As you know, you must report the sale of your home if:
- you did not own it at least 2 of the last 5 years
- you did not use the home as your personal residence for at least 2 of the last 5 years (these don't have to be the same 2 years as the first bullet point)
- you received a 1099-S
- you took depreciation for an office in home or other use which you have to recapture (or other amount that cannot be covered by the home sale exclusion)
- you used the exclusion on home sale within the last two years
If you don't fall into any of those categories, I would respond to the IRS in a polite and timely manner (always important) pointing out the requirements found in Tax Topic 701 Sale of Home (https://www.irs.gov/taxtopics/tc701.html) and note the following (if they are all true):
- you owned the house from XXX to XXX, satisfying the ownership rule
- you used the house as your main residence from XXX to XXX, satisfying the residence rule
- you did not receive a 1099-S nor did you expect to
- you did not take any depreciation in the house or have other gain that could not be excluded
- you have not taken the home sale exclusion in the last X years (or ever)
- you did not report the sale because you could not see why you were required to
It's up to you, but I would consider doing this because the IRS might be mistaken on the reasons why they sent you this notice. Ask them to tell you why they need the Schedule D. They may come back with the reason (good or bad), which you will want to know and want to correct, or they may realize that you met all the requirements not to report the sale and tell you "nevermind".
If, however, they want the Schedule D anyway, then give them exactly what they ask for. But, at least, you have communicated with them in a timely manner, which is critical to good relations with the IRS.
