Do I Need to Pay Tax on Selling a Home?

Real estate values have ballooned in recent years, providing homeowners with record amounts of equity. If you bought in the past few years, there’s a good chance you stand to make money if you sell your home. 

According to Zillow research, home value appreciation in 2021 was higher than median wages in 25 of 38 major metropolitan areas, with appreciation reaching more than $100,000 in 11 of them. Thanks to special tax exemptions for home ownership, sellers may be able to pocket some or all of those gains. But for some sellers, a big profit at closing can also mean a pretty hefty tax bill. 

Not everyone will owe taxes for the sale of their home — there are plenty of exceptions and personal circumstances that impact tax liability. There are three types of taxes to consider when selling a home:

• Capital gains tax
• Property tax
• Real estate transfer tax

An important caveat: As with anything related to taxes, this information is intended only as a general overview. What you owe — or are owed — depends on your specific set of circumstances. To see how these and other tax ramifications apply to you, consult with a tax professional or certified public accountant.

What is capital gains tax?

Capital gains are the profits you make when you sell an asset, including a home. In general, the tax rate you pay depends on how long you’ve owned your home and how long you’ve lived in it before selling. Those circumstances generally determine whether you have to pay capital gains on the sale of your home, and how much you have to pay.

Do I pay capital gains tax?

It depends. Ask yourself the following questions: 

1. Did you own the home?
2. Was the home your primary residence for at least two of the last five years leading up to the sale?
3. Has it been at least two years since you sold another primary residence and captured the same tax benefit?

If the answer to all those questions is yes, you probably won’t have to pay taxes on the first $250,000 of your net profit if you’re single or $500,000 if you’re married and file jointly.

If your net profit exceeds those limits, you’ll have to report the sale to the IRS, and can probably expect to pay taxes on anything above the limit. 

You can also expect to pay capital gains taxes if you don’t meet any of the qualifications above, unless you qualify for an exclusion or special circumstances.  Special rules will apply if the property generated rental income to the home owner. 

Capital gains tax exemption

Many homeowners avoid capital gains taxes when selling their primary home if they owned the home, lived in it for two of the previous five years and didn’t sell another main residence for which they claimed the exemption in the previous two years.

Married couples who want to take the exemption must file a joint tax return. In order to claim the exemption, one spouse needs to have owned the property for at least two of the last five years, and both spouses should have lived in the house for two of the last five years.

If the profit from selling your home exceeds the exemption, here is the rate you can expect to pay on any profits above $250,000/$500,000. (The rates assume you sold the home in 2024, and are filing in 2025.)

If you’re filing under a different status, information on capital gains tax rates can be found here. If you have owned for less than a year, you’ll be taxed on all the gains at your regular income tax rates.

Other capital gains tax rules

If you don't qualify for the tax exclusion described above, consider one of the other special considerations the IRS allows for when calculating capital gains taxes. 

Divorce: If you acquired the home in a divorce, you can use the time your ex-spouse lived in the home as their primary residence toward the residency requirements. 

Death: If one spouse dies, you can count the time the deceased person lived in the home to qualify for the exclusion, as long as you didn't remarry. 

Qualified official extended duty: If you work for a military or government intelligence agency and were stationed 50-plus miles from home or living in required government housing, you can get the two-year minimum waived. 

Can I qualify for a partial capital gains tax exclusion?

Even if you can't exclude all of your home sale profit, there are other scenarios where you may be able to partially lower your taxable profit. If you experienced any of the following life events, you may be able to get a partial exclusion, based on the the percentage of the two years that you lived in the home: 

• Job change/relocation
• Health issue that requires moving
• Divorce
• Having twins or triplets

How do I know if I owe capital gains taxes on selling my home?

Generally, anyone who receives a Form 1099-S: Proceeds from Real Estate Transactions at closing will owe some sort of capital gains tax on their home sale and will be required to file home sale profits on their tax return. A copy of the 1099-S is sent to the IRS, too. 

