Tax Checklist for New Homeowners
From Tax Guide.
Tax Guide · Arab, Alabama
Do I Owe Taxes When I Sell My Home?
Many homeowners owe no tax on the sale of a main home thanks to the home sale exclusion, but the rules turn on ownership, use and your gain.
The short answer
Do I owe taxes when I sell my home?
Often you do not, because the federal tax law lets many people exclude some or all of the profit from the sale of a main home.
Selling a house can create a taxable gain, which is the difference between what you sold it for (after selling costs) and what it cost you (your basis). The home sale exclusion is a rule that can shield some or all of that gain from tax when the house was your main home. Whether it applies to you depends on how long you owned it, how long you lived in it and how much profit you made.
The amount you can exclude is set by the IRS and can be different for single and married taxpayers. We do not quote it here, because it is worth checking the current figure before you decide anything.
The tests
What is the home sale exclusion and who qualifies?
The exclusion generally applies when you owned the home and used it as your main home for a required period during the years just before the sale.
The two periods do not have to be the same stretch of time, and they do not have to be back to back. There is also a limit on how often you can use the exclusion. Special situations, such as a job move, a health reason, a divorce or a death of a spouse, can change the timing rules.
These are the pieces we check when a client says they sold a home.
- You owned the home for the required amount of time.
- You lived in it as your main home for the required amount of time.
- You have not used the exclusion on another home too recently.
- The property was your home and not, for example, a rental for most of that time.
Working out the gain
How do I figure out the profit on selling my house?
Your gain is the amount you realized from the sale minus your adjusted basis, and both numbers come from records you should still have.
Start with the selling price and subtract selling costs such as agent commissions and certain closing costs. Then look at what the home cost you: the purchase price plus certain buying costs plus the cost of improvements that add value or extend its life. Routine repairs and maintenance generally do not count, but a new roof, an addition or a major remodel usually can.
This is why keeping paperwork matters. People who bought long ago and did many improvements often forget them, and those receipts can lower the gain. If you inherited the home, your starting basis works differently, and our guide on inherited property and taxes explains that.
Paperwork and reporting
Do I have to report the sale of my home on my tax return?
Sometimes you must report the sale even when you owe nothing, especially if you receive a Form 1099-S or if part of the gain is taxable.
The closing agent may send you a Form 1099-S, which reports the sale to the IRS. If you get one, the sale generally needs to be reported on your return, even when the gain is fully excluded. If you do not get one and the whole gain is excluded, you may not have to report it, but the rules depend on the facts.
When part of the gain is taxable, it is usually treated as a capital gain. Alabama has its own return and rules, and we check how the sale flows through to it. A loss on the sale of a personal home is not deductible.
| Situation | What usually happens |
|---|---|
| Main home, gain fully covered by the exclusion | Often no tax; report if a 1099-S was issued |
| Main home, gain larger than the exclusion | The extra gain is usually taxable |
| Home was mostly a rental or second home | The exclusion may not apply; other rules can |
| Sold at a loss (personal home) | The loss is not deductible |
General patterns; your facts can change the result.
Special situations
What if the house was a rental, or I used part of it for business?
The exclusion can be reduced or lost for the period a home was used as a rental or for business, and depreciation you took may be taxed when you sell.
If you rented out the home for a stretch, or claimed a home office, the sale may need to be split into pieces. Depreciation claimed on a rental or business portion generally has to be accounted for at sale. Our guides on rental property and the home office deduction explain how those items build up.
If you bought a new home right after selling, there is no rule that lets you delay tax by buying another house. That was an older rule and it no longer works that way, so plan for the sale on its own terms.
How we can help
Need help reporting the sale of your home?
Our office prepares income tax returns and can work through the sale of a home with you, including the basis, the exclusion and the Alabama return.
Bring the closing statements from both the purchase and the sale, plus records of improvements. Please do not send Social Security numbers or documents through the website; bring them to the office or call us at 256-586-4635.
We serve Arab and the surrounding area. You can also contact us with questions, and if you are planning a sale, our tax planning service can look at the timing first.
Answers
Questions about selling your home
Do I have to pay taxes when I sell my house?
Not always. Many people exclude some or all of the gain on a main home. The result depends on how long you owned and lived in the home and how large the profit is.
Will I get a Form 1099-S?
You might. A closing agent sometimes sends one to report the sale. If you receive it, the sale generally needs to be reported on your return even if no tax is due.
Can I deduct a loss on selling my home?
No. A loss on the sale of a home you lived in personally is not deductible.
Do home improvements count?
Improvements that add value or extend the life of the home are generally added to your basis and can reduce your gain. Routine repairs generally do not count.
What if I sold a home I inherited?
The basis of inherited property is often different from what the original owner paid, which can change the gain. We look at the records and explain how it applies.
Does Alabama tax the gain on a home sale?
Alabama has its own return and rules, and most income taxable federally is also taxable in Alabama, with exceptions. We check how your sale is treated on both returns.
Read next
Related reading
Inherited Property and Taxes
From Tax Guide.
Rental Property Income and Taxes
From Tax Guide.
Income Tax Services
A service Melton Tax Services provides.
Melton Tax Services
Questions about your taxes or your business?
Our team in Arab is just a phone call away, and we are glad to talk it through with you.