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Ten Key Tax Facts about Home Sales

In most cases, gains from sales are taxable. But did you know that if you sell your home, you may not have to pay taxes? Here are ten facts to keep in mind if you sell your home this year.

  1. Exclusion of Gain.  You may be able to exclude part or all of the gain from the sale of your home. This rule may apply if you meet the eligibility test. Parts of the test involve your ownership and use of the home. You must have owned and used it as your main home for at least two out of the five years before the date of sale.
  2. Exceptions May Apply.  There are exceptions to the ownership, use and other rules. One exception applies to persons with a disability. Another applies to certain members of the military. That rule includes certain government and Peace Corps workers. For more on this topic, seePublication 523, Selling Your Home.
  3. Exclusion Limit.  The most gain you can exclude from tax is $250,000. This limit is $500,000 for joint returns. The Net Investment Income Tax will not apply to the excluded gain.
  4. May Not Need to Report Sale.  If the gain is not taxable, you may not need to report the sale to the IRS on your tax return.
  5. When You Must Report the Sale.  You must report the sale on your tax return if you can’t exclude all or part of the gain. You must report the sale if you choose not to claim the exclusion. That’s also true if you get Form 1099-S, Proceeds From Real Estate Transactions. If you report the sale, you should review the Questions and Answers on the Net Investment Income Taxon IRS.gov.
  6. Exclusion Frequency Limit.  Generally, you may exclude the gain from the sale of your main home only once every two years. Some exceptions may apply to this rule.
  7. Only a Main Home Qualifies.  If you own more than one home, you may only exclude the gain on the sale of your main home. Your main home usually is the home that you live in most of the time.
  8. First-time Homebuyer Credit.  If you claimed the first-time homebuyer credit when you bought the home, special rules apply to the sale. For more on those rules, see Publication 523.
  9. Home Sold at a Loss.  If you sell your main home at a loss, you can’t deduct the loss on your tax return.
  10. Report Your Address Change.  After you sell your home and move, update your address with the IRS. To do this, file Form 8822, Change of Address. You can find the address to send it to in the form’s instructions on page two. If you purchase health insurance through the Health Insurance Marketplace, you should also notify the Marketplace when you move out of the area covered by your current Marketplace plan.

Additional IRS Resources:

  • Publication 5152: Report changes to the Marketplace as they happen English | Spanish

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Setting Yourself Up for a Hassle-Free Tax Season in the New Year

By taking a few simple steps now, you can greatly reduce uncertainty and stress during the upcoming 2020 tax filing season. These four actions will help complete your return efficiently, without unpleasant surprises:

Gather Documents Showing Wage, Business and Other Income

If you work as an employee, you should receive a W-2 from your employer(s) by early February, showing your earnings for the year and the total tax withheld from your paychecks. If you are self-employed (including gig economy work) or own a business, you should receive 1099 forms from your clients showing fees paid to you.

Interest and dividend income, along with royalties from past work, are also reported on 1099 forms. Recipients of unemployment benefits (including $600 federal Pandemic Unemployment Assistance payments) and/or taxable Social Security benefits should receive a year-end statement detailing these payments as well. Store all of these documents with your tax records.

Organize Records of Other Potentially Taxable Transactions

The sale of major assets like stock, a house or any other “big ticket” item may yield a taxable capital gain. Many cryptocurrency transactions (such as buying and selling Bitcoin) also have tax implications, since the IRS classifies cryptocurrencies as property. Make sure you have complete records of all your significant financial and property transactions during 2020.

Be Aware of the Rules for Refund Interest and Stimulus Payments

Because the processing of some tax refunds was delayed in 2020 due to the pandemic, the IRS paid interest to many refund recipients. Unlike refunds themselves, these interest payments are classified as taxable income. If you received a tax refund interest payment, the IRS will send you Form 1099-INT in January, which you will need when preparing your return.

Recipients of a 2020 Economic Income Payment (EIP, also called a stimulus payment) should have also received IRS Notice 1444, Your Economic Impact Payment. Make sure to keep this notice handy. If your EIP amount was lower than it should have been, Notice 1444 will give you the information you need to claim a tax refund for the balance owed to you.

Start Early

With all the unpredictability of life during a pandemic, staying ahead of the tax game is more important than ever. Assemble your records as soon as possible. If you have any questions, a tax advisor can help you identify and organize the documents you need. Just remember that tax professionals have far greater availability early in the tax season than at the last minute.