When (and How) to Declare the Sale of Your Primary Residence

Recently a new client came to us.  The Internal Revenue Service (“IRS”) was looking for $262,532 in back taxes.  This was from the sale of their home two years ago.

Form 1099-S Reporting Requirements

Attorneys that handle real estate closings must report the proceeds on IRS Form 1099-S, Sale of Real Estate Property.  There is an exception to this however. If the seller of the real estate signs a certification, the attorney does not need to issue the 1099.  The certification must contain the following:

* The seller owned and used the residence as their primary residence for periods totaling 2 year The IRS only receives the 1099-S documenting the gross proceeds, they don’t know what the cost basis iss or more during the 5 year period ending on the date of sale of the home.

* The seller has not sold another primary residence during the 2 year period ending on the date of sale of the home.

* No portion of the residence has been used for business or rental purposes after May 6, 1997.

* One of the following is true:

  • The sale is less than $250,000- OR
  • The seller is married, the sale is less than $500,000 or less and the gain is less than $250,000 – OR
  • The seller is married, the sale is less than $500,000 and the seller will file a joint return for the year of sale and the sellers spouse meets the 2 out of 5 year residency requirements and has not sold a primary residence during the 2 year period ending on the date of sale.

Taxpayer Reporting Requirements

 

Taxpayers that receive a 1099-S from the sale of their home must report this sale.  This is done on Schedule D, Capital Gains and Losses.  The 1099-S will document the sales price.  Taxpayers need to calculate their cost basis for their home.  This is generally the purchase price plus improvements, which would include items like a new roof, furnace or deck.

Married couples filing a joint return can exclude up to $500,000 of capital gains from their income.  Single filers can exclude $250,000 of gain. The gain is the sale price minus the cost basis.

Losses from the sale of your primary residence are not income tax deductible.

 

 Our New Client

 

The taxpayer mentioned above sold their home for over $600,000.  The attorney who handled the closing was required to file a 1099-S.  The taxpayer failed to record this sale on their income tax return. The IRS only receives the 1099-S documenting the gross proceeds, they don’t know what the cost basis is. The taxpayer failed to declare this sale and the IRS picked up on it.  The cost basis is very close to the selling price so it won’t be taxable and hopefully this story should have a happy ending.

 

ACTION ITEM: Taxpayers need to understand the reporting responsibilities and tax consequences of selling their home.

Thomas F. Scanlon, CPA, CFP®

Photo From Creative Commons

About the author:

Tom Scanlon, CPA, CFP®

Tom Scanlon has over twenty-five years experience in public accounting with an extensive background in the areas of financial, tax and estate planning.
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