Do You Pay Capital Gains Tax When Selling a House?

Most people who sell their home pay no capital gains tax when selling a house, because a federal exclusion shelters up to $250,000 of profit for single filers and $500,000 for married couples filing jointly. Tax only applies to gain above those limits, and the rate then depends on your income. Whether you owe anything comes down to how much profit you made, how long you lived there, and what your income looks like the year you sell.

Who Pays Nothing Because of the Section 121 Exclusion

Federal law lets you exclude a large piece of home-sale profit from income. Single filers can exclude up to $250,000 of gain. Married couples filing jointly can exclude up to $500,000, as long as both spouses meet the use requirement and at least one spouse meets the ownership requirement.¹

These figures apply to profit, not to the sale price. A married couple who bought a home for $400,000 and sells it for $850,000 has a $450,000 gain, which falls entirely inside the $500,000 exclusion. They owe no federal capital gains tax on the sale.

One limit trips people up: you can only use the exclusion once every two years. If you already excluded gain from a different home sale within the prior two years, the current sale doesn’t qualify.¹

The Two-Year Ownership and Use Tests

To claim the full exclusion, you need to pass two tests during the five years before the sale. You must have owned the home for at least two of those five years, and you must have used it as your principal residence for at least two of those five years. The two years don’t need to be consecutive, so a stretch of renting the place out in the middle won’t automatically disqualify you.¹

The IRS treats your principal residence as the place you live most of the time. Voter registration, the address on your federal tax returns, your driver’s license, and where you bank or work all help establish it. If you split time between two homes, the one where you spend more days is the principal residence.

Partial Exclusion When You Sell Early

Selling before the two-year mark doesn’t always mean losing the benefit. A partial exclusion is available when the sale is driven by a job move, health reasons, or an unforeseeable event, prorated to how much of the two-year period you completed.²

A work-related move qualifies when the new workplace is at least 50 miles farther from the home than the previous workplace, or when starting a first job at least 50 miles away.
A health-related move qualifies when you relocate to get or provide medical care, or when a doctor recommends the move for health reasons.
Unforeseeable events include natural disasters, involuntary conversions, and similar circumstances outside your control.

A single owner who lived in the home for one of the required two years before a qualifying job transfer could claim roughly half the maximum, around $125,000.

Suspension for Military and Foreign Service

Active-duty members of the uniformed services or Foreign Service on qualified extended duty away from home can elect to suspend the five-year look-back for up to 10 years. The clock pauses, giving you more time after returning to meet the use requirement. You make the election by filing your return for the year of sale and excluding the gain.³

How to Calculate Your Actual Gain

Your gain isn’t the sale price minus the purchase price. The IRS uses adjusted basis, which starts with your original purchase price (including closing costs at acquisition) and grows with qualifying improvements. Subtract the adjusted basis and your selling expenses from the sale price to find the gain.

Improvements That Raise Your Basis

Capital improvements are projects that add value, extend the home’s useful life, or adapt it to a new use. The IRS separates improvements from routine maintenance.² Improvements you can add include:

Additions such as a new bedroom, bathroom, deck, garage, or porch.
Major systems like central air conditioning, a new furnace, upgraded wiring, or a security system.
Exterior work including a new roof, new siding, storm windows, or insulation.
Interior remodels such as kitchen modernization, new flooring, built-in appliances, or a fireplace.
Grounds work including landscaping, driveways, fences, retaining walls, or a swimming pool.

Routine maintenance doesn’t count. Painting, patching cracks, fixing a leaky faucet, replacing broken hardware: these keep the home working without adding to its value. There’s a wrinkle worth knowing. Repairs done as part of a larger remodel can be treated as part of the improvement. Replacing one broken window is a repair; replacing every window as part of an upgrade is an improvement.²

Selling Expenses

Real estate commissions, title insurance, legal costs, and other expenses tied directly to the sale reduce your gain. Sell for $600,000 with $40,000 in selling expenses and an adjusted basis of $350,000, and your gain is $210,000. For a single filer, that sits inside the $250,000 exclusion. Keep receipts for every improvement and every closing cost. If the IRS questions your basis, documentation is what protects the number.

Rates on Gain Above the Exclusion

Gain that exceeds the exclusion is taxed as long-term capital gain if you owned the home more than a year. The rate depends on your total taxable income, and a 0% bracket exists that many sellers don’t realize applies to them.⁴

For the 2026 tax year:

The 0% rate applies with taxable income up to $49,450 (single), $98,900 (married filing jointly), or $66,200 (head of household).
The 15% rate applies above that up to $545,500 (single), $613,700 (married filing jointly), or $579,600 (head of household).
The 20% rate applies above those thresholds.

