Generally, you are required to include the gain from the sale of your home in your taxable income. However, if the gain is from your primary home, then you may exclude up to a $250,000 gain from income if a single filer, or up to $500,000 if you're a married couple filing jointly (MFJ)—if you meet certain requirements. This is referred to as maximum exclusion.

If the gain exceeds $250,000, then the excess amount must be reported on Schedule D of your tax return.

Key Takeaways

  • If you sell your home for a gain, then you may be subject to taxation on those gains.
  • If, however, the gains are $250,000 or less for a single filer—or $500,000 or less for a joint filer—then this tax may be excluded.
  • To qualify for the exclusion, the property must have been owned by you for two out of the prior five years and lived in as your primary residence.
  • You also must not have receive a similar exemption from a property sale in the last two years.

Eligibility for Gains Exclusion

To be eligible to exclude up to $250,000 in gains on the sale of your property, you must meet the following requirements:

  1. You must meet the “ownership and use” test. Under this requirement, you must have owned the home for at least two years and have lived in it as your primary residence for at least two of those years. This two-year period must be within the five-year period ending on the date when you sold your home. The two-year period does not have to be consecutive.
  2. You did not exclude from your income the gain of a sale from another home during the two-year period ending on the date of the sale of the home for which the exclusion is being claimed.

If you shared ownership in the home, but you and the other owner file separate returns, then you may each exclude up to $250,000 from your income—if you both meet the requirements listed above. Your portion of the gain is the percentage ownership you have in the home multiplied by the total gain from the sale.

For detailed information about the eligibility requirements for this exclusion, refer to Internal Revenue Service (IRS) Publication 523, which also includes information about the reduced maximum exclusion for individuals who are not eligible to claim the maximum exclusion.

Advisor Insight

Steve Stanganelli, CFP®, CRPC®, AEP®, CCFS
Clear View Wealth Advisors, LLC, Amesbury, Mass.

Whether or not you are exempt from tax will depend on your filing status, the amount of the gain, and your occupancy status for the property sold.

Your gain is figured by determining your basis. Your basis consists of what you originally paid for the property plus certain closing costs at the time. Then you add in major home improvements, such as a new kitchen, etc. Also, add in real estate transaction fees you paid.

To figure out the gain, take your sale price, and subtract the basis. If the difference is $250,000 or less (for a single filer) or $500,000 or less (for those filing jointly), you will not pay tax on any of your gain.

You will need to file a form with your taxes to document this. To best determine whether or not your sale is exempt, you may want to speak with a qualified tax planner.