Is Money From the Sale of a House Considered Income?

Money from the sale of a house is not treated as income in the ordinary sense. Only the profit — sale price minus what you paid for the home, improvements, and selling costs — can be taxed, and even that profit is usually wiped out by a federal exclusion of up to $250,000 for single filers or $500,000 for married couples filing jointly. Most homeowners walk away from a sale owing nothing to the IRS.

Why the Check at Closing Isn’t Income

Wages, salary, and interest are ordinary income, taxed at federal rates that run from 10% to 37% in 2026.¹ A home sale is different. Most of what you receive is a return of the money you already put into the property: your down payment, principal payments, closing costs, and improvements. That portion is not taxable at all because it was never income to begin with.

Federal law classifies a personal residence as a capital asset, so any profit is a capital gain rather than ordinary income.² Capital gains carry lower rates than ordinary income, and for a primary residence a separate exclusion often removes the tax entirely.

The Exclusion That Erases Tax for Most Sellers

Section 121 of the Internal Revenue Code lets you exclude up to $250,000 of gain if you file as single, or up to $500,000 if you file jointly with a spouse.³ To qualify, two tests both have to be met:

Ownership test: you owned the home for at least two years during the five years ending on the sale date.
Use test: you lived in the home as your main residence for at least two years during that same five-year window.

The two years don’t need to be consecutive; they just need to add up to 24 months inside the five-year lookback. For a joint $500,000 exclusion, both spouses must meet the use test, but only one has to meet the ownership test. And the exclusion is available only once every two years, so back-to-back flips don’t qualify.³

Several situations bend these rules in the seller’s favor. If you received the home in a divorce, your ex-spouse’s ownership period counts toward yours, and time your ex lives there under a separation agreement can count toward your use test. A surviving spouse who sells within two years of the other spouse’s death and hasn’t remarried can still claim the full $500,000 exclusion.⁴ Members of the uniformed services, Foreign Service, or intelligence community on qualified extended duty can pause the five-year clock for up to ten years.⁵

Partial Exclusion When You Sell Early

Sellers who don’t reach the full two years can still get a reduced exclusion if the move was driven by a job change, a health issue, or an unforeseen event.³ The reduction is proportional: 12 months of qualifying use gets half the normal cap, or $125,000 single / $250,000 joint. The IRS treats certain circumstances as automatically qualifying, including a new job at least 50 miles farther from the home than your old workplace, a move for medical care, a death, divorce, unemployment eligibility, destruction or condemnation of the home, or multiple children from the same pregnancy.⁴ Outside those safe harbors, the IRS weighs the facts and circumstances.

Figuring the Profit That Could Be Taxed

The number that matters is not the sale price. It’s the gain, and it takes three steps to find.

Start with your adjusted basis. That’s the price you originally paid, plus the cost of capital improvements — a new roof, a kitchen remodel, an addition. Routine repairs and maintenance don’t count.⁴ Keep receipts, because a higher basis means a lower gain.

Next, calculate the amount realized: sale price minus selling costs like agent commissions, legal fees, advertising, and any transfer taxes you paid as seller.⁴ Your closing disclosure has most of the numbers you need.

Subtract adjusted basis from amount realized. A positive result is your gain. A negative result is a loss, and losses on a personal residence are not deductible, though you also owe no tax on the money you did receive.⁶

Rates That Apply When Gain Exceeds the Exclusion

If you owned the home for more than a year, gain above the exclusion is taxed at long-term capital gains rates. For 2026, those rates are 0%, 15%, or 20%, tied to your taxable income and filing status:⁷

0% for taxable income up to $49,450 single or $98,900 joint.
15% from there up to $545,500 single or $613,700 joint.
20% above those thresholds.

If you owned the home for a year or less, the profit is a short-term gain and is taxed at ordinary income rates, up to 37%.¹

Higher earners can owe an additional 3.8% net investment income tax on the taxable portion of the gain when modified adjusted gross income exceeds $200,000 single or $250,000 joint.⁸ Gain excluded under Section 121 is not counted, so only the leftover taxable slice is at risk.⁹ State income taxes may also apply, and state rules don’t always mirror the federal exclusion — check your state’s tax authority.

Situations That Change the Answer

Inherited Homes

If you inherited the property, your basis is generally its fair market value on the date the previous owner died, not what they paid for it.¹⁰ A parent’s $100,000 home worth $400,000 at death gives you a $400,000 starting basis, so selling soon after for close to that amount produces little or no gain.

Gifted Homes

A gift works differently. Your basis for figuring a gain is the donor’s basis, usually what they paid plus their improvements.¹¹ If the donor’s basis was higher than the home’s value when gifted, a different, lower basis applies for calculating a loss.

Home Offices and Rental Use

If you took depreciation deductions for a home office or for renting out part of the property, the Section 121 exclusion doesn’t cover the portion of gain tied to that depreciation. Gain equal to depreciation claimed after May 6, 1997, is taxed at a maximum 25% rate no matter how much of your total gain you exclude.¹² Periods after 2008 when the home was not your primary residence are treated as nonqualified use, and the gain allocated to those days can’t be excluded either — with an exception for any period after you last used the home as your main residence.⁴

Foreign Sellers

If you are a foreign person selling U.S. real property, the buyer is generally required to withhold 15% of the gross sale price under FIRPTA and send it to the IRS.¹³ An exemption applies when the buyer plans to use the home as a residence and the price is $300,000 or less. If your actual tax owed is smaller than what was withheld, you can file a return to claim a refund, or apply for a withholding certificate on Form 8288-B before closing to reduce the amount held back.

Reporting the Sale

Even when the gain is fully excluded, you may receive a Form 1099-S from the settlement agent reporting the gross proceeds to the IRS.¹⁴ You can sometimes avoid the form by giving the closing agent a written certification that you qualify for the full exclusion, but many sellers get one anyway.

If your gain exceeds the exclusion or you don’t qualify at all, report the sale on Form 8949 and carry the totals to Schedule D of your Form 1040.⁴ If the gain is fully excludable and no 1099-S was issued, you generally don’t need to report the sale at all. Failing to report a taxable gain can trigger an accuracy-related penalty of 20% of the underpayment.¹⁵

1
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
2
Office of the Law Revision Counsel. 26 U.S. Code 1221 – Capital Asset Defined
3
Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
4
Internal Revenue Service. Publication 523 – Selling Your Home
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eCFR. 26 CFR 1.121-5 – Suspension of 5-Year Period
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Internal Revenue Service. Property (Basis, Sale of Home, Etc.) 3
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Internal Revenue Service. Revenue Procedure 2025-32
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Office of the Law Revision Counsel. 26 U.S. Code 1411 – Imposition of Tax
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Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
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Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
11
Office of the Law Revision Counsel. 26 U.S. Code 1015 – Basis of Property Acquired by Gifts and Transfers in Trust
12
Internal Revenue Service. Property (Basis, Sale of Home, Etc.) 5
13
Internal Revenue Service. FIRPTA Withholding
14
Internal Revenue Service. Instructions for Form 1099-S
15
Internal Revenue Service. Accuracy-Related Penalty