Selling a home can come with various tax considerations, you’re likely to have clients with questions about how their sale impacts their tax return. This article covers what tax professionals need to know about the tax implications of selling a house – including capital gains exclusions, potential deductions, and how to handle losses or exceptions. .
Do you pay taxes when you sell a house?
In most cases, homeowners do not have to pay taxes on profits from the sale of their home. Although capital gains from selling an asset are usually taxable, the sale of a house is one notable exception.
Capital gains from the sale of a house are not considered taxable if the gain is less than $250,000 (or $500,000 for married filing jointly) and if the homeowner lived in the house as their primary residence for at least two of the last five years before the sale.
Even if the gain from the sale is fully excluded, the transaction may still need to be reported to the IRS. If the seller receives a Form 1099-S, which reports the gross proceeds from the sale, they are required to report the sale on their tax return, even if no tax is owed. This form is typically issued by the closing agent, title company, or attorney involved in the transaction.
Exceptions to the capital gains home exclusion
If your client has already profited from the sale of another house within the previous two years and used the capital gains home sale exclusion, they are generally not allowed to use it again for the current sale.
A few other rare factors can affect their eligibility for the capital gains exclusion as well. If there’s any doubt, you can help your clients confirm whether or not they qualify using the IRS’s simple Eligibility Test. If they don’t pass the eligibility test, they may still qualify for a partial capital gains deduction if they moved for work-related reasons, health-related reasons, or due to unforeseeable events (such as the death of a spouse or the birth of multiples).
If you’re unsure of your clients’ exact standing, the worksheets in IRS Publication 523 can help you determine their capital gains exclusion limit, figure their gains or losses, and determine if they have any taxable gain.
Note: If a homeowner’s mortgage debt is forgiven or canceled, such as in a foreclosure or short sale, the forgiven amount is generally considered taxable income. However, under certain conditions, such as when the debt was tied to the taxpayer’s principal residence, they may qualify to exclude the forgiven amount from income under the Mortgage Forgiveness Debt Relief provisions.
How does selling a house for a loss affect taxes?
Unfortunately, the IRS does not offer any tax breaks when a taxpayer sells their primary residence at a loss. If the home was a rental or investment property, however, they can usually deduct it as a passive activity loss.
Income from rental properties is considered passive income, meaning the taxpayer does not materially participate in the activity. If the rental generates a loss, it is reported on Form 8582, and the loss is generally carried forward to offset future passive income or gains from the sale of the passive activity.
What are other tax benefits of owning a home?
Owning a home comes with a few tax deductions as well, but most taxpayers won’t see the benefits unless they itemize deductions. If your client owns a home, consider the following itemized deductions to determine which option – itemizing or taking the standard deduction – is most beneficial.
Mortgage interest tax deduction
The mortgage interest deduction was eliminated in 2021 after the deduction expired. It was reinstated in July 2025 under the One Big Beautiful Bill. The permanent tax code now permits your client to deduct mortgage insurance premiums when taking the mortgage interest deduction. Mortgage insurance premiums, typically paid by borrowers with less than 20% down, can now be deducted as part of mortgage interest beginning in 2026.
This deduction is only available to taxpayers who itemize deductions on Schedule A if they meet the following eligibility requirements:
- Type of home: To qualify, a property must be either your main or second home and contain sleeping, cooking, and toilet facilities. This can include a variety of property types such as house, condominium, cooperative, mobile home, house trailer, or houseboat. Advise clients that only one property can be considered a main home at a time. This would typically be considered the property where they spend the most time during the year.
- When the debt was incurred: If the debt was incurred before December 16, 2017, your client can deduct interest on up to $1 million ($500,000 if married filing separately) of mortgage debt. If the debt was incurred after December 15, 2017, this limit is reduced to up to $750,000 ($375,000 if married filing separately) of mortgage debt.
Property tax deduction
They can also deduct property taxes paid on their home, but only up to a certain amount. The Tax Cuts and Jobs Act reduced this deduction to $5,000 total in state and local taxes ($10,000 for married filing jointly). So, if a client who is filing jointly paid $6,000 in property taxes and $5,000 in other state and local taxes, they’ll still only be able to deduct $10,000.
Unfortunately, both the mortgage interest tax deduction and the property tax deduction only benefit taxpayers who itemize deductions. Since the Tax Cuts and Jobs Act increased the standard deduction, only around 10% of taxpayers itemize their deductions, meaning most homeowners can’t claim these deductions.
Ministers and military housing allowance
Receiving military tax benefits like a housing allowance, which is typically excluded from taxable income, does not impact eligibility to claim itemized deductions for both mortgage interest and property taxes on a qualified home. This applies to taxes for ministers as well. Receiving a housing allowance does not disqualify them from claiming home-related tax benefits like the mortgage interest and property tax deductions.
Want to increase your tax knowledge and grow your client base before tax season begins? Be sure to check out our library of resources on growing your tax business and our professional tax training videos.
