You report the sale of your main home as a regular home sale. Related party rules are put in place to eliminate the ability to sustain and report a loss on a sale, that would affect and reduce other income categories.
There will not be ordinary gain, rather capital gain and if you meet the qualifications you will be allowed to exclude the gain.
Qualifying for the Exclusion
In general, to qualify for the Section 121 exclusion, you must meet both the ownership test and the use test. You're eligible for the exclusion if:
- you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale. You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale.
Generally, you're not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home. Refer to Publication 523 for the complete eligibility requirements, limitations on the exclusion amount, and exceptions to the two-year rule.
If you are saying you are retaining a 'remainder interest' in the property then other rules may apply.
Remainder interest. (usually involves a gift and not a sale)
The sale of a remainder interest in your home is eligible for the exclusion only if both of the following conditions are met.
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The buyer isn’t a “related party.” A related party can be a related person or a related corporation, trust, partnership, or other entity that you control or in which you have an interest.
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You haven't previously sold an interest in the home for which you took the exclusion.
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