Collect these documents during taxation and easily calculate gains.
Form 1099-S (if issued) A settlement statement showing evidence of proof of improvement in sales price and costs (receipts, permits, contracts, contracts)
Does selling a house count as Social Security income?
no. The money received from selling a house is not considered “earned income” and cannot reduce Social Security benefits. However, capital gains may increase your adjusted gross income, which may affect your Social Security tax. For retirees who are earning big profits, this allows them to push more profits into the taxable range.
If you sell your home, do you need to pay taxes?
It depends on the size of your interest, whether you qualify for an exclusion and whether the home was your primary residence or not. In many cases, homeowners do not borrow taxes on the sale of major homes. However, if you sell rentals, second homes, or investment property, taxes are much more likely.
Do you pay taxes if you sell your house and buy another house?
From now on, the IRS allowed “rollovers” to new property to avoid taxes, but this rule ended in 1997. The only way to avoid payment is to qualify for ownership and use exclusions.
Is there a tax impact on selling a house that is below market value?
If it falls below market value, such as selling to families at a massive discount, the IRS may treat the difference as a gift. If your “gift” exceeds the annual exclusion amount ($19,000 in 2025), you will need to file a gift tax return.
