There’s a good chance you won’t have to pay any capital gains tax when you sell your house, so long as it’s your primary residence. However, you may need to pay taxes when you sell your house if you don’t qualify for the primary residence exclusion or you fail to meet other requirements.
Other circumstances can also affect your tax bill when selling your house, such as your tax filing status, if you’re selling an investment property, or if your house is located out of state.
Because taxes on selling a house can get complicated, it’s usually in your best interest to consult a tax professional. That way you can avoid unpleasant surprises and potentially lower your tax liability. That said, here are some things to keep in mind as you start your research.
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Key takeaways
- You may not have to pay any capital gains tax if your home qualifies as a primary residence.
- If you do have to pay capital gains tax, you’ll usually get a lower rate if you’ve owned the property for at least a year.
- Capital gains taxes are more common if you’re selling an investment property.
- You can lower your tax liability by timing the sale right and keeping track of home improvements and selling expenses.
When do you pay taxes on selling a house?
You may have to pay capital gains tax depending on how long you’ve owned and lived in your house. If you have owned it for less than a year, you must pay short-term capital gains tax. Short-term capital gains are taxed as income, so you’ll pay whatever your income tax rate is.
On the other hand, if you’re selling your house after owning it for more than a year, then long-term capital gains tax rates may apply, which are charged at flat rates of 0%, 15%, or 20%—depending on your filing status and capital gains. However, you may be exempt from paying most or all of those taxes if you meet certain conditions for the primary residence exemption, which we’ll look at in more detail in the next section.
When are you exempt from paying taxes on selling your house?
You can be exempt from long-term capital gains tax for up to $250,000 in profit on the sale of your home if you are single, or $500,000 if you are married, filing jointly—so long as your home qualifies as a primary residence.
For your home to qualify as a primary residence, you must meet the following requirements:
- You (or your spouse, if married and filing jointly) has owned the home for at least two years.
- You lived in your home as your primary residence for at least two of the last five years.
- You haven’t claimed the capital gains tax exclusion within the past two years on another home sale.
- You haven’t bought your house through a 1031 exchange.
However, the Internal Revenue Service (IRS) provides some leeway to these rules in special cases. For example, you can claim the capital gains tax exemption even if you’ve done so within the past two years if your move is the result of a change of employment, health reasons, or unforeseen circumstances.
Similarly, if you’ve been granted ownership of the house during a divorce, you can include the time your ex-spouse lived in the home towards meeting the two-in-five-years use requirement.
Finally, military personnel and certain government employees on extended duty (along with their spouses) can defer the two-in-five-years use requirement by 10 years. In effect, this means that you or your spouse need only have lived in the house for two out of the last 15 years in order for it to qualify as a primary residence.
How to calculate capital gains tax on selling your house
Short-term capital gains tax example
Let’s say you and your family purchase a home for $400,000. You soon find out you’re having a child and decide to sell and upgrade to a larger home after just six months. You list the home and it sells for $440,000. Because you sold it for $40,000 more than you bought it for and you only lived in it for 6 months, that money is taxed as if you made that amount from your full-time job.
Long-term capital gains tax examples
Imagine that Sue buys a house with her husband, Fred, for $100,000. They live there for 10 years, and make renovations as well as build several additions. Finally, when they list the house, it sells for $400,000. Because they are married filing jointly, the profit on the house ($300,000) is less than the $500,000 cap. And since they lived in the home for two out of the last five years, there is no capital gains tax to be paid on the $300,000 profit.
However, not everyone is exempt from the long-term capital gains tax, even for primary residences. For example, let’s say Craig bought a house in a struggling neighborhood in 1984 for just $40,000. Over the next four decades, the fortunes of the neighborhood change dramatically and Craig’s home sells in 2024 for $300,000, making a profit of $260,000. Because Craig is single, he’s only exempt from the first $250,000 of capital gains, meaning he’ll have to pay 0%, 15%, or 20% (depending on his income) on the remaining $10,000.
How to report selling your house to the IRS
You’ll need to report the sale of your house to the IRS if any of the following are true:
- You’ve made a taxable gain on the sale of the home.
