By Tony Guerra Updated December 16, 2018
One of the benefits of owning real estate is the ability to sell it at a profit. When you buy real estate at one price and later sell it for a higher price, the profit you realize is called a capital gain. In many instances, the capital gains on real estate are taxable. Generally, you're responsible for reporting to the Internal Revenue Service and applicable states, such as California, capital gains realized from real estate sales.
Tip
Property owned for less than one year is subject to short-term capital gains taxes and is reported as personal income. Long-term capital gains have more tax advantages.
IRS Form 1099-S
The Internal Revenue Service requires owners of real estate to report their capital gains. In some cases when you sell real estate for a capital gain, you'll receive IRS Form 1099-S. This form itself is sent to property sellers by real estate settlement agents, brokers or lenders involved in real estate transactions. The IRS also requires settlement agents and other professionals involved in real estate transactions to send 1099-S forms to the agency, meaning it might know of your property sale.
Reporting Capital Gains
You report all capital gains on the sale of real estate on Schedule D of IRS Form 1040, the annual tax return. The IRS treats home sales a bit differently than most other assets generating capital gains, though. If you sell your home and realize a capital gain, up to $500,000 of that gain may be exempted from taxation. A capital gain is the difference between the price you paid for the property and the amount you receive when you sell it and you can deduct most of your selling costs when calculating the profit. However, the IRS has no exemptions for capital gains realized from the sale of investment real estate.
When to Report
If you can exclude the entire capital gain realized from the sale of your home, you don't need to report it to the IRS. If you receive a 1099-S after selling your home, you must report that sale even if the capital gain can be excluded. You also must report the sale of your home to the IRS if you can't exclude the entire capital gains amount. The IRS partly relies on the honor system when taxes are filed but treats cheaters harshly.
Failing to Report
Failing to report, either deliberately or inadvertently, capital gains you realized during the reporting tax year may put you in jeopardy of IRS sanction. The IRS can and frequently does impose monetary fines and penalties for failing to report all income and capital gains earned or realized. Criminal penalties may also apply in cases in which the IRS proves fraud or tax evasion in hiding capital gains. California and other states also monitor capital gains resulting from real estate sales.
