Most home sales do not trigger federal income tax, but some do

You do not automatically owe federal income tax when you sell your house. The IRS lets you exclude up to $250,000 in profit if you are single, or $500,000 if you are married filing jointly — as long as you meet two conditions. You must have owned the home for at least two of the five years before the sale, and you must have lived in it as your primary residence for at least two of those same five years. If your profit falls within that exclusion, you owe nothing to the federal government.

If your profit exceeds the exclusion amount, you pay capital gains tax on the overage. The rate depends on your overall income for the year and ranges from 0% to 20% at the federal level. You may also owe state income tax on the sale, depending on where you live — some states do not tax capital gains, while others do.

Key Takeaways

  • You can exclude up to $250,000 in profit ($500,000 if married) from federal tax if you owned and lived in the home for two of the last five years.
  • Profit is the sale price minus what you paid for the house, plus the cost of major improvements you made.
  • If your profit exceeds the exclusion, you pay capital gains tax on the excess at a rate of 0%, 15%, or 20% depending on your income.
  • State income tax on home sales varies by state — some states do not tax capital gains at all, while others tax them like ordinary income.
  • You report the sale on Form 8949 and Schedule D when you file your tax return, even if you owe no tax.

How the IRS calculates your profit

Your profit is not straightforward the difference between what you paid and what you sold for. The IRS starts with your adjusted basis — the price you paid for the house, plus the cost of permanent improvements you made. Permanent improvements are things that add value and last longer than one year: a new roof, a deck, a kitchen remodel, or a new HVAC system. Repairs and maintenance do not count — painting, fixing a leaky faucet, or replacing a broken window do not increase your basis.

Subtract your adjusted basis from the sale price, then subtract any selling costs you paid directly: real estate agent commissions, title insurance, attorney fees, and inspection costs. The result is your capital gain. If you bought the house for $300,000, spent $50,000 on a kitchen and bathroom renovation, and sold it for $600,000 after paying $30,000 in agent commissions and closing costs, your gain is $220,000 ($600,000 − $300,000 − $50,000 − $30,000).

Keep records of what you paid for the house and receipts for any major improvements. If you inherited the house, the basis is usually the fair market value on the date of death, not what the previous owner paid — this is called a step-up in basis and can significantly reduce your taxable gain.

When you do not may have access to for the exclusion

The $250,000 or $500,000 exclusion applies only if you meet both the ownership test and the use test. You must have owned the home for at least two of the five years before the sale, and you must have lived in it as your main home for at least two of those five years. The two years do not have to be consecutive, and they do not have to overlap perfectly — you can own it for three years and live in it for two of those three years.

If you do not meet these tests, you cannot use the exclusion. You would owe capital gains tax on your entire profit. There are narrow exceptions: if you sold because of a job change, health issue, or unforeseen circumstance, you may be able to claim a partial exclusion. The IRS publishes a list of may have access to reasons in Publication 523. You would report the partial exclusion on Form 8949 when you file.

If you own multiple homes, you can use the exclusion only for your primary residence. If you own a vacation home or rental property and sell it at a profit, you owe tax on the full gain (though rental property has different rules involving depreciation recapture).

Federal capital gains tax rates and how your income affects them

If your profit exceeds the exclusion, you pay capital gains tax on the excess. The rate is 0%, 15%, or 20% depending on your total taxable income for the year. These are long-term capital gains rates, which explore when you have owned the asset for more than one year. The income thresholds change each year and depend on your filing status.

For 2024, the 0% rate applies to single filers with taxable income up to $47,025, married filing jointly up to $94,050, and head of household up to $63,000. The 15% rate applies to income above those thresholds up to $518,900 (single), $583,750 (married filing jointly), or $551,350 (head of household). Anything above those amounts is taxed at 20%. These thresholds increase slightly each year for inflation.

