Selling a home can feel like crossing a finish line. Then someone mentions “capital gains,” a 1099-S shows up, and suddenly you’re wondering if your profit is about to get sliced up by taxes.
Here’s the good news: many homeowners don’t owe federal income tax on the sale because of a valuable exclusion for a primary residence. The not-so-fun news: the rules have a few sharp edges, especially if you rented the home out, used part of it for business, or haven’t lived there long.
Let’s walk through how to navigate the tax complexities of selling your home.
Step 1: Start with the big question - will your gain be taxable?
When you sell a home for more than your “basis,” you typically have a capital gain. But if the home was your main home, you may be able to exclude:
- Up to $250,000 of gain (most single filers)
- Up to $500,000 of gain (many married couples filing jointly)
That’s the well-known home sale exclusion under Internal Revenue Code Section 121.
The “2 out of 5 years” rule (the part that matters most)
In most cases, you qualify if you meet both tests:
- Ownership test: You owned the home for at least 2 years during the 5-year period ending on the sale date
- Use test: You lived in it as your main home for at least 2 years during that same 5-year window
You also generally can’t claim this exclusion if you excluded gain from another home sale in the prior 2 years.
Real-life example:
If you lived there for 2 years, moved out and rented it for 2 years, then sold it within 5 years of moving out, you might still meet the use/ownership tests. But the rental period can introduce other tax issues (we’ll cover that).
Step 2: Understand the math - sale price vs. gain vs. taxable gain
A lot of people assume:
Gain = Selling price − What I paid
Close… but not quite.
Your gain is generally:
Gain = Amount realized − Adjusted basis
- Amount realized is usually the selling price minus selling costs (like agent commissions and certain closing costs).
- Adjusted basis is what you paid plus certain improvements minus certain deductions/credits (like depreciation, if it was ever a rental). Publication 523 lays out the worksheets and definitions in detail.
Why basis matters so much
If you remodeled a kitchen, added a room, replaced the roof, or did major upgrades, those improvements may increase your basis and reduce your gain. On the other hand, repairs and maintenance usually don’t increase basis.
Practical takeaway: If you’re not sure whether something counts as an improvement or repair, don’t guess. Put it in front of a tax pro and let them classify it correctly (this alone can change your tax bill).
Step 3: Figure out whether you even need to report the sale
This is one of the biggest points of confusion.
In some situations, if you qualify for the exclusion and exclude all the gain, you may not need to report the sale on your return unless you received certain tax forms (like Form 1099-S).
Watch for Form 1099-S
If a Form 1099-S was issued for the sale, you’ll usually want to make sure the sale is properly handled on the return so the IRS sees it accounted for—even if it’s fully excludable. The IRS specifically notes that if you’re excluding all the gain, you generally don’t report the sale unless a 1099-S was issued.
Bottom line: Don’t decide whether to report based on vibes. Decide based on the forms you received and whether any part of your gain is taxable.
Step 4: Know the situations that change the “simple” home sale exclusion
Here are the most common reasons a home sale gets complicated.
1) You sold the home but didn’t live there long enough
If you don’t meet the 2-out-of-5-year tests, you might still qualify for a partial exclusion in certain circumstances (Publication 523 covers this).
Common triggers include things like a job change, health-related move, or other allowed circumstances. If your timeline is tight, this is exactly where tax prep pays off. The difference between “no exclusion” and “partial exclusion” can be massive.
2) You rented the home out (even for a while)
Renting changes the story in two big ways:
- Depreciation: If you claimed depreciation deductions for rental use, part of your gain generally can’t be excluded and may be taxed under special rules.
- Reporting complexity: You may need additional forms and proper categorization to separate excludable home gain from taxable pieces.
Even if you lived there for 2 years and qualify for the main exclusion, rental history can create a taxable portion you don’t want to accidentally ignore.
3) You used part of the home for business (home office, etc.)
If you claimed depreciation for business use, similar “this part isn’t excludable” rules can come into play. Publication 523 discusses these interactions and examples.
This is one of those areas where doing your taxes yourself can feel fine… right up until you realize you’ve got depreciation recapture or mixed-use calculations.
4) You owned the home with someone you aren’t married to
Unmarried co-owners may each qualify for their own exclusion if they each meet the requirements (often discussed in expert guidance and Q&A scenarios), but the exact reporting and allocation must be done correctly. (This is also a situation where documentation and “who paid what” matters.)
