Capital Gain on House Sale: Exclusions, Rates, and NIIT

If you sell your home at a profit, the capital gains tax on a house sale usually comes to nothing at the federal level. A longstanding exclusion shields up to $250,000 of gain for single filers and up to $500,000 for married couples filing jointly.¹ Anything above that is taxed at 0%, 15%, or 20% depending on your income, and a 3.8% surtax can apply on top. The size of your bill depends on three things: how you calculate the gain, whether you qualify for the full exclusion, and what rate applies to any leftover.

Figuring Out Your Gain

The gain is the difference between what you net from the sale and your adjusted basis in the home. Take the sale price on the closing statement and subtract selling costs like real estate commissions, title insurance, and transfer fees. That gives you the amount realized.

Then work out your adjusted basis. Start with what you originally paid, including closing costs at purchase.² Adjust that number up for capital improvements and down for any depreciation you claimed, for example on a home office.³ The gap between the amount realized and your adjusted basis is the capital gain.

Improvements vs. Repairs

The IRS separates capital improvements, which raise your basis, from routine maintenance, which does not. An improvement adds value, extends the home’s useful life, or adapts it to a new use. Upkeep just keeps things working.⁴

Things that add to basis include additions like a bedroom, bathroom, deck, or garage; major systems like a new furnace, central air, or wiring; exterior work like a new roof, siding, or driveway; interior upgrades like a kitchen remodel, new flooring, or built-in appliances; and grounds work like retaining walls, sprinkler systems, or a swimming pool.

Painting, fixing leaks, patching holes, and replacing broken hardware don’t count. One wrinkle trips people up: a repair done as part of a larger remodeling project counts as an improvement. Replacing one broken window is a repair. Replacing every window as a single project is an improvement.⁴ Keep the receipts either way.

If You Inherited the Home

Inherited property works differently. Your starting basis is generally the home’s fair market value on the date of the previous owner’s death, not what they originally paid.⁵ This stepped-up basis wipes out most of the built-up appreciation, so you only owe tax on gain that accrues after the date of death.

The $250,000 / $500,000 Exclusion

The core exclusion has two tests. 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.¹ The two years don’t have to run in a single stretch.

Pass both tests and you can exclude up to $250,000 of gain as a single filer, or up to $500,000 filing jointly. For the full $500,000, at least one spouse must meet the ownership test and both must meet the use test.¹ Married-filing-separately gets $250,000 each, not a split of $500,000.

There’s also a cooldown: you can’t use the exclusion if you already used it on another home sale within the previous two years.⁶ Sell one home and buy another, and you’ll need to hold the new one at least two years before claiming the exclusion again.

Partial Exclusion for Selling Early

Falling short of two years doesn’t automatically kill the exclusion. If you sold because of a job relocation, a health issue, or certain unforeseen events, you can claim a prorated portion based on how long you actually lived there.⁴

Qualifying events include a new job that forces a move, a doctor-recommended relocation for medical care, divorce, and specific situations outside your control like the birth of twins or higher-order multiples from a single pregnancy.⁷ The math: divide months (or days) of residence by 24 months (or 730 days), then multiply by your normal exclusion cap. A single filer who lived in the home 12 months before a qualifying job transfer could exclude up to $125,000.

Rates on the Taxable Portion

Any gain above your exclusion is taxable, and the rate depends on how long you owned the home. Property held one year or less produces a short-term gain, taxed at ordinary income rates.⁸ Held longer than a year, it qualifies for the lower long-term capital gains rates, which is where nearly all home sales fall.

For 2026, the long-term brackets are:

0% on taxable income up to $49,450 (single), $98,900 (married filing jointly), or $66,200 (head of household)
15% from those thresholds up to $545,500 (single), $613,700 (married filing jointly), or $579,600 (head of household)
20% on taxable income above those upper thresholds

Most homeowners with taxable gain after the exclusion land in the 15% bracket.⁸ The 20% rate only applies to the portion of income above the upper threshold.

