NEW YORK (MainStreet ) — The year 2014 ended with an upturn in the housing market. Home sales increased 0.8%, according to the National Association of Realtors, and October’s S&P/Case-Shiller home price index showed a nationwide gain of 4.6%.

“Housing is having a gradual, upward-tilting, L-shaped recovery, which will continue through 2015,” said Hollis Greenlaw, co-founder with United Development Funding. “But as far as so-called full recovery, I think we’re looking at four to six years.”

That’s all the more reason for home sellers to pay close attention to the fine print, especially when it comes to taxation.

“Once you’ve found the perfect realtor, made any repairs or renovations, staged the home and negotiated your contract, you may think you’re done but don’t forget the tax implications of selling your home,” said Vanessa Borges, an enrolled agent and tax preparation supervisor with the Tax Defense Network in Jacksonville, Fla. Unfortunately, that’s not the case.

Tax implications of a home sale depends on factors such as whether or not the property sold is considered a person’s primary residence and how much gain is realized.

“The sale of real property is treated as a capital gain which is subject to ordinary income tax,” said Sarah Deierlein, enrolled agent with the Tax Defense Network.

However, there are exclusions under the tax code that can help homeowners avoid capital gains taxation. For example, individuals can exclude up to $250,000 in profit from the sale of their primary residence.

“You must have owned the home for at least two of the last five years before the sale, and you must have lived in it as a primary residence for at least two of the last five years,” Borges said. “And you can’t use this exclusion if you’ve already taken it in the last two years.”

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The IRS requires real estate agents to receive written assurance that the seller qualifies for the amount of gain to be excluded, and this certification must be signed under penalties of perjury. Otherwise, agents will file a 1099-S.

“Normally, you don’t need to indicate the sale of your home on your income tax return; however, you must include it if you are issued a 1099-S by your real estate agent,” said Borges. “You can typically avoid this by certifying that you meet the ownership, use and timing qualifications at the time of closing.”

For those who don’t meet ownership, use and timing qualifications, partial or reduced exclusions are possible when homes are sold due to divorce, change in employment and change in health, for example.

“The worst case scenario is that you end up with an unexpected tax bill that you cannot pay,” Deierlein told MainStreet. “You will be subject to late payment penalties and collections if you leave the matter unaddressed.”

The gain or loss on the sale of a property is calculated as the price less the selling expenses and adjusted basis.

Selling expenses include any ordinary or customary costs associated with the sale such as commissions, advertising, legal fees and home staging.

“The adjusted basis includes any improvements you made to the property but not repairs,” said Deierlein said. “An improvement adds to the value of your home, prolongs its useful life or adapts it for new uses.”

Examples of improvements are decks, swimming pools, irrigation systems and flooring, while repairs include repainting, replacing a broken window pane or fixing a leak.

-Written for MainStreet by Juliette Fairley