How Does the IRS Know if You Sold Your Home?

Selling a home can be a significant financial transaction, and it’s important to understand the tax implications involved. The Internal Revenue Service (IRS) has specific rules and regulations regarding the reporting and taxation of home sales, and it’s crucial to be aware of these requirements to ensure compliance and avoid any potential issues.

Reporting Home Sales to the IRS

When you sell your home, the closing attorney or real estate professional involved in the transaction is required to report the sale to the IRS using Form 1099-S, Proceeds from Real Estate Transactions. This form provides the IRS with information about the sale, including the gross proceeds, the date of the sale, and the property’s address. The IRS uses this information to track home sales and identify any potential tax liability.

Calculating Capital Gains or Losses

When you sell your home, you may have a capital gain or loss, which is the difference between the sale price and your adjusted basis in the property. Your adjusted basis includes the original purchase price of the home, as well as any improvements or renovations you’ve made over the years. If you have a capital gain, you may be subject to capital gains tax, which is a tax on the profit you made from the sale.

Excluding Capital Gains from Taxes

In certain situations, you may be able to exclude all or a portion of your capital gains from taxes. The IRS allows homeowners to exclude up to $250,000 of capital gains from their income if they meet certain requirements, such as having owned and lived in the home as their primary residence for at least two of the five years preceding the sale. Married couples filing jointly can exclude up to $500,000.

Reporting Excluded Gains

Even if you qualify to exclude your capital gains from taxes, you still need to report the sale on your tax return. You can do this by completing Form 8949, Sale and Other Dispositions of Capital Assets, and attaching it to your tax return. On Form 8949, you’ll report the sale price, your adjusted basis, and the amount of gain or loss.

Penalties for Not Reporting Home Sales

Failing to report the sale of your home to the IRS can result in penalties and interest charges. The IRS may also disallow any deductions or credits related to the sale, which could increase your tax liability.

Understanding how the IRS knows if you sold your home is essential for ensuring accurate tax reporting and avoiding any potential penalties. By being aware of the reporting requirements and the rules for excluding capital gains, you can navigate the home-selling process with confidence and minimize your tax liability.

Do I have to report sale of home to IRS?

FAQ

Does the IRS audit home sales?

Whenever others participate in a transaction, there is a good chance that they will report the dealing to the IRS. Even if you decide not to do so, the disclosure from other folks who are involved would be enough for the IRS to track down enough information to potentially engage in an audit or open a case against you.

Does the IRS know you bought a house?

Property Tax Records: Your local government keeps records of all real estate transactions and property taxes. Since the IRS has ways to access these records, they can easily find out about your cash purchase.

How does the IRS track real estate transactions?

The information is transferred onto magnetic media by the settlement agent who will make the required report to the I.R.S. The settlement agent is also required to keep a master copy of all transactions reported for a length of four years from the date of transaction. In general, information required by the I.R.S.

Do you always get a 1099 when you sell a house?

When you sell your home, federal tax law requires lenders or real estate agents to file a Form 1099-S, Proceeds from Real Estate Transactions, with the IRS and send you a copy if you do not meet IRS requirements for excluding the taxable gain from the sale on your income tax return.