If you receive a Form 1099-S and believe you could qualify for any capital gains tax exclusions, talk to a pro, like your real estate agent or attorney, so you can avoid having the form filed. If you receive the form in error, make sure you can document how you qualify, and talk to your accountant or attorney about how to handle reporting the home sale on your taxes.  

Will I owe taxes on selling a second house?

The above capital gains exclusions apply only to primary residences, so any second home or investment property will be subject to capital gains taxes, at any amount of profit. But there are a few things you can do to minimize the burden. 

Convert the home to a primary residence

Move into the second home or rental property. By making it your primary residence, in two years you'll be able to sell while taking advantage of capital gains exclusions, as long as you haven’t taken the capital gains exclusion in the last five years. 

Do an IRS Section 1031 exchange

A 1031 exchange allows you to roll over profits from a second home sale into another investment property within 90 days of selling and defer capital gains tax liability. This is a complicated process that requires an intermediary to manage the rollover, and you're required to follow specific guidelines. For example, 1031 exchanges are only available on rental properties (not primary homes or vacation properties), so if you want to take advantage of this tax-deferred exchange, you'll need to convert the property to a rental property first. And you're limited to doing one 1031 exchange every five years. 

If you're interested in doing a 1031 exchange, talk to your real estate agent, tax professional and attorney first. 

Report losses to offset profits

Make sure to report other capital losses you’ve had in the same tax year to offset your capital gains. 

How to calculate capital gains tax

If you won't qualify for any capital gains tax exemptions, it's best to know how much you'll owe ahead of time so you have a better idea of your final profit. Here's how to calculate it.  

Figure out your cost basis

Your cost basis is the original purchase price of your home, plus any money you’ve spent on improvements that you did not previously deduct for tax purposes. 

For example: You purchased the home for $350,000 and put $50,000 into improvements, making your cost basis $400,000. 

If you converted a rental property into your primary residence, your basis would be the lower of your original purchase price or the fair market value of the home on the date you converted its use. You will still increase the basis by any money spent on improvements.

Calculate net proceeds

Your net proceeds are the sale price of the home minus any commissions and fees. 

For example, if your home sells for $300,000 and your closing costs are 10% of the purchase price ($30,000), your net proceeds will be $270,000. 

Find your taxable amount

If you’re selling a second home or don’t qualify for a capital gains exclusion on your primary home, your taxable income is your net proceeds minus your cost basis. 

So if your net proceeds are $270,000 and your cost basis is $250,000, you’ll be responsible for capital gains taxes on $20,000 of profit. At the 15% capital gains tax rate, you’ll owe $3,000 in the year you sold the home. 

Do I pay property tax when I sell my house?

Yes. At closing, you'll pay taxes prorated up to the closing date (your buyer will take over property taxes once they take possession). If your mortgage lender handles your property tax payments for you, you can expect to see the amount as a line item in your payoff settlement statement. 

Most property taxes are paid in arrears, which means you pay after the fact for charges that are already accrued. And most property taxes are charged on a twice-yearly basis, so it's likely you'll have to pay a prorated portion of your six-month tax bill at closing. 

Property tax rates by state

The property tax rate can vary based on the state where you’re selling. Here’s a quick summary of the highest and lowest property tax states:

States with highest effective property tax rates:

• New Jersey: 2.33%
• Illinois: 2.11%
• Connecticut: 2%
• New Hampshire: 1.89%
• Vermont: 1.78%

States with lowest effective property tax rates:

• Hawaii: 0.27%
• Alabama: 0.39%
• Colorado: 0.49%
• Nevada: 0.50%
• South Carolina: 0.53%

What is real estate transfer tax?

Among other selling-related costs and fees, a government transfer tax or title fee will have to be paid. Transfer taxes can be paid by either the buyer or seller, or split 50/50 between the two parties. Who pays is typically determined by market conditions.  The transfer tax on selling a house is calculated as a percentage of the sale price. In the U.S., the median transfer tax is $745. The rate varies widely by state, and even from one city to the next. And some places have no transfer taxes at all. 

Here are the median transfer taxes for the largest 10 metro areas:

As with all things tax related, it bears repeating that any tax obligations will depend on your specific circumstances. If you have questions, you should consult a tax professional or CPA.