Your guide to the tax implications of selling a home

Nobody wants a surprise when tax season rolls around. If you sold a property in the last tax year, you could have a significant tax burden. Taxes are often one of the standard costs of selling a home.

The tax implications of selling a house depend on a variety of factors, like how long you owned the property, your filing status, and more. Before you sell a home, it’s important to understand what you’ll be on the hook for to— and what exemptions can help you lessen your tax bill

Do you pay taxes on the sale of a house? 

Home sellers have to pay a capital gains tax on the profits of their home sale unless they qualify for an exemption. The size of their tax burden will depend on a variety of factors, like:

• Home sale price
• If the home is their primary residence
• How long they’ve lived in the home
• Filing status (single; jointly; married, filing separately)

What is capital gains tax on real estate?

The capital gains tax is a fee on the profit an investor makes when they sell an investment. It’s a common tax on the sale of stocks, digital assets (like cryptocurrencies and NFTs), and real estate.

To determine the gain on a home sale, you need to determine what your adjusted basis is. This number will determine how much you gained or lost in the sale and how much is taxable.

Your adjusted basis is how much you paid for your house plus all of the expenses you took on to make capital improvements, or anything you did that added value to your home, extended its life, or adapted the home for a different use. 

For example, the addition of a new roof, swimming pool, or central air conditioning unit all count as capital improvements, but minor repairs and updates like painting the walls don’t. 

Once you add capital gains expenses to the original cost of the home, you increase your adjusted basis, which then decreases the amount you gain on a sale.

When do you pay capital gains tax on real estate?

Fortunately, the IRS allows exclusions on capital gains, so you won’t pay taxes on your adjusted basis. What is considered a taxable profit will depend on your filing status:

• If you’re single: You can exclude $250,000 of capital gains on real estate sales.
• If you’re married and filing jointly: You can exclude $500,000 of capital gains on real estate sales. 

But you may have to pay taxes on the full “capital gain” if one or more of the following factors apply to your situation:

• The home isn’t your principal residence, or it was only your primary residence for less than two years (some exceptions apply, such as for members of the military).
• You owned the home for less than two years in the five-year period that occurred before you sold it.
• You previously claimed the capital gains exclusion on a different home in the two-year period before this most recent sale.
• You are subject to expatriate tax.
• You purchased your home through a like-kind exchange in the past five years.

Calculating capital gains tax rate

If you do need to pay capital gains taxes on some or all of the money you made off a home sale, your tax rate will depend on the time you’ve spent in the home:

• Short-term capital gains tax rate: If you owned the home for less than a year, your capital gains tax rate will be your typical income tax rate (a.k.a., your tax bracket).
• Long-term capital gains tax rate: If you owned the home for more than a year you typically qualify for either a 0%, 15%, or 20% tax rate — the rate depends on what your filing status and capital gains received are.

Example home sale and tax implications

All of those numbers can get confusing, so let’s look at an example:

Let’s say you bought a house 20 years ago for$300,000 and today you sell that home for $900,000. You would make $600,000 on the sale. 

If you’re married, that means that $500,000 out of that $600,000 would not be subject to capital gains tax, but the remaining $100,000 would. If you’re single, you can only exclude $250,000 out of the $600,000, which leaves you with $350,000 of profit that is subject to capital gains tax.

Curious what the tax implications are of selling your home? Use our Home Sale Proceeds Calculator to help find out:

Are there any tax benefits of selling a home? 

Alongside the exclusions previously outlined, you may qualify for special circumstances that give you a capital gains tax break. 

There are some special rules in place that allow sellers to either claim a full or partial exclusion, that apply to:

• Divorce settlements: If you acquire ownership of the home through a divorce settlement, the amount of time your former spouse owned the home may count towards the two-out-of-five-years rule.
• Divorce and separation agreements: The spouse who doesn’t live in the home during a divorce or separation agreement can count the time their spouse lived in the home to the rule as well. This is especially relevant if one spouse lived in the home while the sales process was underway. 
• Temporary absences: Even if you didn’t use the home as a primary residence for the full time you owned it, you are able to count short temporary absences towards that time rule, even if you rented the home out during those brief absences.
• Death: If one spouse dies prior to the sale of a home, the surviving spouse may count the time the deceased spouse lived in the property towards the ownership-and-use test.

→ Learn more about selling inherited property

Does the sale amount impact your taxes? 

Yes, how much you sell your home for can greatly impact your annual taxes. When tax season rolls around after you sell your home, you need to report that sale on your tax return if one of the two events occurred:

• You received a Form 1099-S
• You didn’t meet the requirements for excluding the capital gain

Typically, either your real estate agent, real estate broker, mortgage company, or title company you worked with when you sold your home will issue Form 1099-S. If you want to avoid getting this form and a copy of it going to the IRS, you have to tell the appropriate party that at any time before February 15 (the year after the sale) that all of the profit from your home sale is tax-free. To do this, you must assure the responsible party that:

• You both owned and utilized the residence as your primary residence for at least two years during the five-year period that leads up to the sale (or your spouse did).
• Neither you nor your spouse sold or exchanged another principal residence during that two-year period.
• You didn’t use any portion of the home for business or rental purposes.
• A minimum of one of the following statements apply to your situation:
• You’re single and the sale price is $250,000 or less or the capital gain on the sale is $250,000 or less.
• You’re married and the sale price is $500,000 or less or the capital gain on the sale is $500,000 or less.
• You plan to file a joint tax return for the year of the sale.

You should only receive a 1099-S form if you need to report your home sale on your income tax return, but if a mistake occurs and you receive a Form 1099-S anyways (the IRS will get a copy too), that doesn’t mean you necessarily have to pay taxes on the home sale. Mistakes happen, so make sure you have all of your paperwork from the sale ready to show to the IRS to prove you don’t owe capital gains taxes. 

Related: Are closing costs tax deductible?

When to talk with a tax professional

The math necessary to determine if you owe capital gains tax is often a bit trickier than just calculating the difference between what you bought and sold the home for. So don’t be afraid to ask for help with this. If it’s unclear to you if you owe capital gains taxes or not, it’s always helpful to consult a financial advisor to help you gain clarity and some peace of mind. 

If you’re not quite ready to meet with a financial advisor, there are also online tools that exist to help you calculate capital gains taxes. While these tools give you an idea of what to expect, it really is more reliable to work with a financial advisor. The last thing you want is to wake up to an unexpected (and quite large) tax bill.