Most sellers with moderate incomes who exceed the exclusion pay 15%. The 20% rate kicks in only at incomes well above half a million dollars.⁴

The 3.8% Net Investment Income Tax

Higher-income sellers can face an additional 3.8% surtax, the Net Investment Income Tax. It applies when modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly). Those thresholds are not indexed for inflation, so more sellers cross them each year.⁵

Gain sheltered by the Section 121 exclusion is also excluded from the NIIT. The surtax reaches only the gain above the exclusion, and it’s calculated on the lesser of your net investment income or the amount your MAGI exceeds the threshold.

Depreciation Recapture If You Used Part of the Home for Business

If you claimed depreciation on any part of the home, the IRS wants some of that benefit back at sale. This most often affects sellers who took a home office deduction using the regular method or rented out part of the property.

Under the regular method, your basis is reduced by the depreciation you claimed, or the amount you were entitled to claim, whichever is greater. Skipping the depreciation deduction while claiming other home office expenses doesn’t let you dodge the basis reduction. At sale, the portion of gain tied to that depreciation is taxed as unrecaptured Section 1250 gain, at a maximum rate of 25%, regardless of your bracket.⁶

The simplified home office method ($5 per square foot, up to 300 square feet) treats depreciation as zero and doesn’t reduce your basis. If you plan to sell the home eventually, the simplified method sidesteps the recapture issue.⁶

Inherited Homes and Homes From a Divorce

Stepped-Up Basis on Inherited Property

When you inherit a home, your basis is generally the property’s fair market value on the date of the previous owner’s death, not what they paid. This stepped-up basis can wipe out most or all of the taxable gain. A parent who bought a house for $80,000 decades ago might leave it to you when it’s worth $400,000. Your basis starts at $400,000, so selling for $420,000 produces only $20,000 in gain.⁷

You still need to meet the two-out-of-five-year ownership and use tests to claim the Section 121 exclusion on an inherited home. Inheriting and selling immediately without living there means no exclusion, and you’d owe capital gains tax on any profit above the stepped-up basis. For homes sold near the date of death, that gain is usually modest.

Homes Received in a Divorce

Receiving a home through a divorce or separation agreement carries some favorable rules. You get credit for your former spouse’s period of ownership, so if your ex owned the home for three years before transferring it, those years count toward your requirement. You’re also treated as using the home as your principal residence during any period your former spouse lives there under a divorce or separation instrument.¹ The rules protect a spouse who moves out from otherwise failing the use test.

State Taxes and Transfer Taxes

Federal tax is only one layer. Most states tax capital gains as ordinary income, so profit above the federal exclusion will typically show up on your state return too. A handful of states have no income tax, and a few give partial breaks on capital gains, but in most of the country you should plan on a state tax bill for any gain that survives the federal exclusion. Rates and rules differ enough that checking your state’s treatment is worth doing.

Separately, many states and localities charge a real estate transfer tax when the deed changes hands. Rates run from zero in some states up to around 3% in others, and who pays depends on local custom or the terms of the purchase agreement. Transfer taxes apply to the sale price, not the gain, and are collected at closing. They’re deductible as a selling expense when you figure your federal gain.

Reporting the Sale

The closing agent is usually required to file IRS Form 1099-S, reporting the gross proceeds to you and the IRS. You may not receive one if you certify in writing to the closing agent that the entire gain qualifies for the Section 121 exclusion.⁸ Not getting a 1099-S doesn’t erase your obligation to report a taxable gain.

When gain exceeds the exclusion, report the sale on Schedule D of Form 1040 and detail the transaction on Form 8949, which captures your acquisition date, sale date, proceeds, and cost basis.⁹ Failing to report a taxable gain can trigger interest and penalties.

1
Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
2
Internal Revenue Service. Publication 523, Selling Your Home
3
eCFR. 26 CFR 1.121-5 – Suspension of 5-Year Period for Certain Members of the Uniformed Services and Foreign Service
4
Internal Revenue Service. Revenue Procedure 2025-32
5
Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
6
Internal Revenue Service. Depreciation and Recapture
7
Internal Revenue Service. Gifts and Inheritances
8
Internal Revenue Service. Instructions for Form 1099-S
9
Internal Revenue Service. About Schedule D (Form 1040), Capital Gains and Losses