Don't File Until You Read This Guide to Home Sale Taxes

Selling your home is one of the most significant financial events of your life — and for many Austin homeowners, it's also one of the most confusing come tax season. Between closing disclosures, 1099-S forms, and terms like "adjusted basis" and "capital gain exclusion," it's easy to feel overwhelmed before you've even opened TurboTax.

The good news? The IRS actually wrote a plain-language guide for this exact situation. It's called Publication 523: Selling Your Home, and it covers nearly every scenario a homeowner might face. Here's what you need to know — and how it applies to the Austin market.

Start With the Big Win: The $250,000 / $500,000 Exclusion

Let's begin with the most important rule. If you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income — or up to $500,000 if you file a joint return with your spouse.

For most Austin homeowners who bought before 2020 and have seen significant appreciation, this exclusion alone may eliminate any federal tax liability on the sale entirely.

To qualify, you must meet both an ownership test and a use test — meaning you must have owned the home and lived in it as your main home for at least two years during the five-year period ending on the date of sale. The IRS Topic 701 page has a concise summary of these requirements.

• Homeowners who can exclude all of the gain do not need to report the sale — unless a Form 1099-S was issued
• If your home sells for less than you paid, that loss is not deductible
• You can only exclude gain on your main home — gains on second homes or investment properties are taxable

Understanding Your Gain: It's Not Just the Sale Price

Here's where many sellers leave money on the table. Your taxable gain isn't simply what you sold the home for — it's calculated as:

The selling price is the total amount you received, including money, notes, mortgages, or other property. You then subtract any selling expenses — agent commissions, title fees, transfer taxes, and similar closing costs.

Your adjusted basis is where things get interesting. It generally starts with what you paid for the home, but it can be increased by capital improvements made during ownership — a kitchen remodel, an addition, a new roof. It can also be reduced if you've claimed energy-efficiency credits, a casualty loss deduction, or depreciation from rental or home office use. Publication 523 includes step-by-step worksheets to walk you through every calculation.

Most sellers focus on the sale price — but it's the adjusted basis and selling expenses that actually determine how much gain you'll owe taxes on. Getting those numbers right can make a significant difference.

What About the 1099-S Form?

When a home sale closes, the title company typically issues a Form 1099-S reporting the gross proceeds. If you receive one, you must report the sale on your tax return — even if the gain is fully excludable under the $250K/$500K rules.

The 1099-S only captures the proceeds. It does not include your cost basis or selling expenses. You'll need to pull those figures from your closing disclosure (the ALTA/CD) and calculate them yourself, or work with your CPA. The proper form for reporting the transaction is Form 8949, with totals flowing to Schedule D on your Form 1040.

Co-Ownership: What If Two People Are on Title?

This question comes up frequently among unmarried co-buyers, partners, or family members who purchased together. The rule is straightforward: each owner reports their proportionate share of the proceeds, cost basis, and selling expenses — and each may claim their own $250,000 exclusion, provided they individually meet the ownership and use tests.

So if two people split a home sale 50/50, each reports 50% of the sale price, 50% of the basis, and 50% of closing costs — keeping the gain calculation consistent for each filer.

When It Gets More Complicated

Publication 523 dedicates significant space to scenarios outside the standard sale. Three worth knowing about:

What to Gather Before Filing

Where to Learn More

The IRS offers several resources that are genuinely useful for homeowners navigating a sale. Here are the ones worth bookmarking:

• IRS Publication 523: Selling Your Home — the definitive guide, updated each tax year, with worksheets for every calculation
• IRS Topic 701: Sale of Your Home — a concise summary of the exclusion rules and key requirements
• IRS Form 8949 — where you report the details of the sale transaction
• IRS Schedule D — where capital gains and losses are summarized on your 1040
• IRS Tax Reminders for Home Sellers — a helpful overview of the most commonly missed rules