When to Report a Home Sale
If you sold your home last year, there's a good chance you don't have to tell the IRS about the deal -- even if you made a healthy profit.
The law makes the first $250,000 of profit on the sale of a home tax-free if you meet a couple of tests. The quarter-million-dollar limit is for single returns; it doubles to $500,000 if you're married and file a joint return with your husband or wife.
You qualify for tax-free profit on your home sale if:
You owned and lived in the house for two of the five years leading up to the sale; and
You did not sell another house -- and claim tax-free profit on the deal -- in the two years leading up to the time you sold this house.
And, if you have no taxable profit to report from the sale, the IRS doesn't want to hear about it. Now, if your profit breached the tax-free limits, you report the taxable profit on Schedule D.
There's more good news if you used part of the house for business purposes. Say you had a home office for which you deducted expenses or rented out a room. Until recently, homeowners in that situation couldn't count profit from the business part of the house as tax-free home-sale gain. Instead it was taxed as profit from commercial real estate. But a few years ago, the IRS decided to forget about that distinction. You no longer have to allocate profit between the home and business part of the house. (Although you don't have to treat a portion of the profit as taxable, the part of the profit attributable to depreciation deductions claimed for the business part of the house is still taxable.)
Tomorrow: How to handle a sale if you don't meet the two-out-of-five year tests.