IRS Publication 523: Selling the House You Live In

If you sell your main home, you have to consider the IRS and your federal income taxes when tax time rolls around.  Now, just to be clear, with IRS Publication 523 we are talking strictly your main home that you live in most of the time.  This is not for selling a rental property or a vacation home.  You will have to pay income tax if you made over a certain amount.  If you lost money, you’ll have to report that to the IRS.  So, first we have to determine whether you made or lost money.  Here’s how.

How to Figure Out How Much Money You Gained by Selling Your Home

Start with the selling price.  If you got extra money in the sale of your home for things like furniture & appliances or other personal property, this doesn’t count.  Some people get an IRS form 1099-S, Proceeds From Real Estate Transactions when they sell their home.  This will show the amount you received.

Now you have to subtract selling expenses you had.  The commissions, advertising fees or anything else gets removed from your selling price.

Determining Cost Basis of Your Home

Now, you need to determine the basis in your home.  This is what you paid, plus adjustments to basis which would be improvements you made.  Also, add in any settlement fees you had paid when you bought the house: title search fees, inspector fees, survey, transfer stamp, all that miscellaneous crap you have to pay when you buy a home.

What if you inherited your home, and now you’re selling it?  How do you figure basis?  Use fair market value, which is determined by an appraisal. Your basis would be the fair market value on the day of the transfer of the house to you.  If your uncle left you a house in1990 and it’s been your main home for at least 2 years.  The fair market value in 1990 is your cost basis.  Take your selling price in 2013 or whenever, and subtract the 1990 FMV for your gain.

You Don’t Necessarily Have to Pay the IRS

If your gain is less than $250,000 then you won’t have to pay any income taxes to the IRS.  This is assuming you owned the home for at least 2 years before selling it and lived in it for at least 2 of the 5 years leading up to the sale.  If you don’t meet these requirements then the property isn’t your main home and Pub 523 is not relevant to you.