Seller Property Taxes: What You Owe When Selling a Home

When you sell a home, you owe property taxes for every day you owned it during the tax year, and that share is settled at closing out of your sale proceeds. Beyond the property tax itself, seller property taxes when selling a home sit alongside several other tax obligations: federal capital gains tax on your profit above the Section 121 exclusion, state or local transfer taxes, and reporting requirements the IRS expects to see on your return.

How Property Taxes Get Prorated at Closing

Property taxes don’t pause because a home changes hands. The title company or settlement agent divides the year’s tax bill between you and the buyer based on the number of days each party owns the property. The annual bill is divided by 365 to get a daily rate, and you’re responsible for every day from the start of the tax period through the day before closing. Close on June 15 in a calendar-year tax jurisdiction and you cover roughly 165 days.

In most of the country, property taxes are collected in arrears, meaning the bill for the current tax period hasn’t come due yet at closing. In that situation, the settlement agent credits the buyer for your share of the unpaid taxes. That credit reduces your net proceeds, and the buyer uses it to pay the full bill when it arrives. You’ll see the adjustment itemized on the Closing Disclosure.

The opposite happens when taxes have already been prepaid. If you paid the full year and you’re selling partway through, the buyer reimburses you for the remaining days at closing. One wrinkle: not every jurisdiction runs its tax year from January to December. Some use a fiscal year starting July 1. The proration clause in your purchase contract should specify which calendar applies, because a mismatched assumption between fiscal and calendar years can shift hundreds of dollars in either direction.

Delinquent Property Taxes Come Out of Your Proceeds

Unpaid property taxes automatically become a lien on the property, and that lien takes priority over almost every other claim, including the mortgage. The IRS recognizes this “superpriority” for local property tax liens, so they jump ahead of even federal tax liens when state or local law gives them that status.¹

Before closing, the title company runs a search for outstanding tax balances. If delinquent taxes exist, the closing agent pays them directly from your proceeds, including accumulated interest and penalties. Penalty rates vary by jurisdiction and by how long the taxes have been overdue. Until the lien is cleared, no title company will issue title insurance, and without title insurance, the buyer’s lender won’t fund the loan. The sale can’t close until the debt is resolved. Any back taxes will come out of your proceeds whether you planned for them or not, so it’s better to know the number before you list.

Capital Gains Tax on the Sale

The profit from selling your home is taxable income, but Section 121 of the Internal Revenue Code lets most homeowners exclude a large piece of it. You can exclude up to $250,000 of gain from the sale of your primary residence, or up to $500,000 if you’re married filing jointly.² For joint filers to claim the full $500,000, at least one spouse must meet the ownership test and both spouses must meet the use test.

The requirements: you must have owned the home and used it as your primary residence for at least two of the five years before the sale date. Those two years don’t need to be consecutive. You also can’t have claimed the exclusion on another home sale in the prior two years.²

One rule that’s easy to miss: an unmarried surviving spouse can still claim the $500,000 exclusion if the sale happens within two years of the spouse’s death and the ownership and use tests were met just before the death.² That window can save tens of thousands of dollars.

Calculating Your Taxable Gain

Your gain isn’t the sale price minus what you paid. You first calculate your “adjusted basis,” which starts with your original purchase price and increases by qualifying capital improvements made over the years. The higher your adjusted basis, the smaller your gain and the less you owe.

The IRS draws a firm line between improvements and repairs. Improvements add value, extend the home’s life, or adapt it to a new use, and their cost gets added to your basis. Repairs maintain the home’s existing condition and don’t count. Common qualifying improvements include:³

Additions such as bedrooms, bathrooms, decks, garages, and porches
Systems including central air conditioning, a new furnace, security systems, and wiring upgrades
Exterior work like a new roof, new siding, or storm windows
Grounds improvements including landscaping, driveways, fences, retaining walls, and swimming pools
Interior upgrades such as kitchen modernization, built-in appliances, and new flooring

Painting, fixing leaks, patching cracks, and replacing broken hardware are repairs and don’t increase your basis. One exception: repairs done as part of a larger renovation or restoration project can be included.³ A new faucet by itself is a repair. A new faucet installed during a full bathroom remodel is part of an improvement. Keep receipts for every project.

Gain above the Section 121 exclusion is taxed at long-term capital gains rates of 0%, 15%, or 20%, depending on your taxable income.⁴ For 2026, the 20% rate starts at $545,500 for single filers and $613,700 for married couples filing jointly. High earners also face the 3.8% Net Investment Income Tax on capital gains when modified adjusted gross income exceeds $200,000 for single filers or $250,000 for joint filers.⁵ That surtax can push the effective rate above 23% for sellers in high-cost markets.