The 3.8% Net Investment Income Tax

Higher earners face an additional 3.8% tax on net investment income, which can include the taxable portion of a home sale gain. The surtax applies to the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds the threshold for your filing status.⁹

The thresholds are $200,000 for single or head of household, $250,000 for married filing jointly, and $125,000 for married filing separately. Gain you successfully exclude under Section 121 doesn’t count toward this tax. Only the portion that ends up in your taxable income is at risk. A large sale can still push your modified AGI above the threshold in that one year and pull in investment income you wouldn’t otherwise owe the surtax on. Combined with the 20% long-term rate, the top effective federal rate on home sale gains is 23.8%.

Depreciation Recapture If You Had a Home Office

If you claimed depreciation on part of the home for a home office or rental use after May 6, 1997, the Section 121 exclusion won’t shelter it. The depreciation you previously deducted is taxed as unrecaptured Section 1250 gain at a maximum rate of 25%, no matter how well the rest of your gain fits inside the exclusion.³ The rate can be lower if your ordinary bracket is below 25%.

This surprises people. You might have a $200,000 gain sitting comfortably inside the $250,000 exclusion and assume the tax is zero. If you claimed $15,000 in depreciation for a home office over the years, that $15,000 is taxed separately at up to 25%. The exclusion covers the appreciation; it doesn’t undo the deduction you already took.

State Tax Adds to the Bill

Federal isn’t the whole story. Most states with an income tax treat capital gains as ordinary income, so your home sale profit stacks on top of your other earnings at your state’s regular rates. A handful of states don’t tax income at all, and some treat capital gains differently. Check your state’s rules before estimating the total.

Reporting the Sale

The closing agent typically files Form 1099-S reporting the sale proceeds to the IRS.¹⁰ If your entire gain fits inside the exclusion and you didn’t receive a 1099-S, you generally don’t need to report the sale on your return.⁶ If you did receive one, or if any part of the gain is taxable, you have to report it.

Reporting flows through Form 8949 and Schedule D of your Form 1040. When the gain is fully excluded, you still complete Form 8949 and enter the excluded amount as a negative adjustment using code “EH.”¹¹ Have your original purchase settlement statement, the sale closing statement, and improvement records ready so the basis is accurate.

Estimated Payments After a Large Sale

A taxable gain can create a one-time tax bill that regular paycheck withholding won’t cover. If you expect to owe at least $1,000 after withholding and credits, and your withholding won’t cover at least 90% of your current-year tax or 100% of last year’s tax (110% if last year’s AGI topped $150,000), the IRS wants quarterly estimated payments.¹²

You don’t have to spread the payments across all four quarters. You can annualize your income and make a larger estimated payment in the quarter when the sale closed.¹³ If you do, file Form 2210 with Schedule AI so the uneven payments line up with uneven income. If you have a regular paycheck, another option is to bump up W-2 withholding for the rest of the year. The IRS treats withholding as paid evenly across the year regardless of when it comes out, which sidesteps the timing question entirely.

Missing an estimated payment doesn’t trigger the failure-to-pay penalty on its own, but it can produce an underpayment penalty calculated as interest on what you should have paid each quarter. The separate failure-to-pay penalty on tax still unpaid at filing runs at 0.5% per month, up to 25%.¹⁴

1
Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
2
Office of the Law Revision Counsel. 26 USC 1012 – Basis of Property Cost
3
Office of the Law Revision Counsel. 26 USC 1016 – Adjustments to Basis
4
Internal Revenue Service. Publication 523 – Selling Your Home
5
Internal Revenue Service. Gifts and Inheritances
6
Internal Revenue Service. Topic No 701 – Sale of Your Home
7
Internal Revenue Service. Publication 523 – Selling Your Home
8
Internal Revenue Service. Topic No 409 – Capital Gains and Losses
9
Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax
10
Internal Revenue Service. About Form 1099-S – Proceeds From Real Estate Transactions
11
Internal Revenue Service. Instructions for Form 8949
12
Internal Revenue Service. 2026 Form 1040-ES
13
Internal Revenue Service. Large Gains, Lump Sum Distributions, Etc
14
Internal Revenue Service. Failure to Pay Penalty