If you have just sold your home or are thinking about selling your home, it is beneficial to understand federal and state tax laws regarding the sale of a home. You may or may not owe taxes; this will be contingent on the circumstances surrounding the purchase and sale of the property. The best way to learn about these tax implications is to visit the Internal Revenue Service (IRS) Web site at www.irs.gov. Please note that since the tax laws are continually changing, it is advisable to consult a professional tax preparer or the IRS’s Web site to keep abreast of recent changes.

The most pertinent and comprehensive IRS publication on selling property is Publication 523 - Selling Your Home. Read this to help you determine if you have a “gain” or a “loss” on the transaction, how to report the sale on your tax forms, and how to determine the “basis of your home.”

The basis of your home is a number that is calculated by the cost of the home when purchased and its fair market value. If you got the home as a gift, there will be other factors to consider when figuring out the basis. Once you know the basis of your home, you will then be able to figure out your home’s “adjusted basis.” The adjusted basis is determined by incorporating the adjustments (increases or decreases) to your home while you owned it. This final number will indicate if your home sold with a gain or a loss and will ultimately determine if taxes are due.

There are many guidelines and variables involved when it comes to determining the tax implications of selling property. When selling your home you may be using professionals like a real estate agent and a lawyer. However, consulting with an accounting professional who is knowledgeable in real estate tax law is prudent. There are penalties for not paying tax  on the sale of real estate in a timely fashion, so make sure you have a clear understanding of your federal tax responsibilities.

In addition, each state has its own tax laws regarding the sale of property. If you are working with an accountant and lawyer, use ones that are familiar with the state laws where you sold the property.

Additional Resources

--    IRS Topic 701 - Sale of Your Home

--    Learn about Installment Sales from IRS Topic 705

--    Gains will be reported on IRS Form 1040, Schedule D (PDF)

--    IRS Sale of Residence - Real Estate Tax Tips

--    IRS All Types of Real Estate - Tax Tips Index