J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

29.1 Avoiding Tax on Sale of Principal Residence

If you sell (or exchange) your principal residence at a gain (29.5), up to $250,000 of the gain may be excluded from income if you owned and occupied it as a principal residence for an aggregate of at least two years in the five-year period ending on the date of sale and did not claim an exclusion on another sale within the prior two years. See the discussion of the two-out-of-five-year ownership and use tests in the following section (29.2). If you are married filing jointly, you may be able to exclude up to $500,000 of gain (29.3). Even if you do not meet the two-out-of-five-year ownership and use tests, you are entitled to a reduced maximum exclusion limit if the primary reason for your sale was a change in the place of employment, health reasons, or unforeseen circumstances (29.4).

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Filing Instruction

Reporting Home Sale Gain

If the entire gain on the sale of your principal residence is excludable from income under the rules discussed in this chapter (29.1–29.7), you do not have to report the sale at all on your return unless you received a Form 1099-S from the settlement agent reporting the sale. If you received Form 1099-S, have any gain that cannot be excluded, or you decide not to claim the exclusion for excludable gain, report the transaction on Form 8949 and Schedule D. Follow the IRS instructions ...