Tax-Free Profit for Homeowners
If you owned and lived in the home for two of the five years before the sale, then up to $250,000 of profit is tax-free for single-filers and up to $500,000 for married joint filers. Any excess profit is typically reported as a capital gain. However, this only applies to a primary residence. For rental or investment properties, the full profit is taxable income.
Reporting Home Sales to the IRS
You must report the sale if you receive a Form 1099-S. It provides the sale price to calculate gain or loss. This exclusion does not apply to rental properties where the full profit is taxable.
You report real estate gains on Schedule D of Form 1040.
Capital Gains Tax on Home Sales
- If you sell within one year of buying, short-term capital gains are taxed as ordinary income.
- If you sell after owning for over one year, long-term capital gains receive lower tax rates.
After the Sale
When you sell, the buyer’s funds pay off your mortgage and cover transaction fees. With the leftover lump sum, consider:
- Longer-term CDs which have higher interest rates
- Paying down debts like credit cards