Does the IRS Get to Tax Your House?

By Kelly M. Walsh

Income tax generally applies to all income, from whatever source derived, including gains from the sale of property. That includes the sale of real property, such as a house. If you sold your home, make sure you know how to properly report it to satisfy the IRS, and how to claim all of the exclusions and deductions you are entitled to so you don’t pay more than you have to.

Typically, your gain from the sale of real estate is not actually the sale price. You get to deduct your tax basis from the sale price to determine the amount of that sale price that could be taxable income. If you bought your house, your tax basis is probably the price you paid to buy it. If you inherited it or received it as a gift from a family member, the calculation is more complex. You can also factor in the cost of various renovations you did while you owned the house.

There is a significant additional exclusion that applies if the real estate you sold was your primary residence. You can exclude up to $250,000 of gains from the sale of real estate ($500,000 if you file married filing jointly) so long as you meet the eligibility test. It must be a property you owned and lived in as your primary residence for at least 24 months out of the last 5 years. You must not have claimed the exclusion for another home sold during the last 2-year period before the date of sale.

There are a variety of exceptions. If you sold a property that was transferred to you from an ex-spouse in a divorce, you can consider your ex-spouse’s period of ownership as part of your two year period. The residency requirement is also modified to provide for service members, intelligence, and peace corps personnel during periods of service. On the other hand, you are automatically disqualified from claiming the exemption if you obtained the property through a like-kind exchange or if you are subject to expatriate tax.

If you need help with your income taxes after the sale of real estate, call Scaringi Law at 717-657-7770 to ask about a free initial consultation.