How Does The IRS Know If You Sold Your Home?

How does the IRS know if you sold your home

Selling your home is a huge deal, not only to you, but also to the taxman. After selling your home for a nice profit, you may be tempted to keep things under wraps from the IRS. If it weren’t a requirement, why would anyone want to share the proceeds of selling their home with the state? 

Be that as it may, in the United States you have a legal responsibility to report all of the capital gains you get from selling your property. Which means reporting any profits realized from selling your home for more than you bought it for. Failure to do so is considered a criminal offense. 

Given how elaborate this tax governing agency is, how does the IRS know if you sold your home? 

The tax body has an intricate system in place to sniff out unreported capital gains, using a network of real estate settlement agents, brokers, and lenders to determine unpaid taxes due from the sale of your home.

So, who is eligible to pay taxes on home sales, and how does the process work?

Who Should Pay Tax After Selling A Home?

Not everyone needs to pay tax after selling their home. However, the moment you sell your house for more than the amount you bought it for, you’re on the IRS’ radar and are liable to pay taxes on any capital gains you’ve made. In other words, you’ll need to pay tax on the profit realized from selling your home.

With that said, there’s a loophole that can exempt you from paying tax after selling your home, known as the primary residence exclusion clause. To qualify for this exclusion, you will need to have lived on the property for at least two years. And in those two years, you shouldn’t have claimed an exclusion on another home.  

Under this clause, you’re allowed to exclude as much as $500,000 from taxation if you are a couple and file your tax returns jointly. In the case of a single filer, you can exclude as much as $250,000. 

In some cases, the IRS may also exempt you from paying tax if you sold the house because of unforeseen personal emergencies or poor health. Exceptions can also be made if you’ve made significant home improvements since you bought it, as long as you have a detailed paper trail to prove it. 

How Do You Report Capital Gains?

As mentioned, it’s your duty as a U.S. law-abiding citizen to report any capital gains you make from the sale of your property. The IRS works hand-in-hand with real estate settlement agents, financial brokers, and lenders to ensure you do your part. 

After concluding a home sale, you will be sent a 1099-S form. This form will provide financial details of the profit you made from the sale of your home. After completing this form, you can include it with your other returns when filing your taxes. 

The real estate settlement agents or brokers involved in the selling of your property are already aware of this information. This means that should you decide not to report your capital gains, the documentation that comes with the sale of a property can lead to the IRS getting on your tail for potential tax evasion. 

What Are The Consequences Of Not Reporting Capital Gains?

The IRS takes tax evasion very seriously and the last thing you want is for them to sanction you. Should you choose not to report your capital gains, you run the risk of needing to pay fines when you’re caught, on top of the cost of your initial capital gains tax. In some cases, avoiding the payment of capital gains is considered fraud and you could very well face jail time. The latter usually happens if the IRS can prove that tax evasion was intentional on your part.

Conclusion

When you sell your home at a higher price than you originally paid for, you owe the IRS a piece of the pie. That’s simply how the law works in California and across the United States. 

With the help of real estate settlement agents, the IRS has thorough reporting on the sale of your home, including all associated financial transactions. In an effort to avoid penalties or even jail time, it’s best to be forthcoming about the sale of your home and pay any required taxes.   The amount you pay in will depend on your income, as well as how long you’ve stayed on the property. But fortunately, the IRS allows exceptions for long-term home owners, such as the primary residence exclusion. With all the hassle that comes with selling your property, getting a cash offer on your house can often be the easiest step in the process.

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