You may not have to pay taxes on the profits (up to $250,000 or $500,000 if MFJ) if you meet certain conditions.
The three tests that you must meet are:
- Ownership - You must have owned your home for at least two of the five years before you sell your home.
- Use - You must have used your home as a personal residence for at least two of the five years prior to the date that you sell your home.
- Timing - You can't exclude the gain of another principal residence that you sold within two years of the current sale.
If you meet these requirements, you don't have to pay taxes on the first $250,000 (500,000 if you are married and file a joint tax return). If your profit is more than $250,000 ($500,000 if MFJ) then, the excess is reported on Schedule D as a capital gain.
For additional information, refer to the TurboTax article Tax Aspects of Home Ownership: Selling a Home and the IRS article Topic no. 701, Sale of your home.
If the house isn't your main home, you will pay capital gains tax on the profit. You will subtract the adjusted basis from the selling price to get your profit. You can calculate the adjusted cost basis by adding capital improvements made to the home plus the selling expenses to the basis.
Refer to the TurboTax article Cost Basis: Tracking Your Tax Basis and Where do I enter the sale of a second home, an inherited home, or land on my 2024 taxes? for more information.
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