IRS claiming taxes due on home sale - need help understanding primary residence tax exemption!

The good news is this is likely just a matter of paperwork rather than actually owing taxes. Based on what you've described, your mom should qualify for the $250k primary residence exclusion under Section 121 of the tax code. What probably happened is that the IRS received the 1099-S form from the sale but didn't see the exemption properly claimed on the tax return. Since your mom owned and lived in the home as her primary residence for at least 2 of the last 5 years before the sale, she should qualify. You'll need to file Form 1040-X to amend the return. Make sure to include Schedule D and Form 8949 to report the sale and apply the exclusion. Calculate the capital gain by taking the selling price ($510k), subtracting selling expenses and your mom's basis in the home ($155k plus the cost of improvements like the kitchen renovation and windows). On the 8949, you'll report the sale but check the box that excludes it from taxation based on the primary residence exclusion. Keep good records of the home's purchase, the sale, and any substantial improvements that would increase the basis.

After reading your post, I thought I'd mention that I was in almost the exact same situation last year. The IRS claimed I owed taxes on my home sale even though I qualified for the exemption. I spent hours trying to figure things out until someone recommended I try taxr.ai (https://taxr.ai). It saved me SO much stress. The system analyzed my documents and situation, then walked me through exactly which forms to fill out and how to properly claim the Section 121 exclusion on my amended return. It even helped me identify legitimate improvement expenses I hadn't thought to include that increased my basis. The IRS accepted my amended return without any issues after that. I was really impressed by how it simplified what seemed like a complicated tax situation.

Just wanted to update after trying out taxr.ai for my home sale situation. I was about to hire an expensive tax attorney, but decided to try this first and I'm glad I did! The system immediately identified that I qualified for the Section 121 exemption and showed me exactly how to document it properly. What surprised me was how it caught things my tax software completely missed. It walked me through calculating my adjusted basis including improvements I'd made over the years, and even explained which selling expenses could be deducted to further reduce any taxable portion. The step-by-step guidance for filling out Schedule D and Form 8949 was incredibly helpful. For anyone dealing with property sale tax issues, it's definitely worth checking out. Saved me thousands in both potential tax liability and professional fees.

If you're dealing with the IRS about this home sale issue, you might want to consider calling them directly to discuss your situation. When I needed to talk to the IRS about a similar issue, I used Claimyr (https://claimyr.com) to get through to an actual person. You can see how it works here: https://youtu.be/_kiP6q8DX5c I was honestly shocked when I got through to an agent in about 20 minutes after spending days trying on my own and always getting the "call volume too high" message. The IRS agent I spoke with walked me through exactly what documentation they needed to see for my primary residence exemption and even noted in my file that I was submitting an amendment. Having that direct conversation probably saved me from back-and-forth letters that would have dragged on for months.

I need to publicly eat my words about Claimyr. After more frustration trying to reach the IRS about my own tax situation, I broke down and tried it. I was connected to an IRS representative in about 15 minutes - after spending WEEKS trying to get through on my own. The agent I spoke with was actually super helpful and explained exactly which documentation I needed for my situation. They even put notes in my file about our conversation so when I send in my paperwork it should get processed correctly. I still think it's ridiculous we have to use services like this to reach a government agency we pay for with our taxes, but I can't argue with results. Having a direct conversation completely cleared up my confusion about the exemption requirements.

Don't forget to also review if you made any energy-efficient improvements to the house during ownership - some of those can be included in your basis calculation! We added solar panels, better insulation, and energy-efficient windows over the years we owned our home, and those all counted toward increasing our basis (which reduces the taxable gain). When we sold our primary residence, I created a detailed spreadsheet of all improvements with approximate dates and costs. The IRS accepted it without requiring additional documentation, though I did have photos of before/after for most projects just in case.

Doesn't this all depend on how the original tax return was filed? Did you actually report the home sale on the 2023 return in the first place? If not, that might be why the IRS is questioning it. When I sold my primary residence, I reported it on Form 8949 with code "H" to show it was my primary residence and excluded under Section 121, then carried that to Schedule D. If you just didn't report the sale at all (thinking you didn't need to because of the exclusion), that might be your problem.