Yes, selling property is generally taxable at the federal level: the IRS treats the difference between what you paid and what you sold for as a capital gain, and capital gains are income. That said, many sellers owe far less than they expect, and some owe nothing. What you actually pay depends on the kind of property, how long you owned it, your income for the year, and whether you qualify for an exclusion or deferral. A home you lived in, a rental, raw land, and a personal vehicle each follow different rules.
The Main Home Exclusion Wipes Out Most Sales
The single biggest break goes to your primary residence. If you qualify, you can exclude up to $250,000 of profit as a single filer, or up to $500,000 filing jointly. That is enough to erase the taxable gain on the vast majority of home sales in the United States.1Internal Revenue Service. Sale of Your Home
To qualify, you must pass two tests. You must have owned the home for at least two of the five years ending on the sale date, and you must have used it as your main residence for at least two of those same five years. The two years don’t have to be consecutive.2Office of the Law Revision Counsel. 26 US Code 121 – Exclusion of Gain From Sale of Principal Residence
For a married couple claiming the full $500,000, at least one spouse must meet the ownership test, both must meet the use test, and neither can have used the exclusion on another home sale in the prior two years.1Internal Revenue Service. Sale of Your Home
Partial Exclusion When You Sell Early
If you sell before hitting two years, you may still get a prorated exclusion when the sale is driven by a job relocation that makes keeping the home impractical, a serious health issue, divorce, or certain disasters. The amount is the same fraction of the normal exclusion that your time in the home represents of the two-year requirement.3Internal Revenue Service. Publication 523, Selling Your Home
Military and Foreign Service
Members of the military, intelligence community, and Peace Corps can suspend the five-year test window during periods of qualified extended duty, for up to 10 years. That stretches the ownership-and-use window to as long as 15 years, and only one property at a time can have its clock suspended.3Internal Revenue Service. Publication 523, Selling Your Home
How the Taxable Gain Is Calculated
Your taxable gain isn’t the sale price minus what you paid. It’s the sale price, minus selling expenses like agent commissions and transfer fees, minus your adjusted basis. Getting the basis right is where sellers save or lose the most.
Adjusted basis starts with the original purchase price, plus the cost of major improvements. Qualifying improvements are projects that add value or extend the property’s useful life: a new roof, a kitchen renovation, adding a bathroom, replacing the HVAC system, building a deck. Routine maintenance like repainting or fixing a leaky faucet does not count.4Internal Revenue Service. Publication 551 – Basis of Assets
If you used the property for business or rental purposes and claimed depreciation, you subtract that depreciation from your basis, which raises your gain when you sell. The adjustment is required whether or not you actually claimed the deductions you were entitled to.5Internal Revenue Service. Topic No. 703, Basis of Assets
Short-Term vs. Long-Term Rates
Holding period decides the rate. Property held for one year or less produces a short-term gain, taxed at your ordinary income rate. Held for more than one year, it’s a long-term gain and qualifies for lower rates.6Internal Revenue Service. Topic No. 409, Capital Gains and Losses
For 2026, long-term capital gains rates are 0%, 15%, or 20%, based on taxable income and filing status:7Internal Revenue Service. Revenue Procedure 2025-32
- 0% rate: taxable income up to $49,450 single, $98,900 married filing jointly, $66,200 head of household.
- 15% rate: from those thresholds up to $545,500 single, $613,700 married filing jointly, $579,600 head of household.
- 20% rate: taxable income above the 15% ceilings.
The gap between short-term and long-term treatment is large. In the 32% ordinary bracket, a gain on property held 11 months is taxed at 32%. Wait two more months and it can drop to 15%, sometimes to 0%.
The 3.8% Net Investment Income Tax
Higher-income sellers owe an extra 3.8% surtax on capital gains. It applies when modified adjusted gross income exceeds $200,000 single, $250,000 married filing jointly, or $125,000 married filing separately. The 3.8% is charged on the lesser of your net investment income or the amount you exceed the threshold by.8Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax
Gain covered by the $250,000 or $500,000 home exclusion doesn’t count as net investment income. Gain above the exclusion, and gain from a vacation home or investment property, does count. A married couple with $600,000 of profit on their main home excludes $500,000 and can owe the surtax on part or all of the remaining $100,000 if their income exceeds the threshold.
Extra Tax Layers on Rental and Business Property
Selling rental or business-use property brings a second tax layer that catches many owners off guard. The IRS recaptures the depreciation you claimed over the years and taxes it at up to 25%, regardless of holding period, on top of any long-term capital gains tax on the remaining profit.
