Tax Tips: Selling Your Primary Residence
So, you’re thinking about selling your home. Congrats! Whether you're downsizing, upgrading, or finally escaping that neighbor with the drum set, it's a big deal. Before you start purging in preparation for the move, let’s talk taxes. Yes, even your humble abode is on the IRS's radar. Here's what you need to know (and keep!) when selling your personal residence.
The Capital Gain Exclusion Rule. Good news first: the IRS doesn’t want all of your home-sale profits. If you meet a few key conditions, you can exclude up to $250,000 of capital gain from your income if you're single, or up to $500,000 if you're married and filing jointly. To qualify, you must:
Have owned the home for at least 2 of the last 5 years,
Have lived in it as your main home for 2 of the last 5 years,
Not have used the exclusion on another home sale in the last 2 years.
Note: The 2 years don’t have to be consecutive. You just need 24 months of ownership and residence within the 5-year window.
When You Might Owe Taxes. You could owe capital gains tax if:
Your gain exceeds the exclusion amount,
You didn’t meet the ownership and residency tests,
You used part of the home for business (hello, pandemic-era home offices),
You claimed depreciation on the home,
It was a second home or rental.
How to Calculate Your Gain. Let’s simplify the math: Your gain is: Selling Price - (Adjusted Basis + Selling Costs) = Capital Gain.
Adjusted Basis includes your original purchase price, plus major improvements (new roof, remodeled kitchen, bathroom upgrades), and certain acquisition costs.
Selling Costs include agent commissions, legal fees, and closing costs.
Keep those receipts. No one wants to be digging through a shoe box of faded Home Depot invoices while you’re trying to get ready to move.
Exceptions and Special Situations. Life happens. If you had to sell because of a job change, health reasons, or "unforeseen circumstances" (your townhouse neighbor decided to take up indoor beekeeping), you might qualify for a partial exclusion even if you didn’t meet the full two years.
Military members and certain government employees may also suspend the 5-year test during deployments. Divorce? The IRS has rules for that, too. (Of course they do.)
Record-Keeping Recommendations. Here’s what to keep:
Purchase documents - closing statement, aka settlement sheet / HUD-1
Receipts for improvements - contractor invoices, permits, photos. Consider using a spreadsheet listing date, payee, description and amount paid for each improvement and then use that list to confirm you have the necessary receipts.
Selling documents - commission statements, closing statement
Hold onto these for at least 3 years after the tax return is filed for the year of the sale. Longer if the gain is taxable or you claimed depreciation. Digital copies are fine.
Do You Have to Report the Sale? If you meet all the exclusion rules and your gain is below the threshold, you might not need to report the sale at all. However, if you receive a Form 1099-S (issued at closing), the IRS knows about the sale and you should report it on Form 8949 and Schedule D with your tax return.
Final Thoughts. Selling a home can be the biggest financial transaction of your life. Don’t let the tax part sneak up on you. Track your improvements, know your exclusion limit, and plan for any tax that may be owed.
Whether you’re downsizing to something cozier, upgrading to more house, or just saying goodbye to that quirky neighbor, know that I am here to help you unpack the tax side of things. Happy moving!