Calculate gain before the exclusion
Gather the purchase price, qualifying improvements, and other basis adjustments. Subtract selling costs and adjusted basis from the sale proceeds to determine gain. Paying off the mortgage affects cash received, not the gain calculation itself.
Check the ownership and use tests
A qualifying main-home sale may exclude part or all of the gain. Ownership, use, prior exclusions, and filing status matter. A partial exclusion can apply in certain circumstances, so review a shorter period of ownership rather than assuming there is no relief.
Flag rental or business use
Depreciation and periods of nonqualified use can change the result. Give your preparer the full property history, including home-office or rental activity. Reporting may still be required even when an exclusion covers the gain.
A practical example
A home sells for $400,000 with $25,000 of selling costs and $280,000 of adjusted basis. The gain before any exclusion is $95,000. The remaining mortgage balance does not enter that calculation.
What to gather
- Purchase and sale closing statements
- Improvement receipts and basis adjustments
- Dates of ownership and occupancy
- Rental, depreciation, and prior home-sale records
Official references
General educational information, not individualized tax, legal, or investment advice. Federal rules are summarized; state rules and your circumstances may differ. Check the rules for your tax year before acting.