Tax Talk: What you need to know when selling your home in a lucrative housing market

Ken Milani
Ken Milani
Rick Klee
Rick Klee

I have owned my current home (and the 40 acres of adjacent land) for over 30 years. My plan is to sell sometime in 2022 or 2023. Do I need to buy a more expensive home to keep the gain from being taxable?

— JI, email

With the housing market "heating up" faster than our weather, it is an attractive option to explore selling your primary residence (including land) at a significant profit. However, the "rollover" rule is no longer in play. That provision has been replaced with a LARGE exclusion of gain on the sale of a personal residence. Note: the gain on sale exclusion for a home can include land if the land was not used for income-producing activities such as farming, ranching, grazing, etc. The maximum exclusion of gain figures are $250,000 (for Single, Head of Household or Married Filing Separately) and $500,000 (Married Filing Jointly). The IRS Eligibility Test must be passed to take the full exclusion. Fail the test and you may qualify for a partial exclusion of gain. Publication 523, Selling Your Home, can be accessed at our favorite website at this time of the year (

You can exclude ALL of the gain from a home sale if you meet the ROLE (i.e., Residence, Ownership, Last 2 years, Exclusion) requirements. Namely: Residence is your principal residence; Ownership and living in the home meets the "at least 2 of the last 5 years" criteria; Last two years – prior to the date you sold the home – do not include an exclusion for a home-sale profit; Exclusion of gain is less than $250,000 (or $500,000 for married filing jointly).

A PARTIAL exclusion of gain is allowed if the main reason for your home sale involves a change in workplace location, a health issue or an unforeseeable event (e.g., house destroyed by a natural disaster, death of a spouse, significant change in one's employment status). A worksheet on page 7 of Publication 523 (cited above) provides a helpful template for this computation.

Determining the amount of gain starts with the AMOUNT REALIZED — selling price reduced by selling expenses such as sales commission paid to a real estate agent, advertising costs, legal fees, mortgage points or other loan charges paid on behalf of the buyer and other charges tied to the home-sale activity. Next subtract the ADJUSTED BASIS of the home, which calls for "number crunching" and includes: original price paid for the property + closing costs and settlement fees + qualifying improvements made to the property such as additions to the home, new HVAC system, grounds enhancements, internal renovations and many other items. Do NOT include personal property (e.g., furniture, appliances) even if it is part of the sale. Page 9 of Publication 523 provides a very helpful checklist.

If you receive a Form 1099-S, you must report the sale on Form 8949 unless the home sale results in a loss. If (most likely) there is a gain, see the instructions to Form 8949 and Schedule D (Form 1040) for additional details.

"Cutting to the chase scene" – the sale of your home has a ton of twists and turns creating potential tax savings. Our advice – if there is any business purpose use (e.g., home office, rental), treatment as a vacation property and/or a divorced spouse is involved – contact a tax professional because the rules are a lot more complicated in such situations.

Ken & Klee's income tax bulletin board. We feel the obvious must be explicitly stated . . . a loss on the sale of a personal residence is not allowed on an income tax return . . . the IRS backlog of 2020 refunds is slowly being diminished.

Rick Klee served as the tax director at the University of Notre Dame from 1998 through August 2019. A retired CPA, Klee is a graduate of Notre Dame. You can contact him at

Ken Milani is a professor of accountancy at Notre Dame where he served as the faculty coordinator of the Notre Dame Tax Assistance Program. Contact him at E-mail questions to either.

This article originally appeared on South Bend Tribune: Tax Talk: Selling your home in a lucrative housing market