- You’ve received Form 1099-S. If you’ve received this form, you must report your taxable gains. But if you meet the criteria for the primary residence exclusion, you may not receive this form and won’t need to report the sale.
- You wish to report an otherwise non-taxable gain as taxable. This may apply, for example, if you plan to sell another property within two years and want to use the capital gains tax exemption then instead. This is a rare circumstance and you should consult a tax professional if this applies to you.
If none of the above is true, then you don’t need to report the sale of your home on your tax return.
You may also need to complete Form 8949 if you made a capital gain or loss on the sale of your property. The information in Form 8949 is then transferred to Schedule D.
You should always keep detailed records of your house sale, no matter what. In most cases, the IRS has up to three years to perform an audit on your tax return, although this period can be extended up to six years if you have substantially underreported your income.
Taxes on rental properties and second homes
Taxes on rental properties are treated differently from primary residences. If you are selling an investment property you've never lived in, you will pay capital gains tax on the sale of the home. You will also pay depreciation recapture taxes based on the amount you deducted from your income during your ownership of the house.
However, there are ways to avoid taxes when you sell a rental property. If you lived in the investment property for two of the last five years, then you could treat it as your primary residence and receive exemptions up to $250,000 if you’re filing single or $500,000 if you are married, filing jointly. An example of this would be if you bought a multifamily rental unit and lived in one of the units while renting out the others.
State taxes on selling a house
Most states have their own capital gains taxes on top of federal capital gains taxes. The states that don’t charge capital gains tax are:
- Alaska
- Florida
- New Hampshire
- Nevada
- South Dakota
- Tennessee
- Texas
- Wyoming
The capital gains tax rate for all other states varies substantially, from a maximum of just 2.5% in Arizona to up to 13.3% in California. Most states tax capital gains as income tax, but some apply a flat rate. For example, Utah charges a flat 4.95% capital gains tax.
Some states, such as Vermont, also charge different rates depending on how long you owned the asset. Because the rules for capital gains taxes vary substantially from state to state, it’s important to check your state’s laws and regulations. Find the capital gains tax rate in your state here.
Selling a house in a state you don’t live in
If you’re selling a house out of state, then in most cases you’ll need to pay capital gains based on the tax rate for the state where the property is located. That means filing a nonresident tax return for that state. Depending on where you live, you might be able to get a credit on your income tax return for some or all of the tax you paid to the other state. Each state has different laws, so check the regulations for your state and the state you’re selling in carefully.
How to pay less taxes when you sell your home
In addition to applying for the primary residence exclusion, there are a handful of other ways you can pay less tax when you sell your home.
1. Time the sale right.
Taxes for long-term capital gains are usually lower than for short-term capital gains. If you can, wait at least a year since you purchased the property before selling it. Similarly, if you’ve already claimed the capital gains tax exclusion before, you’ll need to wait two years before claiming it again.
2. Keep track of home improvements.
Many home improvements can be used to increase your home’s cost basis, which is essentially what you paid for your home plus the money you invested in improvements. The cost basis is deducted from the home’s selling price to calculate your taxable capital gains, so the higher your cost basis, the lower your capital gains tax.
3. Record selling expenses.
Many selling expenses can be deducted from your home’s sale price, which in turn will also reduce your taxable capital gains. For example, advertising, closing costs, broker commission, and settlement and title search fees are all deductible.
4. Consult a tax professional.
Capital gains taxes can get complicated, especially if you’re in a unique situation, like selling out of state or a second home. A tax professional is one of the best ways to maximize your deductions and ensure you’re not overpaying in capital gains taxes when you sell your house.
5. Use an experienced real estate agent to maximize your profits.
While reducing your taxes when you sell a house is important, maximizing your sale price should be your top priority. The best way to do that is by working with a top-rated local real estate agent.
With Clever, you can get matched with a vetted, experienced local realtor who can help you sell your house for a fair price. Clever also negotiates rates of 1.5% with our agents—that’s roughly half the traditional fee, which will save you thousands of dollars while still getting the same full-service home selling experience. Get matched with a Clever agent today and see your agent options for free.