Tax on Home Sale

Definition

The Tax on Home Sale refers to the taxes applied on the profit made from selling a residential property. Governed by Section 121 of the U.S. Internal Revenue Code (IRC), certain homeowners may qualify for excluding up to $250,000 of the gain ($500,000 if married filing jointly) from their taxable income, provided specific conditions are met.

Key Provisions of Section 121

Primary Residence Requirement: The exclusion applies only to the sale of a primary residence.
Ownership Test: The homeowner must have owned the home for at least two years.
Use Test: The homeowner must have lived in the home as their primary residence for at least two of the last five years before the sale.
Frequency Limitation: The exclusion can only be claimed once every two years.

Examples

Single Homeowner: Rachel sells her home, which she lived in as her primary residence for 3 years, with a gain of $200,000. Under Section 121, she qualifies for the exclusion and will not have to pay taxes on the $200,000 gain.
Married Couple: John and Mary sell their jointly-owned home, which they both lived in for 4 years, with a gain of $400,000. They can exclude the full amount because they meet the criteria for the $500,000 exclusion.
Partial Exclusion: Lisa lived in her house for two years but sells it after 18 months due to a job relocation. She qualifies for a partial exclusion based on the proportion of the time she lived there.

Frequently Asked Questions (FAQs)

1. What is the capital gains tax rate on the sale of a home?

The capital gains tax rate can be 0%, 15%, or 20%, depending on your taxable income and tax filing status. However, under Section 121, qualifying homeowners can exclude up to $250,000 ($500,000 for married couples) from their taxable gains.

2. Do I have to report the sale of my home to the IRS?

If the gain from the sale is fully excludable and you don’t receive a Form 1099-S, it’s not necessary to report the sale on your tax return. Otherwise, you must report the sale and any non-excludable gain.

3. How often can I use the Section 121 exclusion?

You can use the Section 121 exclusion once every two years.

4. Can I use Section 121 exclusion for rental property?

No, the property must be your primary residence. However, if part of the home was used for business or rental purposes, gain must be allocated between the residential part and the business part, with only gain attributable to the residence being potentially excludable.

5. Can I claim the Section 121 exclusion if I sell my home due to a change in health?

Yes, special rules allow for a partial exclusion if the sale is due to a change in employment, health, or unforeseen circumstances.

Capital Gains: The profit made from selling an asset such as real estate.
Primary Residence: The main home where an individual resides.
Form 1099-S: A form used to report gross proceeds from the sale or exchange of real estate.

Online Resources

References

🗂️ “Publication 523 (2019), Selling Your Home.” Internal Revenue Service. IRS.gov
🗂️ “Topic No. 701 Sale of Your Home.” Internal Revenue Service. IRS.gov

Suggested Books for Further Studies

📘 “Home Tax Deductions: Valuable Tips for Maximizing Tax Deductions on Your Home” by Simon Kidd
📘 “J.K. Lasser’s Homeowner’s Tax Breaks 2021: Your Complete Guide to Everything Deductible” by Gerald J. Robinson
📘 “Real Estate Tax Guide: The Art of Tax Deduction Managing” by Blake Beaumont

Real Estate Basics: Tax on Home Sale Fundamentals Quiz

### What is the maximum exclusion amount for a single homeowner? - [x] $250,000 - [ ] $300,000 - [ ] $500,000 - [ ] $150,000 > **Explanation:** Under Section 121, a single homeowner can exclude up to $250,000 of capital gains from the taxable income when selling their primary residence. ### How often can the Section 121 exclusion be used? - [ ] Once a year - [ ] Every five years - [x] Once every two years - [ ] Unlimited > **Explanation:** The IRS allows homeowners to use the Section 121 exclusion once every two years, provided they meet its primary residence and ownership requirements. ### For how many years must the homeowner have lived in the home to qualify for the exclusion? - [x] Two out of the last five years - [ ] Three out of the last ten years - [ ] One continuous year - [ ] Five consecutive years > **Explanation:** To qualify for the Section 121 exclusion, the homeowner must have used the home as their primary residence for at least two of the past five years prior to sale. ### Is a homeowner required to report the sale if the gain is fully excludable? - [ ] Yes, regardless of gain - [x] No, unless they receive Form 1099-S - [ ] Yes, if the home is in a high-value area - [ ] No, always exempt > **Explanation:** No reporting is necessary if the entire gain is excludable and they do not receive Form 1099-S from the sale's proceedings. ### Can Section 121 be used on a property that was partly used for business? - [x] Yes, but only for the residential conferred gains - [ ] No, never - [ ] Yes, in full - [ ] Only for short-term rentals > **Explanation:** Gain from the sale of property that was partially used for business must be allocated, with only the gains attributable to the residential portion potentially being excludable under Section 121. ### What is one of the special situations that allow for a partial exclusion? - [ ] Vacation needs - [ ] Annual trips - [x] Change in employment - [ ] Hobbies > **Explanation:** Homeowners may qualify for a partial exclusion if the sale was necessitated by a change in employment or health, or due to unforeseen circumstances. ### What is the form used to report gross proceeds from real estate sales? - [x] Form 1099-S - [ ] Form 1040 - [ ] Form 4562 - [ ] Form 8283 > **Explanation:** The form used to report gross proceeds from real estate sales is Form 1099-S. This form helps ensure the correct reporting of capital gains. ### What determines if an exclusion is partial or full? - [x] Reason for move, and time lived in the home - [ ] Realtor's discretion - [ ] Neighbor's testimony - [ ] Market conditions > **Explanation:** The determination for a partial or full exclusion depends on the reason for the home sale and the amount of time the home was occupied as a primary residence. Factors like job relocation or health concerns typically qualify for partial exclusions. ### What is the primary requirement for the residence to qualify under Section 121? - [x] It must be the primary residence. - [ ] It must be newly built. - [ ] It must be in an urban area. - [ ] It must be jointly owned. > **Explanation:** To qualify for the exclusion, the property must be the homeowner's primary residence using the basis that it's where they live for most of the time. ### Under Section 121, for what time period must the homeowner have owned the home to be eligible for the exclusion? - [ ] Six months - [ ] Eleven years - [x] Two out of the last five years - [ ] Four years exactly > **Explanation:** To qualify for the capital gains exclusion under Section 121, the homeowner must have owned the property for at least two out of the last five years before the sale.

;