How to Plan Taxes Around a Home Sale and a Move

How should I plan taxes when selling my home and moving?

Selling a home while relocating creates a mix of federal and state tax issues that can affect how much of your proceeds you keep. Good planning reduces surprises: verify whether you qualify for the home-sale exclusion, document improvements that raise your basis, account for rental or business use (which can trigger depreciation recapture), and consider how state residency rules affect the year of taxation.

This guide gives a step-by-step checklist, practical examples, common pitfalls, and the forms you’ll likely need. It draws on IRS guidance (Publication 523) and professional practice experience. It is educational and not a substitute for personalized advice — see the disclaimer at the end.

Quick checklist before you list

• Confirm ownership and use tests for the Section 121 exclusion: owned and used the home as your primary residence for at least two of the five years ending on the sale date (IRS Publication 523).
• Gather records: purchase documents, closing statements, receipts for capital improvements, real estate commissions, and dates of occupancy.
• Identify any periods the property was rented or used for business — you may owe depreciation recapture.
• Review state residency rules for the year of sale (destination and origin states) to avoid double taxation.
• Decide on timing: selling late in the year or delaying into the next tax year can change your marginal tax rate and which year’s residency rules apply.

1) Calculate adjusted basis and taxable gain

• Start with your purchase price plus acquisition costs (title, legal fees) to form your initial basis.
• Add qualifying capital improvements (projects that add value or extend useful life such as additions, new roof, major HVAC upgrades) to increase basis — keep receipts.
• Subtract allowable selling costs (real estate commissions, certain closing costs) from the sale proceeds.
• If you sell for less than your adjusted basis, you have a personal loss which generally isn’t deductible.

Example: Bought for $300,000, $40,000 in documented improvements, sold for $650,000 with $40,000 commission. Adjusted basis = $340,000. Realized gain before exclusion = $650,000 – $340,000 – $40,000 (selling costs) = $270,000.

If you qualify for the Section 121 exclusion (see next section), you may exclude up to $250,000 ($500,000 for married filing jointly) of that gain.

(IRS Publication 523 — Selling Your Home: https://www.irs.gov/publications/p523)

2) Understand the Section 121 exclusion and partial exclusions

• Section 121 allows exclusion of up to $250,000 of gain ($500,000 for qualifying married couples filing jointly) if you meet the ownership-and-use tests.
• Partial exclusions may apply if you sell due to a change in health, certain unforeseen circumstances, or employment — rules are detailed in Publication 523.
• You cannot exclude gain allocated to periods of depreciation if the home was used for business or rented after 2008 — depreciation claimed after May 6, 1997, is subject to recapture as ordinary income to the extent of the depreciation.

For a deeper review of the exclusion mechanics, see our internal explainer: Capital Gains Exclusion on Home Sale (https://finhelp.io/glossary/capital-gains-exclusion-on-home-sale/).

3) Watch for depreciation recapture (rental or business use)

• If you converted the home to rental or used part as a home office and claimed depreciation, the IRS requires recapture of depreciation on sale. That amount is taxed as ordinary income up to a maximum rate (see IRS guidance on Form 4797).
• Depreciation recapture increases your taxable portion even if you otherwise qualify for Section 121; the exclusion does not apply to depreciation deductions allowed or allowable for periods after May 6, 1997.

Forms commonly involved: Form 4797 and Schedule D/Form 8949 reporting requirements (https://www.irs.gov/forms-pubs/about-form-4797).

4) Timing the sale and the move

• Year of sale vs. year of move: if you change state residency in the same tax year you sell, both states’ residency and sourcing rules matter. Establishing residency in a new state late in the year might still leave you subject to your old state’s tax on the sale.
• If you’re near the two-year residency threshold for the Section 121 exclusion, delaying the sale until you meet the test can save significant tax.
• For higher-income sellers, timing can affect whether gains push you into higher capital gains brackets or trigger the 3.8% Net Investment Income Tax (NIIT). See IRS guidance on investment income taxes.

Related reading: State Residency Rules: How Moving Impacts Your Tax Liability (https://finhelp.io/glossary/state-residency-rules-how-moving-affects-your-tax-obligations/) and Timing Capital Gains Around Major Life Events (https://finhelp.io/glossary/timing-capital-gains-around-major-life-events-a-practical-guide/).

