Owning a home puts you on the hook for three distinct taxes: an annual property tax based on your home’s assessed value, a transfer tax when the deed changes hands, and potentially a capital gains tax when you sell. A federal exclusion shelters up to $250,000 of gain on a primary-residence sale ($500,000 for married couples filing jointly), and if you itemize you can deduct property taxes and mortgage interest within federal limits. The taxes homeowners pay vary heavily by state and county, but the categories are the same everywhere.
Annual Property Taxes
Property taxes are ad valorem, meaning the amount you owe is proportional to your home’s assessed value. A local assessor sets that value through inspections, automated valuation models, or comparisons with similar nearby properties. A millage rate is then applied, with one mill equal to one dollar of tax per $1,000 of assessed value. A home assessed at $300,000 in a jurisdiction with a 20-mill rate would owe $6,000 a year.
These taxes fund local services: public schools, fire departments, road maintenance. Counties, cities, and special districts each set their own rates under state law, so an identical home across a jurisdictional line can carry a very different bill.
Most lenders collect property taxes through an escrow account. Each month you pay roughly one-twelfth of the annual bill along with your mortgage, and the servicer pays the taxing authority when the bill comes due. Your lender reviews the account at least yearly and adjusts the monthly amount when rates or assessments rise.1Consumer Financial Protection Bureau. 12 CFR 1024.17 – Escrow Accounts If your home is paid off or your loan has no escrow requirement, you pay the county treasurer or tax collector directly.
Falling behind is serious. The local government places a tax lien that the IRS calls a “superpriority” lien, taking precedence over mortgages and even federal tax liens under most state laws.2Internal Revenue Service. IRS Internal Revenue Manual 5.17.2 – Federal Tax Liens After a delinquency period of one to five years depending on the state, the jurisdiction may auction the property or the tax debt itself. Penalties, interest, and administrative costs pile on during that window.
Lowering Your Property Tax Bill
Homestead Exemptions
Most states reduce the taxable value of a primary residence through a homestead exemption. You must own the home and live there as your permanent residence. Many states offer enhanced exemptions for seniors, veterans, and people with disabilities. The exemption is almost never automatic. You file an application with the county assessor, usually by a specific annual deadline, and missing it means paying the full unreduced bill for the year.
Appealing Your Assessment
If your assessed value looks too high, you can challenge it. Start informally with the county assessor’s office. If that goes nowhere, file a formal appeal with the local or county review board. A denial can be escalated to a state tax court or administrative tribunal. Comparable sales at lower prices, errors in the property record such as overstated square footage, and independent appraisals are the evidence that moves these cases.
Special Assessments and Supplemental Bills
Special assessments are separate charges that fund specific infrastructure, such as new sewer lines, street lighting, or sidewalks, within a defined district. Only properties that benefit pay, and the charge shows up as its own line item on your tax bill.3FHWA – Center for Innovative Finance Support. Special Assessments – An Introduction Unlike general property tax, a special assessment usually expires when the bond that financed the project is paid off. Before you buy, check whether the property sits in an assessment district. The added cost can run several thousand dollars a year for decades.
New buyers are often surprised by a supplemental property tax bill that arrives months after closing. When a property changes hands, the assessor reassesses it based on the purchase price. If the new value is higher than the old one, you owe a supplemental tax on the difference, prorated from your purchase date through the end of the tax year. Depending on timing, you may get more than one supplemental bill covering different fiscal periods. These bills are usually not paid from your escrow account, so plan to cover them yourself.
Federal Deductions and Credits Tied to Owning a Home
The Property Tax Deduction and the SALT Cap
If you itemize, you can deduct state and local property taxes on your primary residence and a second home on Schedule A. That deduction sits under the state and local tax cap. For 2026, the combined SALT deduction (state and local income or sales taxes plus property taxes) is limited to $40,400 for most filers and $20,200 if married filing separately.4Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 The cap phases down once modified adjusted gross income exceeds $505,000 ($252,500 if married filing separately), shrinking by 30 cents per dollar of excess income until it hits a $10,000 floor.
The taxes have to be assessed uniformly on all real property in the community and fund general governmental purposes. You deduct them in the year you actually pay them, not the year assessed.
The Mortgage Interest Deduction
Itemizers can also deduct interest on mortgage debt used to buy, build, or substantially improve a primary or second home. For loans taken out after December 15, 2017, the deduction covers interest on the first $750,000 of mortgage debt ($375,000 if married filing separately).5Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction Older mortgages remain under the previous $1 million limit. Neither limit is adjusted for inflation.
