Home Sale: Essential Tips for Tax-Free Transaction

Selling your home can be a great financial move, especially when you qualify for a tax-free home sale under IRS rules. If you meet the ownership and residency requirements, you may exclude up to $250,000 of gain if you’re unmarried (or married filing separately) or $500,000 if you’re married filing jointly.

But do you always need to report your home sale to the IRS? The answer depends on whether you receive Form 1099-S, Proceeds from Real Estate Transactions.

When You Must Report Your Home Sale

1. Form 1099-S Is Issued

A real estate agency, closing company, mortgage lender, or attorney may report the sale to the IRS using Form 1099-S. This form lists your home’s gross sale proceeds, address, and closing date. You’ll receive a copy of your closing documents.

You must report your home sale on your tax return if Form 1099-S is issued, even if you qualify for the entire home sale exclusion. Otherwise, the IRS may assume the entire sale amount is taxable and issue a tax adjustment.

2. Sale Price Exceeds $250,000/$500,000

If your home’s sale price exceeds $250,000 for individuals or $500,000 for married couples, a Form 1099-S must be filed regardless of the actual gain. You’ll need to report the sale to calculate any taxable portion of the gain.

3. No Certification of Tax-Free Sale

You may be able to avoid Form 1099-S filing if:

• Your sale price is below $250,000 (single) or $500,000 (married filing jointly), and
• You certify under penalty of perjury that your entire gain qualifies for exclusion.

Even if you sign this certification, some settlement agents still file Form 1099-S as a precaution.

When You Don’t Need to Report Your Home Sale

1. No Form 1099-S and No Taxable Gain

You do not have to report the sale on your tax return if you meet the home sale exclusion rules and no Form 1099-S is issued.

2. You’re Below the IRS Filing Threshold

You generally don’t need to file a tax return if your gross income, including any home sale gain, is below the standard deduction. However, if Form 1099-S is issued, you should file to report the sale and avoid IRS scrutiny.

Why You Should Report Even When Not Required

While not always mandatory, reporting the sale of the home can protect you from IRS audits. The IRS typically has three years to audit your tax return, but the period extends to six years if you omit over 25% of your income. Since home sale gains count as gross income, failing to report could trigger a more extended audit period.

By filing IRS Form 8949 and Schedule D, you document your home sale, ensuring the three-year statute of limitations applies.

Electing Not to Claim the Exclusion

You may choose not to claim the exclusion if you plan to sell another home within two years with a more significant gain. In this case, report the sale as taxable and pay any applicable capital gains tax.

If circumstances change (e.g., you don’t sell the second home or the gain is lower than expected), you can amend your tax return within three years to retroactively claim the exclusion.

How to Report a Home Sale to the IRS

To report your home sale:

1. File Form 8949, Sales and Other Dispositions of Capital Assets.
2. Include Schedule D, Capital Gains and Losses, with your tax return.
3. Report any taxable gain that exceeds the IRS exclusion limits.

Conclusion

Understanding IRS reporting requirements can help you avoid unnecessary tax complications. If you qualify for the home sale exclusion, you may not need to report your sale—unless Form 1099-S is issued. However, voluntarily reporting your sale can prevent IRS audits and start the three-year statute of limitations. Filing IRS Form 8949 and Schedule D ensures compliance and peace of mind.

When in doubt, consult a tax professional to confirm whether reporting your home sale is necessary.