The Taxpayer Times

What to know before filing your 2025 Tax Returns

Christmas is approaching, the year is winding down, and before we know it, another tax season will be here.

Throughout the year, not just at year-end, I receive calls from people who have bought or sold a home and are trying to understand the tax consequences. Some seem confident because they’ve heard that home sales aren’t taxable. Others are uneasy because a tax document arrived in the mail and they weren’t expecting it. Most simply want reassurance that they didn’t miss something important.

This article is for individual taxpayers who purchased or sold a personal residence in 2025 and want to understand how those transactions affect their 2025 tax returns, which will be filed in 2026, before tax season pressure clouds the picture.

Selling a Home in 2025: Why the IRS Cares

Let’s start with the biggest misconception. Yes, many homeowners pay no federal tax when they sell their primary residence. But that outcome depends on very specific rules, not rumors, assumptions, or social media advice.

The exclusion people talk about – but often don’t fully understand

Under current law, homeowners may be able to exclude capital gains of up to:

• $250,000 if you’re single (or married filing separately)
• $500,000 if you’re married filing jointly

This exclusion is not automatic. It depends on ownership, use, timing, and documentation.

To qualify, you generally must have:

• Owned the home for at least two years, and
• Lived in it as your main residence for at least two years,
• During the five-year period ending on the sale date

There is also a two-year lookback rule that often catches repeat sellers. In general, you cannot claim the exclusion if you used it on another home sale within the two years before the current sale.

Miss one of these requirements, and the tax result can change quickly.

“But I Didn’t Make That Much Money” – How the IRS Calculates Gain

This is where confusion usually starts. The IRS looks at gain, not proceeds. Gain is calculated using:

• The sale price
• Minus selling costs
• Minus your adjusted basis

Your basis usually starts with what you paid for the home, but it doesn’t necessarily end there. Over time, certain improvements may increase your basis and reduce taxable gain. However, and this is critical, not everything you spend on a home increases basis.

Only qualifying capital improvements may be added, and only if they:

• Add value to the home,
• Extend its useful life, or
• Adapt it to a new use, and are properly documented.

Examples often include a full kitchen remodel, roof replacement, a home addition, or finishing a basement. Routine repairs, cosmetic updates, or undocumented expenses do not qualify and cannot be added simply because they were paid during ownership.

The IRS does not allow homeowners to increase the basis based on estimates, memory, or what “feels fair.” Costs must be supported by records such as invoices, contracts, or settlement documents. In practice, basis adjustments are one of the most scrutinized areas during an IRS review, and unsupported or inflated claims are a common audit issue that can result in penalties.

When a Home Sale Becomes Taxable (Even If You Heard Otherwise)

Certain situations come up repeatedly in practice:

• You didn’t live in the home long enough
• You converted the home to a rental at some point
• You claimed depreciation
• You sold another home recently and already used the exclusion
• You received a tax form that forces the sale onto the return

Even when the exclusion applies, it does not always protect the entire transaction.

If you fail the two-out-of-five-year test, you may have a taxable gain unless you qualify for a partial exclusion due to specific circumstances. If part of the home was used for rental or business purposes and depreciation was claimed, depreciation recapture rules may apply. And if you sold the home at a loss, the loss on a personal residence is not deductible.

The Biggest Myth: “I Sold My House, So I Don’t Need to Report It”

Sometimes you still must report the sale. If all gain is excluded, the sale generally does not need to be reported unless Form 1099-S was issued. If you received a 1099-S, your tax return usually needs to reflect the transaction so it matches what the IRS already has on record.

This is often why people call because they receive a 1099-S and panic. That reaction is understandable.

When Paperwork Pulls a Sale Onto the Tax Return

Even when a sale is fully excludable, paperwork can still trigger reporting. If you sold a home in 2025, you may have received:

• Form 1099-S reporting gross sale proceeds
• A HUD-1 Settlement Statement or Closing Disclosure
• Mortgage payoff documentation

If Form 1099-S was issued, the IRS already has a record of the sale. That doesn’t automatically mean tax is due, but it does mean the return must align with what the IRS sees. This is often the moment someone says, “I thought this wasn’t taxable – why did I get a tax form?”

Buying a Home in 2025: Expectations vs. Reality

Buying a home does not create taxable income, but it does create expectations – especially around deductions. Some homeowners expect an immediate tax benefit. Others are surprised when nothing seems to change.

The outcome depends largely on whether you itemize deductions or take the standard deduction.

Changes under the One Big Beautiful Bill Act have made itemizing relevant again for some taxpayers, particularly those with higher property taxes, but this is not universal.

For tax year 2025, the standard deduction amounts are:

• $31,500 – Married Filing Jointly / Qualifying Surviving Spouse
• $23,625 – Head of Household
• $15,750 – Single / Married Filing Separately

If your itemized deductions don’t exceed the standard deduction, home-related deductions may not change your tax bill much.

Key Homeowner Deductions for 2025

If you itemize, several home-related items may matter.

State and local taxes (SALT). For 2025, the SALT deduction cap increased to:

• Up to $40,000 (or $20,000 if MFS)
• With reductions for higher-income taxpayers based on MAGI

Property taxes fall under SALT, making this a meaningful change for some homeowners.

Mortgage interest. Mortgage interest may be deductible if the loan is secured by your main home or second home and used to buy, build, or substantially improve the property, subject to limitations.

Points and closing costs. Points may be deductible in certain cases. Many other closing costs are not immediately deductible and instead affect basis or are nondeductible altogether. This is where reviewing the Closing Disclosure matters.

Energy Credits: Timing Matters in 2025

If you installed energy-efficient improvements or solar in 2025, timing is critical. Several residential energy credits are scheduled to expire after December 31, 2025, under current law.

What matters is when the property was placed in service, not when you paid the bill. In this area, documentation – not intent – determines eligibility.

A Practical Checklist Before Filing

If you sold a home in 2025, gather:

• Closing or settlement statement
• Any Form 1099-S
• Proof of primary residence use
• Major improvement receipts
• Rental or home-office history, if applicable

If you bought a home in 2025, gather:

• Closing Disclosure or settlement statement
• Form 1098
• Property tax records
• Energy improvement receipts with placed-in-service dates

Final Thoughts

Real estate transactions are significant life events. For tax purposes, the outcome depends on facts, timing, and documentation – not assumptions.

Understanding those details before filing your 2025 tax returns can prevent surprises when tax season arrives in 2026.