Say you bought a rental for $300,000, claimed $80,000 of depreciation, and sold for $400,000. The $80,000 of recapture is taxed at up to 25%. The remaining $100,000 of appreciation is taxed at your applicable long-term capital gains rate. Investment sales almost always produce a higher effective rate than sellers expect.5Internal Revenue Service. Topic No. 703, Basis of Assets
Deferring the Tax With a 1031 Exchange
If you’re selling investment or business real estate and buying another qualifying property, a like-kind exchange under Section 1031 lets you defer the entire capital gains tax. The tax carries forward to the replacement property rather than disappearing, but deferral keeps the money working for you.9Office of the Law Revision Counsel. 26 US Code 1031 – Exchange of Real Property Held for Productive Use or Investment
The rules are strict. Since 2018, only real estate qualifies; equipment and vehicles no longer do. You have 45 days from closing on the sale to identify replacement properties in writing, and 180 days from that same date (or your tax return due date, whichever is sooner) to close on the replacement. Miss a deadline and the entire exchange is disqualified. Most investors use a qualified intermediary to hold the sale proceeds, because touching the money yourself can also blow up the transaction.
Inherited vs. Gifted Property
How you acquired the property changes the math dramatically. When you inherit, your basis is generally the fair market value on the date the previous owner died, not what they paid. If a parent bought a home in 1985 for $80,000 and it was worth $400,000 at death, your basis is $400,000. Sell for $410,000 and only $10,000 is taxable gain.10Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
Gifts work the opposite way. If someone gives you property while alive, you take their original basis. Same house, gifted at $400,000 with an $80,000 original basis, sold for $410,000: $330,000 is taxable gain.11Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust One wrinkle: if the property’s fair market value at the time of the gift was lower than the donor’s basis, your basis for figuring a loss is capped at that lower value. Ask the giver for records of the original purchase price and improvements; you’ll need them when you sell.12Internal Revenue Service. Gifts and Inheritances
Selling at a Loss
If you sell your personal home or car for less than you paid, the loss is not deductible. The IRS does not allow write-offs on losses from personal-use property.13Internal Revenue Service. Publication 544, Sales and Other Dispositions of Assets
Losses on investment property behave differently. A capital loss first offsets any capital gains you have that year. If losses exceed gains, you can deduct up to $3,000 of the excess against ordinary income ($1,500 if married filing separately). Unused losses carry forward to future years indefinitely.
Installment Sales
When the buyer pays you over multiple years instead of at closing, the installment method lets you spread the taxable gain across those years. You calculate a gross profit percentage and apply it to each payment as received. Each payment is treated as part return of basis (not taxed), part gain (taxed), and part interest income (also taxed). The installment method is the default for qualifying sales; you have to elect out to report the entire gain upfront.14Internal Revenue Service. Publication 537, Installment Sales
Spreading the income can keep you in a lower bracket and reduce or avoid the 3.8% surtax.
Watch for Estimated Tax After a Big Sale
A large gain mid-year can create a quarterly estimated tax obligation. If withholding and credits won’t cover at least 90% of the current year’s tax (or 100% of last year’s, 110% if your prior-year AGI exceeded $150,000), you’re expected to make estimated payments. Skipping them triggers an underpayment penalty even if you pay in full by April.15Internal Revenue Service. Large Gains, Lump Sum Distributions, Etc.
If the gain hits in a single quarter, you can annualize your income and pay more in that quarter rather than spreading the payment evenly across the year.
Foreign Sellers: FIRPTA Withholding
Non-resident foreign persons selling U.S. real estate are subject to automatic withholding of 15% of the total sale price at closing under the Foreign Investment in Real Property Tax Act. The buyer remits the withholding, and the foreign seller files a U.S. return to claim any refund or pay any remaining balance.16Internal Revenue Service. FIRPTA Withholding
How to Report the Sale
Report the sale on Form 8949, which captures what you sold, when you bought and sold it, your basis, and your gain or loss. The totals move to Schedule D and then to your Form 1040.17Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets
For real estate, the settlement agent files Form 1099-S with the IRS reporting the proceeds, and you get a copy. If your entire home-sale gain fits inside the exclusion, you may not need to report it, but if you received a 1099-S, report the transaction anyway so the IRS can match the numbers.18Internal Revenue Service. Instructions for Form 1099-S Taxes owed are due by the April filing deadline even if you get a filing extension; an extension gives you more time to file, not more time to pay.19Internal Revenue Service. Pay Taxes on Time
Records to Keep
The IRS recommends keeping returns and supporting documents for at least three years from the filing date.20Internal Revenue Service. Good Recordkeeping Year-Round Helps Taxpayers Avoid Tax Time Frustration For property sales, hold onto closing documents, the settlement statement, Form 1099-S, receipts for capital improvements, and any depreciation records. If you claimed the primary residence exclusion, keep proof of ownership and occupancy. Six years is a safer buffer, since the IRS can audit returns for that long when income is substantially understated.