Real Estate Capital Gains Tax: What You Owe After Selling Your Home

Added May 9, 2008 by Ilyce R. Glink

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Summary: After selling a home you've lived in for more than five years, what is the real estate capital gains tax and what do you report to the IRS. If you're married you can take up to $500,000 in profit without paying capital gains tax to the IRS, after living in a home at least two of the last five years. If you're single, you can take up to $250,000 in profit without paying capital gains tax to the IRS, after living in a home at least two of the last five years.

Q: We bought a home in 1999 and lived in it until December 2007. We moved to a new home and since it was winter time, we rented out the home for 3 months and then put it in the market and sold it. Should we report the sale of the home to IRS?

A: It's nice to hear about a home that actually sold relatively quickly in these troubled real estate times. Good for you!

To answer your question, it depends on whether you are referring to the reporting requirement at the settlement or the closing of your sale, or upon filing your federal income tax return.

If your sale exceeded $500,000, your sale needs to be reported to the IRS. But that may have happened for you at the closing. Almost always, the IRS form will be filled out at settlement or closing by the title company or closing agent and sent to the IRS.

In terms of reporting your profit or loss from the sale of your home, you would do that with the filing of your federal income tax return from the year in which the home sold. If you sold in 2007, you would report the sale on your 2008 income tax return.

You and your wife are able to keep up to $500,000 in profits (up to $250,000 if you were single) from the sale of your personal residence. Your house qualifies because you lived in it for 2 of the last 5 years, and because you only rented it for a short time.

If you're close or seem to be just over the $500,000 mark, you'll want to make sure you've included all of your expenses in the calculation of your costs basis. Here's the formula: Take the price you paid for the home, and add to it the costs of purchase, the costs of sale, and the cost of any capital improvements (think structural improvements, not decorating) to the property. Then, subtract that amount from the sales price of the property.

Depending on whether the title company or settlement agent reported your sale to the IRS - in most cases when the sale is over $250,000, if you are single, or $500,000 if you are married, you may have to include additional information on your tax return even if you have no federal income tax to pay resulting from the sale.

For more details, please consult with your tax preparer.

May 9, 2008.

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