5) State tax rules and residency issues

• States vary widely: some have no income tax, others tax capital gains as ordinary income. Determine whether the source state or your new state taxes the sale proceeds.
• Common trap: part-year residency and allocation. If you lived in State A and moved to State B in the same year, both states may require pro rata allocation of income — including capital gain on a home sale.
• Keep careful date-stamped evidence of the move (driver’s license, voter registration, utility records) to support residency claims if audited.

FinHelp’s piece on state residency rules provides practical checklists for documentation (https://finhelp.io/glossary/state-residency-rules-how-moving-affects-your-tax-obligations/).

6) Recordkeeping and documentation

• Keep the closing disclosure, HUD-1 (for older transactions), settlement sheets, receipts for capital improvements, loan payoff statements, and documentation of moving dates.
• For conversions to rental use, retain records of rental income, depreciation schedules, and dates of conversion.
• Good recordkeeping often saves more than it costs when substantiating exclusions or basis adjustments.

7) Reporting: forms and lines to watch

• If gain is fully excluded under Section 121 and you have no other reportable adjustments, you may not need to report the sale on your return. However, if you received Form 1099-S or don’t qualify for the full exclusion, you’ll typically report the sale on Form 8949 and Schedule D (Form 1040) and possibly Form 4797 for depreciation recapture.
• Keep an eye on 1099-S from the closing agent; it often triggers IRS notice if not reconciled on your return.

IRS links: Publication 523 (Selling Your Home), Form 8949 and Schedule D instructions (https://www.irs.gov/forms-pubs/about-schedule-d).

Practical examples and decisions

1) Married sellers meet the tests and exclude $500k. If your adjusted gain (after costs and improvements) is below $500k, you owe no federal capital gains tax and generally just pay any applicable state income tax.

2) Converted rental: You lived in the house 3 years, then rented it for 2 years, then sold. You may qualify for a partial Section 121 exclusion for the period you lived there, but you must recapture depreciation for the rental period.

3) Moving across state lines: If you change residency mid-year, plan to document the date you established residency in the new state. Small changes in residency timing can change which state taxes the gain.

Common mistakes to avoid

• Assuming the exclusion is automatic without documenting use and ownership.
• Ignoring depreciation recapture after rental or business use.
• Failing to track and document capital improvements.
• Overlooking state tax consequences and residency rules.
• Forgetting to report when you receive a 1099-S.

Pro tips from practice

• When possible, close major qualifying home improvements with invoices that show work and cost dates — these increase basis and reduce gain.
• If you’re near the two-year mark, evaluate the trade-off of a delayed sale versus market risk; sometimes waiting for tax qualification is worth it.
• For clients converting a second home or rental to a personal residence to qualify for Section 121, I document every day of occupancy and keep conversion paperwork — the IRS looks for clear evidence.

Where to get help

• Consult a CPA or tax attorney if your situation includes rentals, short ownership periods, or multistate residency.
• Use Publication 523 as your primary federal reference: https://www.irs.gov/publications/p523

Frequently asked questions (short)

• Will I always owe tax on a home sale? No — many owners who meet Section 121 tests owe no federal capital gains tax on qualifying gains.
• What if I get a 1099-S? Reconcile the 1099-S on your tax return. If you exclude the gain, keep documentation proving eligibility.
• Are moving expenses deductible? Generally no, except for active-duty military who move due to a military order (see IRS Form 3903 guidance).

Professional disclaimer

This article is educational and reflects general federal and state-level issues as of 2025. It does not replace tailored tax advice. For decisions that affect your tax liability, consult a licensed CPA or tax attorney.

Sources and further reading

• IRS Publication 523, Selling Your Home: https://www.irs.gov/publications/p523
• IRS — About Schedule D (Form 1040): https://www.irs.gov/forms-pubs/about-schedule-d
• IRS — About Form 4797 (Sale of Business Property): https://www.irs.gov/forms-pubs/about-form-4797
• FinHelp — Capital Gains Exclusion on Home Sale: https://finhelp.io/glossary/capital-gains-exclusion-on-home-sale/
• FinHelp — Navigating the Tax Implications of a Home Sale: https://finhelp.io/glossary/navigating-the-tax-implications-of-a-home-sale/
• FinHelp — State Residency Rules: How Moving Impacts Your Tax Liability: https://finhelp.io/glossary/state-residency-rules-how-moving-affects-your-tax-obligations/

If you’d like, I can produce a one-page checklist you can print and use at closing or prepare a short list of documents your CPA will want to see.