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Transaction Planning- Sale of Home

Transaction Planning- Sale of Home

July 18, 2022

2022 Transaction Planning: Sale of Residence
The hot housing market may be cooling slightly, but there are still many buyers looking to make a move now due to rising interest rates. Some homeowners are concerned that selling their homes now may significantly impact their taxes next year. Old news but good news nonetheless is homeowners may qualify to exclude from their income all or part of any gain from the sale of their main home. 

Ownership and Use Tests
To claim the exclusion, you must meet the ownership and use tests. This means that during the 5 years ending on the date of the sale, you must have:

  • Owned the home for at least two years (the ownership test)
  • Lived in the home as your main home for at least two years (the use test)

Gains and Losses
If you have a gain from the sale of your main home, you may be able to exclude up to $250,000 of the gain from your income ($500,000 on a joint return in most cases). You cannot deduct a loss from the sale of a home.

Reporting the Sale
If you receive an informational income-reporting document such as Form 1099-S, Proceeds From Real Estate Transactions, you must report the home's sale even if the gain from the sale is excludable. Additionally, you must report the home's sale if you can't exclude all your capital gain from income.

More Than One Home
If you have more than one home, you can exclude the gain only from selling your main home. You must pay tax on the income from selling any other home. If you have two homes and live in both of them, your main home is the one you live in most of the time.

Example One. You own and live in a house in the city. You also own a beach house, which you use during summer. The house in the city is your main home; the beach house is not.

Example Two. You own a house, but you live in another house that you rent. The rented house is your main home.

Business Use or Rental of Home
You may be able to exclude your gain from selling a home that you have used for business or producing rental income. But you must meet the ownership and use tests.

Example. On February 1, 2014, Amy bought a house. She moved in on that date and lived in it until May 31, 2015, when she moved out of the house and put it up for rent. The house was rented from June 1, 2015, to March 31, 2017. Amy moved back into the house on April 1, 2017, and lived there until she sold it on January 31, 2019. During the 5-year period ending on the date of the sale (February 1, 2014 - January 31, 2019), Amy owned and lived in the house for more than 2 years, as shown in the table below.

Five Year Period

Used as a Home

Used as a Rental

2/1/14 – 5/31/15

16 months


6/1/15 – 3/31/17


22 months

4/1/17 – 1/31/19

22 months


Total time period

38 months

22 months

Amy can exclude gain up to $250,000. However, she cannot exclude the part of the gain equal to the depreciation she claimed for renting the house.

Suspension of the Five-Year Test Period
Suppose you or your spouse are on qualified official extended duty in the Uniformed Services, the Foreign Service, or the intelligence community. In that case, you may elect to suspend the five-year test period for up to 10 years. An individual is on qualified official extended duty if for more than 90 days or an indefinite period, the individual is:

  • At a duty station that's at least 50 miles from their main home, or
  • Residing under government orders in government housing.

Installment Sales
If you sold your home under a contract that provides for all or part of the selling price to be paid in a later year, you made an installment sale. You may report the sale under the installment method unless you elect out if you have an installment sale. Even if you use the installment method to defer some of the gain, the exclusion of gain remains available.

If you have any questions about the sale of your home, reach out to our team to walk through your options.