IRS publication 523 Selling Your Home of the Internal Revenue Service (IRS) of the U.S. explains various tax rules applicable to you when you sell your home, especially your main home, the one in which you have lived most of your life. If you have sold this home in 2012, you would be able to avail a tax break and avoid taxes on capital gains after the sale of this home. You are eligible to exclude any gain on such sale up to $250,000 from income if you file tax return as an individual. If you file a joint return, the limit is $500,000.
How Much Can You Exclude on Sale of Your Home?
If you are in a position to avoid paying income tax on the proceeds of your home sale, you need not even report the sale of the main house on your yearly tax return. However, if your profit from selling your main home is above the dollar amount that you could exclude, that amount is taxable. You should report that amount on form 8949 and also in Schedule D of your form 1040. You would also be required to submit form 4797, which relates to sale of business property. If you have incurred any loss on this sale, you would not be able to deduct the loss on your return but you should report this loss to the IRS.
Does Your Home Sale Qualify?
If you wish to avoid payment of capital gains after you have sold your main home, you should have owned the property and lived in it for a minimum period of two years within a period of five years prior to the sale date of the home. This two-year period of ownership and residence need not be continuous but should have occurred within the five-year period prior to the sale of the home. The IRS considers several other factors also to decide whether the home that you sold is your main home or not. You could avoid taxes on capital gains if certain exceptions to your ownership and residency exist. These exceptions are
If individuals with any disability have lived in the main home for a minimum period of one year and have become disabled physically or mentally, the period that such persons spend in licensed facilities for disabled persons would add up to the time that these persons have lived in the main home. However, this should still meet the minimum two year period out of the five year period to avoid taxes on capital gains.
If the main home has been condemned or destroyed, you could avoid taxes on capital gains when you sell your replacement home, if your ownership and residency of both homes meet the exclusion of two out of five year condition.
Any member of Foreign Service and uniformed services, employees of intelligence community, and volunteers or employees of Peace Corps could avoid taxes on capital gains by suspending the time that they were on extended duty to meet the two year period, even if they did not live in the house continuously for two years.
You should study the IRS publication 523 thoroughly to understand the various exception factors. However, it is advisable to consult a tax expert familiar with IRS tax procedures and provisions of IRS 523 on this issue to avoid later penalties by the IRS.