5) You’re selling after a divorce or death
Life events can change filing status, ownership, and how the home is treated for tax purposes. While the broad home-sale exclusion rules still revolve around ownership/use and timing, the details can get complicated fast - especially if title changed hands or the home was sold by an estate.
If your sale is connected to a major life event, that’s a strong signal to use a tax pro.
Step 5: If any gain is taxable, understand how it’s reported
When a home sale is reportable and taxable, it typically flows through the capital gains system.
You may see these forms involved:
- Form 8949 (Sales and Other Dispositions of Capital Assets)
- Schedule D (Form 1040) (Capital Gains and Losses)
The IRS instructions for Schedule D explain when Form 8949 is used and how totals are carried to Schedule D.
What this means for you: even if your gain is straightforward, the filing mechanics still have to match what the IRS expects - especially if a 1099-S exists.
Step 6: Do a “paperwork sweep” before you file
If you want this to go smoothly (and avoid overpaying), gather these items early.
Core documents
- Closing disclosure/settlement statement from when you bought the home
- Closing disclosure/settlement statement from when you sold the home
- Form 1099-S (if received)
- Records of selling costs (agent commission, certain fees)
Basis and improvement records
- Receipts/invoices for major improvements (materials + labor)
- Permits (if applicable)
- Contractor agreements
- Before/after documentation (photos can help support that work was an improvement)
Rental/business use records (if this ever applied)
- Depreciation schedules or prior-year returns showing depreciation claimed
- Dates the home was rented
- Dates you lived there vs. rented it
- Any home office depreciation claims
Pro tip: If you can’t find every receipt, don’t panic. A tax preparer can still help you reconstruct a reasonable history, figure out what documentation is “must-have,” and identify what’s still worth tracking down.
Step 7: Common mistakes that cost people money (or trigger IRS letters)
Here are the most frequent tripwires:
Forgetting to include improvements in basis
If you don’t include legitimate improvements, you can accidentally inflate your gain and overpay tax.
Assuming “I lived there once” automatically qualifies you
The rule is specific: 2 years of ownership and 2 years of use in the 5-year window.
Ignoring Form 1099-S
If the IRS receives a 1099-S and you don’t account for the sale appropriately, that mismatch can create unnecessary headaches. The IRS notes the general reporting expectation tied to whether a 1099-S was issued.
Missing the depreciation “can’t exclude this part” rule
This one hits former rentals and home-office users. Publication 523 and IRS guidance highlight that certain gain tied to depreciation adjustments isn’t treated the same as the rest of your home gain.
Assuming a loss on the sale is deductible
If you sell your main home at a loss, that loss is generally not deductible.
A quick “self-check” to estimate your situation
Use this to get your bearings:
- Did you live in the home as your main home for 2 years in the last 5?
- Did you own it for 2 years in the last 5?
- Did you claim the exclusion for another home sale in the last 2 years?
- Was it ever a rental or partly business-use (depreciation concerns)?
- Did you receive a 1099-S?
If you answered “yes” to #4 or #5, it’s usually worth having a pro handle it.
Where AMG Finance tax prep services fit in (and why it matters)
Home sales are one of those tax moments where a small misunderstanding can cause:
- You pay tax you didn’t need to pay (by missing basis adjustments or mishandling the exclusion)
- You underreport and end up dealing with IRS notices
- You file the right answer on the wrong form (and it still triggers questions)
A tax professional can help you:
- Confirm whether you qualify for the $250k/$500k exclusion and whether any partial exclusion applies
- Calculate your adjusted basis correctly using the IRS framework (including what counts as an improvement)
- Handle rental/business-use situations where depreciation creates taxable portions
- Make sure reporting matches IRS expectations when a 1099-S is involved
- Prepare any needed forms like Form 8949 and Schedule D cleanly and consistently
The simplest way to think about it
If your home sale is truly simple, a pro helps you keep it simple.
If your home sale is not simple (rental history, home office, short timeline, divorce, co-ownership), a pro helps you keep it correct.
That’s where AMG Finance’s tax prep services can be a real stress-saver: you bring the paperwork, we handle the rules, and you walk away knowing your return is filed accurately - with the sale reported (or excluded) the way the IRS expects.