Selling Before Two Years or After Renting the Home

If you sell before meeting the two-year residency test, you may still qualify for a partial exclusion if the sale was triggered by a job change, a health condition, or an unforeseen circumstance. The IRS recognizes specific safe harbors:

Employment: your new workplace is at least 50 miles farther from the home than your old workplace was
Health: a doctor recommended the move to obtain or provide medical care for you or a family member
Unforeseen circumstances: death of a spouse or co-owner, divorce, job loss qualifying for unemployment benefits, natural disaster causing property damage, or multiple children from the same pregnancy

The partial exclusion works as a fraction. Take the shortest of three periods (time you lived in the home, time you owned it, or time since you last claimed the exclusion), divide by 730 days, and multiply by $250,000 (or $500,000).³ Fifteen months of residency before a qualifying job relocation produces a partial exclusion of roughly $153,000 (about 457 days ÷ 730 × $250,000).

If you used the home as a rental or second home at any point after December 31, 2008, and then converted it to your primary residence, the exclusion won’t cover the full gain. The law allocates a portion of your profit to “non-qualified use” periods based on the ratio of non-qualified use days to total ownership days. Own a home ten years, rent it three starting in 2015, then live in it seven, and roughly 30% of your gain gets taxed at capital gains rates regardless of Section 121. Time after the home was last used as your primary residence doesn’t count as non-qualified use, so moving out and selling a year later doesn’t trigger this rule.²

If you claimed depreciation during a rental period, gain attributable to that depreciation is taxed at a maximum rate of 25% as unrecaptured Section 1250 gain, calculated before the non-qualified use allocation applies.

Deducting Property Taxes for the Year of Sale

Property taxes you paid during the year of the sale are deductible on your federal return, but only for the portion of the year you owned the home. Sell in April and you deduct four months’ worth, not the full year, regardless of how the actual payment was timed. The proration figures on your Closing Disclosure are the source document.

Property tax deductions fall under the State and Local Tax (SALT) deduction. For 2026, the SALT cap is $40,400 for most filers, or $20,200 for married individuals filing separately. This cap covers all state and local taxes combined, including income taxes and property taxes.⁶ The $40,400 cap phases down for filers with modified adjusted gross income above $505,000, shrinking to a floor of $10,000. The cap and income threshold increase by 1% each year through 2029, when the expanded limit is scheduled to expire. To claim the deduction, you must itemize on Schedule A of Form 1040. Sellers in high-tax states who paid substantial property and state income taxes may find that itemizing makes sense in the year of a sale even if it didn’t in previous years.

Reporting the Sale to the IRS

The closing agent, typically the title company or settlement attorney, is required to file Form 1099-S with the IRS reporting the gross proceeds of your home sale. You’ll receive a copy. There is one way the 1099-S can be skipped: if the sale price is $250,000 or less ($500,000 for a married seller) and you certify in writing that the home was your principal residence, that the full gain is excludable under Section 121, and that there was no period of non-qualified use after 2008.⁷

When your gain exceeds the Section 121 exclusion or you don’t qualify for it at all, report the sale on Form 8949 and summarize it on Schedule D of Form 1040.⁴ Even if the gain is fully excludable but a 1099-S was issued, reporting the sale on your return and claiming the exclusion lets the IRS match the 1099-S to your filing without a letter asking about unreported income.

State Transfer Taxes

Most states impose a transfer tax or documentary stamp fee when real property changes hands. These are separate from property taxes and are typically calculated as a percentage of the sale price. Rates vary widely, from as low as 0.01% in some states to well over 1% in others, and a handful of states don’t impose them at all. Whether the buyer or seller pays depends on local custom and contract negotiation, though in many markets the seller covers this cost. On a $400,000 sale, transfer taxes can range from a few hundred dollars to several thousand. Your closing agent will list the exact amount on the Closing Disclosure, but checking your state’s rate early keeps the number from surprising you at the settlement table.

FIRPTA Withholding If You’re a Foreign Seller

If you’re a foreign person selling U.S. real property, the buyer is required to withhold 15% of the total sale price and remit it to the IRS under the Foreign Investment in Real Property Tax Act.⁸ That’s 15% of the entire amount realized, not just the profit, which often means the withholding exceeds the actual tax owed.

An exemption applies when the sale price is $300,000 or less and the buyer is an individual who intends to use the property as a residence for at least half the time during each of the first two years after purchase.⁸ For sales above that threshold, a foreign seller can apply for a reduced withholding amount by filing Form 8288-B with the IRS before closing, requesting withholding based on the estimated tax owed rather than the full 15%.⁹ Processing takes time, so filing well before the expected closing date is critical to avoid having the full amount withheld at settlement.

1
Internal Revenue Service. IRM 5.17.2 Federal Tax Liens
2
Office of the Law Revision Counsel. 26 USC 121 Exclusion of Gain From Sale of Principal Residence
3
Internal Revenue Service. Publication 523 (2025) Selling Your Home
4
Internal Revenue Service. Topic No. 409 Capital Gains and Losses
5
Internal Revenue Service. Topic No. 559 Net Investment Income Tax
6
Internal Revenue Service. How to Update Withholding to Account for Tax Law Changes for 2025
7
Internal Revenue Service. Instructions for Form 1099-S (12/2026)
8
Internal Revenue Service. FIRPTA Withholding
9
Internal Revenue Service. About Form 8288-B Application for Withholding Certificate for Dispositions by Foreign Persons of US Real Property Interests