What you owe depends on how long you owned the property and your income level
The tax on profit from selling real estate falls into two categories: long-term capital gains (if you owned it more than one year) and short-term capital gains (if you owned it one year or less). Long-term gains are taxed at lower federal rates — 0%, 15%, or 20% depending on your total income. Short-term gains are taxed as ordinary income, which means your regular tax bracket applies. Your state may also tax the gain, and the rate varies by where you live and where the property is located.
The gain itself is the sale price minus what you paid for it, minus certain costs like real estate agent commissions and improvements you made to the property. You do not owe tax on the full sale price — only on the profit.
Key Takeaways
- Long-term capital gains (property owned over one year) are taxed at 0%, 15%, or 20% federally, depending on your income; short-term gains use your regular income tax rate.
- Your state income tax applies to the gain as well, and the rate depends on your state and sometimes on where the property sits.
- The taxable gain is the sale price minus your purchase price, minus closing costs, agent fees, and the cost of major improvements.
- If the property was your primary home, you may exclude up to $250,000 (single) or $500,000 (married filing jointly) of the gain from federal tax.
- Rental properties and investment real estate do not may have access to for the home sale exclusion and may be subject to an additional 3.8% net investment income tax if your income is above certain thresholds.
Federal long-term capital gains rates and income thresholds
The federal rate you pay on long-term gains depends on your taxable income for the year. The IRS sets three brackets: 0%, 15%, and 20%. These thresholds change each year and differ based on whether you file as single, married filing jointly, head of household, or married filing separately.
For 2024, the 0% rate applies to single filers with taxable income up to $47,025 and married couples filing jointly up to $94,050. The 15% rate covers the middle range, and the 20% rate applies to income above the highest threshold. These numbers shift annually for inflation, so check the IRS website or your tax software for the current year's brackets.
The gain itself pushes your total taxable income higher, which can move you into a higher bracket. If you are near a threshold, selling in a year when your other income is lower may reduce your rate. This is why some people time large sales around retirement or a year with lower wages.
Short-term capital gains and ordinary income tax rates
If you owned the property for one year or less, the profit is taxed as short-term capital gains, which means it is added to your wages, self-employment income, and other earnings and taxed at your regular income tax rate. This can be 10%, 12%, 22%, 24%, 32%, 35%, or 37%, depending on your total income and filing status.
Short-term gains are almost always more expensive than long-term gains. A property you sell after 11 months could owe tax at 24% or higher, while the same profit would owe only 15% if you waited one more month. For this reason, real estate investors often hold property past the one-year mark before selling.
State income tax on real estate gains
Most states tax capital gains as income. The rate varies widely: some states have no income tax at all (Florida, Texas, Wyoming, and others), while others tax gains at rates between 3% and 13%. A few states, including California and New York, tax long-term gains at the same rate as short-term gains, with no federal-style reduction.
The state that taxes you is usually the state where the property is located, not where you live. If you sell a rental property in California but live in Florida, you owe California tax on the gain. Some states have reciprocal agreements or special rules for non-residents, so check your state's tax authority website or speak with a tax professional if the property is in a different state than your home.
The primary residence exclusion for your main home
If the property was your primary residence — the home where you lived most of the time — you may exclude part or all of the gain from federal tax. Single filers can exclude up to $250,000 of gain; married couples filing jointly can exclude up to $500,000. This exclusion applies only once every two years.
To may have access to, you must have owned the home and lived in it as your main home for at least two of the five years before the sale. If you meet these rules, you owe no federal tax on the first $250,000 or $500,000 of gain, and you owe the long-term capital gains rate only on any gain above that amount. This exclusion does not explore to state taxes, so you may still owe state income tax on the full gain.
If you did not live in the home for the full two years — for example, you rented it out for part of the time — you may still may have access to for a partial exclusion. The IRS calculates this based on the fraction of the five-year period you actually lived there.
Rental properties and the net investment income tax
Rental properties and investment real estate do not may have access to for the primary residence exclusion. You owe long-term or short-term capital gains tax on the full profit, depending on how long you owned it. Additionally, if your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly), you may owe an extra 3.8% net investment income tax on the gain.
This 3.8% tax was created under the Affordable Care Act and applies to investment income, including capital gains. It is separate from your regular income tax and is calculated on your tax return. If you have significant rental income or other investment gains in the same year as a large real estate sale, the combined effect can be substantial.
Calculating your actual taxable gain
The gain is not the sale price. It is the sale price minus your cost basis and minus certain costs of the sale. Your cost basis is usually what you paid for the property, plus the cost of any major improvements (a new roof, an addition, a new HVAC system), minus any depreciation you claimed if it was a rental.
Costs you can subtract from the sale price include real estate agent commissions, title insurance, attorney fees, and transfer taxes. You cannot subtract routine maintenance or repairs, only improvements that add value or extend the life of the property. Keep receipts and records for all improvements and sale costs — the IRS may ask for them if you are audited.
If you inherited the property, your cost basis is usually the fair market value on the date of death, not what the previous owner paid. This is called a stepped-up basis and can significantly reduce or eliminate the taxable gain if the property has appreciated since the original purchase.
Frequently Asked Questions
Do I owe tax if I sell my home at a loss?
No. If you sell for less than you paid, you have a capital loss, not a gain. You cannot deduct a loss on the sale of your primary home. If the property was a rental or investment property, you can use the loss to offset other capital gains or, in some cases, up to $3,000 of ordinary income per year.
What if I sell the property in one state but live in another?
You owe tax to the state where the property is located. If you live in a state with no income tax and sell property in a state that does, you owe that state's tax. Some states offer credits for taxes paid to other states, so check both state tax authority websites or consult a tax professional.
Can I avoid capital gains tax by using the money to buy another property?
Not by straightforward reinvesting the proceeds. However, if the property was a rental or investment property, you may be able to defer the tax using a 1031 exchange, which allows you to roll the proceeds into another investment property within specific time limits. This does not eliminate the tax; it postpones it. A primary residence sale does not may have access to for a 1031 exchange.
How do I report the sale on my tax return?
You report the sale on Form 8949 (Sales of Capital Assets) and Schedule D (Capital Gains and Losses). If you used the primary residence exclusion, you also note that on Form 8949. Your tax software usually walks you through these forms, or a tax professional can prepare them for you.
What if I owned the property before January 1, 2022?
The tax rate and rules are the same regardless of when you bought it. The only date that matters is how long you owned it (for the long-term versus short-term distinction) and the date you sell. There are no special rules for older properties.