Energy-Efficient Home Improvement Credits Have Expired
The Energy Efficient Home Improvement Credit and the Residential Clean Energy Credit ended on December 31, 2025. Under the One Big Beautiful Bill Act, neither credit is available for property placed in service or expenditures made after that date.6Internal Revenue Service. FAQs for Modification of Sections 25C, 25D, 25E, 30C, 30D, 45L, 45W, and 179D Under the One Big Beautiful Bill If your installation was completed before the cutoff, you can still claim the credit on your 2025 return.
Real Estate Transfer Taxes
When a property changes hands, most jurisdictions charge a transfer tax, sometimes called a documentary transfer tax or deed tax. It is usually a flat rate per dollar of the sale price and is collected at closing before the deed is recorded. Some states put the tax on the buyer, some on the seller, and some split it. A few states impose no transfer tax at all.
The transfer tax is separate from recording fees, which just cover the administrative cost of filing the new deed. Without payment of any required transfer tax, the county recorder generally will not process the deed.
Several common exemptions cut or eliminate the tax. Transfers between immediate family members, transfers into or out of a living trust where the owner does not change, and transfers to a business entity wholly owned by the person conveying the property are frequently exempt. Check your jurisdiction’s rules before assuming a gift or family restructuring will trigger the tax.
Capital Gains Taxes When You Sell
How the Gain Is Calculated
If you sell for more than your adjusted cost basis (usually the purchase price plus the cost of capital improvements), the profit is a capital gain. Hold the home a year or less and the gain is short-term, taxed at ordinary income rates that reach 37 percent for 2026.7Internal Revenue Service. Topic No. 409, Capital Gains and Losses4Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Hold it more than a year and the gain is long-term, taxed at 0, 15, or 20 percent depending on your taxable income.
The Primary Residence Exclusion
Most homeowners selling their main home owe nothing, thanks to the exclusion under Section 121 of the Internal Revenue Code. If you owned and lived in the home as your principal residence for at least two of the five years before the sale, you can exclude up to $250,000 of gain. Married couples filing jointly can exclude up to $500,000 if both spouses meet the use requirement and at least one meets the ownership requirement.8Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence The exclusion is available only once every two years.
If your gain exceeds the exclusion, you owe tax only on the excess. A married couple with a $600,000 gain on a qualifying sale would pay capital gains tax on $100,000. The exclusion does not apply to gain allocated to “nonqualified use” periods, meaning stretches when the home was not your primary residence, such as years you rented it out.8Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
The Net Investment Income Tax
Higher-income sellers may owe an additional 3.8 percent Net Investment Income Tax. It applies to the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds $200,000 (single), $250,000 (married filing jointly), or $125,000 (married filing separately).9Internal Revenue Service. Topic No. 559, Net Investment Income Tax These thresholds are not adjusted for inflation. The Section 121 exclusion reduces your taxable gain before the NIIT calculation, so most primary-residence sellers stay clear.
Reporting the Sale
If your gain exceeds the exclusion, or if you receive a Form 1099-S at closing, report the sale on Form 8949 and carry it to Schedule D.10Internal Revenue Service. 2025 Instructions for Schedule D (Form 1040) Even if the entire gain is excludable, you still have to report the sale if a 1099-S was issued.11Internal Revenue Service. Topic No. 701, Sale of Your Home Skipping that step can trigger IRS notices and penalties.
Inherited and Investment Property Are Different
Inherited real estate gets a “stepped-up” basis to fair market value on the date the previous owner died. You owe capital gains tax only on appreciation after that date, not on the decades of growth the prior owner saw.12Internal Revenue Service. Gifts and Inheritances A quick sale after inheritance often produces little or no taxable gain. The Section 121 exclusion generally will not help unless you actually move in and meet the two-out-of-five-year residency test before selling.
Investment property does not qualify for the Section 121 exclusion at all. When you sell a rental at a profit, the full gain is taxable, and any depreciation you claimed during the rental years is recaptured at rates up to 25 percent, on top of the regular capital gains rate on the remaining profit.7Internal Revenue Service. Topic No. 409, Capital Gains and Losses A Section 1031 like-kind exchange can defer these taxes if you roll the proceeds into another qualifying investment property within strict deadlines, but Section 1031 does not apply to your primary residence.13Internal Revenue Service. Like-Kind Exchanges – Real Estate Tax Tips