Tax on Selling a House: 2025 Home Sale Tax Guide

When you sell your main home, you might owe capital gains tax on the profit, but most homeowners don’t. If you meet the IRS ownership and use tests, you can usually exclude up to $250,000 in gains ($500,000 for married couples filing jointly). 

Wondering about taxes on selling a house? Join the club.

The tax implications of the sale of your home can be challenging to decipher, with closing costs, reporting requirements, and, of course, capital gains taxes all coming into play. Toss in trying to remember years’ worth of home improvements and repairs, and you’ve suddenly got yourself a tax puzzle worthy of the intelligence community.

Fortunately, most homeowners won’t end up owing capital gains tax. The IRS provides some generous tax breaks to help you avoid these taxes on your primary residence. Nevertheless, there’s a lot to know, whether you’re a married couple filing jointly, a single filer, or an investment property owner. 

Does the IRS tax a house sale? We’ll walk you through everything you need to know to make sure you’ve got your main home (and side hustles) covered.

When Selling a Home Creates a Taxable Gain

If you’re selling your home (or even a rental property or vacation home), the first step is figuring out whether you’ll have taxable gain. The IRS treats your home as a capital asset. When you sell a capital asset for more than you paid for it (plus settlement fees and significant improvements), the profit is taxable income.

That’s your capital gain, and it determines whether you’ll pay capital gains tax.

So, how do you determine your gain from the sale of your home? You’ll need the selling price, your cost basis (the purchase price plus investment in significant improvements), and you’ll need to subtract things like selling costs, and sometimes, depreciation if you used the home to generate income (for example, renting out a basement apartment).

It might be helpful to think of your adjusted basis as a pool: the purchase price faces a tidal wave of closing costs, every central AC upgrade, deck addition, or other home improvements, and sometimes depreciation if you took deductions for home office or business use.

When you sell, subtract this adjusted basis from the selling price. The difference is your gain on the sale, or more precisely, your taxable gain.

The $250,000 / $500,000 Home Sale Exclusion

The IRS tax code does throw out a major lifeline to taxpayers: a huge capital gains tax exclusion.

Your tax filing status matters: if you’re single, you can exclude up to $250,000 of capital gains from your taxable gross income, while married couples filing jointly can exclude up to $500,000 in gain from the sale of a main home.

To qualify for this exclusion amount, you need to pass the ownership and use tests laid out by the Internal Revenue Service:

The Ownership and Use Tests

You must have owned and used the house as your principal residence for at least two out of the last five years before the sale. This five-year period doesn’t have to be continuous or even consecutive. Both use and ownership are required, and they often overlap. These rules, along with details on partial exclusions for unforeseen circumstances, are covered in IRS Pub. 523.

If you’re looking for more details and examples (especially on tricky cases), you can find them in our home sale exclusion guide (LINK - /home-sale-exclusion). Remember, there are some partial exclusions if you move for work in the foreign service, health reasons, or other government housing-related assignments. 

How to Calculate and Report the Gain

Now, we’ll walk you through how you actually calculate capital gains tax on a house sale and report everything to the IRS. This process is the same for your personal residence or certain investment properties.

The step-by-step calculator goes like this:

1. Figure out your selling price (subtracting selling expenses such as real estate agent commissions, legal fees, and other settlement fees).
2. Calculate your cost basis (purchase price plus improvements minus any depreciation if it was rental property or used for business).
3. Subtract your adjusted basis from your selling price for your gain (or loss).
4. Apply your exclusion amount. If you’re below $250,000 or $500,000 for your filing status, congrats: you likely owe no capital gains taxes.

If you’re single and your gain is below $250,000, you avoid capital gains tax. If not, you pay taxes on the portion above the exclusion. You’ll report the sale using IRS Form 8949 and Schedule D.

Special Situations That Affect Home Sale Taxes

Like anything in life, sometimes, home sales don’t fit neatly into IRS boxes. There are several situations that might affect whether you owe taxes on selling a house:

Inherited or Gifted Homes

If you inherited the property, your cost basis is “stepped up” to fair market value as of the alternate valuation date (usually the owner’s date of death). This often means little to no capital gain. 

Divorce or Separation

A former spouse may acquire the basis and exclusion. You’ll have to coordinate to split the exclusion. This rule also applies if you co-own rental properties or an investment property.

Home Office, Rental, or Business Property Use

If you used part of your house, a vacation home, or any investment property as a rental or for business, any depreciation you’ve claimed offsets gains but also affects your basis. You may have taxable income from depreciation recapture, taxed at a special rate (often up to 25%). 

You’ll find the rules for rental property and business uses covered in our business property tax guidance (LINK - /business-property-taxes).

Disaster Relief and Expatriate Tax Rules

If disaster strikes or you’re subject to expatriate tax rules, special relief may apply.

How Improvements and Repairs Affect Your Basis

Want to reduce capital gains tax on the sale of your home? The key is to keep detailed records of all significant improvements. Only improvements (not repairs) will add to your cost basis and reduce your taxable gains. 

Here’s an example of how each works:

Remember, no matter what you’re doing to your home, documenting your improvements and closing costs is the best way to reduce your capital gains tax and lower your tax bill in a meaningful way. 

Reporting Requirements for Home Sales

Who must file a tax return reporting their home sale? Simple: anyone who receives Form 1099-S from the settlement agent or who can’t fully exclude the gain. 

Here’s what you need to do:

1. Gather your documents: Closing Disclosure, 1099-S, invoices for significant improvements, and selling costs.
2. Fill out Form 8949: Report selling price, cost basis, and exclusion amount (if any), and indicate the capital gain or exclusion.
3. Transfer amounts to Schedule D: This is where you calculate net profit and report your gain or loss. Check the official IRS Form 8949 Instructions if you’re not sure about the details.

If you qualify for the full home sale exclusion and you did not receive a Form 1099-S, you generally do not need to report the sale on your tax return. However, in some situations, the IRS or state may receive a 1099-S from the settlement agent even when the homeowner doesn’t. If that happens and the sale isn’t reported, the IRS may assume the full proceeds are taxable and send a notice.

If you’re unsure whether a 1099-S was issued or want to avoid potential notices, reporting the sale anyway is often the safer choice.

State-Level Home Sale Taxes

If you’re excluded from the federal capital gains tax, unfortunately, that doesn’t always mean you’re in the clear on state taxes. 

Several states, like California, tax capital gains as ordinary income, so you may still owe state taxes on gains from the sale even when you avoid federal capital gains tax. Others, like Florida, generally don’t tax gains on the sale of your home at all.

Your tax bracket and local laws will dictate if you owe capital gains taxes at the state level for the sale of your home, investment properties, or business property. Always check with a local tax advisor or revenue department before you start to celebrate your tax-free move!

Plan Ahead to Avoid Capital Gains Tax on Real Estate

Fortunately, most sellers can avoid capital gains taxes on the sale of a primary residence as long as they plan carefully, track their improvement costs, and meet any and all exclusion rules.

If you’re selling a home, investment property, or rental property, make sure you consult a tax advisor and stay updated on IRS and state tax rules so you’re responsible for the lowest tax bill possible. Welcome home!

💡 File your taxes with confidence. FileTax.com helps you report home sales accurately and apply the $250,000 or $500,000 exclusion automatically.