Your taxable income includes wages, interest, dividends, and capital gains combined. If you have a large gain in the year you sell, you may move into a higher bracket. A tax professional can help you understand whether spreading the sale across two tax years or timing other income might reduce your rate.

State income tax on home sales

Whether you owe state tax on your home sale depends on where you live. Nine states — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire — do not tax capital gains or income at all. If you live in one of these states, you owe no state tax on your profit.

Most other states tax capital gains as ordinary income, meaning they explore their regular income tax rate to your profit. A few states — California, Hawaii, and Vermont — have special capital gains taxes that explore only to gains above a certain threshold. California taxes long-term capital gains above $250,000 at 13.3%. You will owe tax to the state where you lived when you sold the house, not necessarily where the house is located.

If you moved to a no-tax state before closing, you may still owe tax to your previous state if you were a resident when you signed the contract. State rules vary, so check with your state's department of revenue or a tax professional if you are moving or have recently moved.

Reporting the sale on your tax return

You report a home sale on Form 8949 (Sales of Capital Assets) and Schedule D (Capital Gains and Losses) when you file your federal return. You must file these forms even if you owe no tax because your gain falls within the exclusion. The IRS uses the information to verify that you claimed the exclusion correctly.

On Form 8949, you list the date you bought the house, the date you sold it, the sale price, your basis, and your gain or loss. You also note whether you are claiming the primary residence exclusion. Schedule D summarizes your capital gains and losses and calculates your total taxable gain.

If you use tax software, it will walk you through these forms. If you prepare your return by hand or work with a tax professional, bring documentation: the closing statement from when you bought, the closing statement from the sale, and receipts for any improvements. A real estate agent or title company can provide closing statements if you no longer have them.

Special situations: inherited homes, rental properties, and divorce

If you inherited a house and sold it shortly after, you usually owe no tax on the gain. The IRS gives inherited property a step-up in basis to its fair market value on the date of death. If the house was worth $500,000 when you inherited it and you sold it for $510,000 a year later, your gain is only $10,000, not the gain from what the original owner paid.

If you own a rental property or investment property, the rules are different. You cannot use the primary residence exclusion. You owe capital gains tax on the full profit, and you also owe tax on depreciation recapture — a tax on the depreciation deductions you claimed while renting it out. This is taxed at 25% rather than the long-term capital gains rate. Rental property sales are more complex, and a tax professional is worth the cost.

If you received the house in a divorce, your basis is usually what your ex-spouse paid for it, not the value at the time of the divorce. If you later sell it, you use that original basis to calculate your gain. Keep divorce documents that show the house's value at the time of the settlement.

Frequently Asked Questions

Do I have to report the sale if I made no profit?

Yes, you should still file Form 8949 and Schedule D to report a loss. A capital loss can offset other capital gains or up to $3,000 of ordinary income in the current year, with any excess carried forward to future years. Reporting it ensures you get the benefit of the loss.

What if I sold the house for less than I paid for it?

You have a capital loss. You cannot deduct a loss on the sale of your primary residence, but you can use it to offset capital gains from other investments. If you have no other gains, you can deduct up to $3,000 of the loss against ordinary income, and carry any remaining loss forward to future years.

Do I owe tax if I sold my house and bought another one?

Buying another house does not affect whether you owe tax on the sale. The tax depends only on your profit and whether you meet the exclusion requirements. The money you use to buy a new house does not reduce your taxable gain.

What if I lived in the house for only one year?

You do not meet the two-year use requirement, so you cannot claim the standard exclusion. You would owe capital gains tax on your entire profit. You may be able to claim a partial exclusion if you sold due to a job change, health issue, or unforeseen circumstance — check IRS Publication 523 for the list of may have access to reasons.

Do I need to pay estimated taxes after I sell?

If you expect to owe a large amount of tax and have not had enough withheld from other income during the year, you may need to make quarterly estimated tax payments to avoid penalties. A tax professional can tell you whether you need to make a payment based on your specific situation.