Capital gains exemption

[user17524181159]

We are getting ready to sell our house, where we have lived for the past 18 years.  It is our primary and only residence.  We don't rent any of the property to anyone else.  We have also not claimed any capital gains exemptions in the past.

How do I take advantage of the Capital Gains exemption for a home sale?  Is this something that will be done at closing for the sale of my current residence and/or at the purchase of my new residence?  Or is the exemption only reclaimed at the end of the year when I file my income taxes?

[xmasbaby0 · Accepted solution]

SALE OF HOUSE

If your gain was more than  $250,000 filing Single, or more than $500,000 filing Married Filing Jointly the sale must be reported on your tax return.  Whether you re-invested the gain in to another house is irrelevant.  If you  have a Form 1099-S go to Federal>Wages and Income>Less Common Income>Sale of Home (gain or loss)

If you owned and lived in the home as your primary residence for at least 2 of the last 5 years on the date of the sale, you do not have to report the home sale if the gain is less than $250K filing Single, or less than $500K filing Married Filing Jointly (and you both owned and lived in the home for at least 2 years).

• If you are using online TT, you need Premium software to report the 1099-S

[DoninGA]

The capital gain exclusion on the sale of your personal residence is reported on your tax return for the year of the sale, if required.

If you sold your primary personal residence and you lived in and owned the home for at least two years in the five year period on the date of sale, you do not have to report the sale if your gains are less then the exclusion amounts of $250,000 if filing Single or $500,000 if filing Married Filing Jointly (and both lived in the home for two years).

Gain or Loss = Sales Price minus Sales Expenses minus Adjusted Basis (Purchase Price plus the cost of improvements prior to the sale)

Selling cost can include escrow fees, legal fees, real estate agent commissions, advertising costs, and even home staging fees.

If you had a gain greater then the exclusion amounts then you would have to report the sale. Also, if you received a Form 1099-S for the sale either with a gain or a loss, the sale has to be reported.

[rjs]

If you qualify to exclude the entire gain (the gain is less than $250,000/$500,000) you should be able to sign a form at closing so that the closing agent will not issue a Form 1099-S. Then you will not have to report the sale on your tax return.

It's an exclusion, not an exemption. See IRS Publication 523, Selling Your Home, for all the details of the exclusion.

[NCperson]

The closing agent is not required to provide a 1099-S if the SALES PRICE is less than $250,000 / $500,000.  They may still opt to do so.  If they issue a 1099-S, you must report that on your tax return.  

@rjs  - the closing agent would not know what the capital gains would be; they would only know what the sales price is.   The form you suggest is only available if the selling price is less than $250,000 / $500,000. See the "exception" paragraph in the link below. 

https://www.irs.gov/pub/irs-pdf/i1099s.pdf

[Opus 17]

"How do I take advantage of the Capital Gains exemption for a home sale"

All income received in 2025 is reported on your 2025 tax return.  In Turbotax, you should report the sale of "your home" in the section for Sales of Assets and other property.  You will report your original cost, the cost of any improvements, and the selling price (which you can reduce by certain closing costs).  Turbotax will automatically apply the exclusion.  If your gain is less than the exclusion AND you did not receive a 1099-S at the closing, Turbotax will probably leave the entire sale off your return.  If your gain is more, it will be reported and you will be taxed on the taxable portion.  (But you should always report all the details in the program and let the program do the work for you.)

Tax penalties

If you are going to owe some capital gains tax, you need to make an estimated payment when you close.  Tax payments are supposed to be pay-as-you-go, and if you have a lump sum of income and don't make a payment, may be assessed a penalty for under-payment, even if you pay in full when you file your return.   You can make a payment at www.irs.gov/payments.

If your other income, plus the taxable part of your capital gain, is less than $600,000, your estimated payment should be 15%.  If your income is more than $600,000, your estimated payment should be 15% of the amount under $600,000 and 20% of the amount over $600,000.

For example, you bought the house 18 years ago for $300,000--it is worth today $1 million.  Your gain is $700,000, of which $500,000 is excluded.  So the taxable part of the gain is $200,000.  As long as your other income is less than $400,000, you should make an estimated payment of $30,000 after you receive the proceeds.  (Technically, if the closing is before August 31, the payment is due Sept 15, and if the closing is between Sept and December, the payment is due January 15.)

You will also need to select "calculate my penalty" from the page of Special Circumstances, even if it does not come up automatically, and use the "annualized income" method to calculate your penalty.  This form will show the IRS that even though your tax payments were not evenly spread out over the year, your income was also not evenly spread out, but your payments matched your income as it came in.