If you receive an informational income statement document, such as Form 1099-S, Income from Real Estate Transactions, you must declare the sale of the home even if the profit from the sale is excludable. In addition, you must declare the sale of the home if you cannot exclude all your capital gain from income. Use Schedule D (Form 1040), Capital Gains and Losses and Form 8949, Sales and Other Dispositions of Capital Assets when necessary to declare the sale of the home. See Publication 523 for the rules on how to declare your sale on your income tax return.
Regardless of moral and ethical limits, many taxpayers are looking for ways to avoid these marginal costs. This is quite common in real estate transactions, since both buyers and sellers like to be guided by the quote “they don't see the bad, they don't hear the bad, don't say anything bad”. That means that they don't mind going outside the legal limits if that allows them to save taxes. One way to do that would be to simply avoid reporting the sale of the property.
After all, the IRS won't know about a transaction unless their attention is specifically directed at it, right? Not exactly. In fact, if the IRS doesn't yet know when you're buying or selling a home, it's only a matter of time before it finds out. While the IRS can't track the sale of your property in cash or the contents of the safe deposit box, car and loan repayment transactions will represent a glaring red flag. While most earnings from home sales are now tax-free, the IRS may impose taxes on profits when you sell.
Buying your first home is a big step, but the tax deductions available to you as a homeowner can lower your tax bill. Sellers who have used the home as their primary residence for less than two years will need to report capital gains and may have to pay some taxes on those gains. McDermut says that in his area, where there is a fairly wealthy demographic group, they sell in cash on a regular basis. Cash transactions tend to be quite simplified, McDermut explains, and closures are usually done in as little as 10 days, as opposed to the usual 30 days needed when using a mortgage lender.
There is a partial exclusion if you sell your home early due to a change in employment, a change in health, or because of other unforeseen circumstances, such as a divorce or multiple births due to a single pregnancy. Even if you choose not to, the disclosure of other people involved would be enough for the IRS to locate enough information to initiate an audit or open a case against you. As an additional incentive for homebuyers, the normal 10% penalty for withdrawing traditional IRA funds before their 59½ year old does not apply to first-time homebuyers who enter their IRAs to pay the down payment. We comply with IRS regulations and allow you to exclude, up to a certain amount, the profits you make from the sale of your home.
If you sell a property for a huge profit, it's very likely that the Internal Revenue Service, or the IRS, will want its share of the capital gains.