Capital gains tax on a home sale

Do I pay capital gains tax when I sell my house?

Only on gain above the exclusion, and only if you fail the tests. The IRS applies two of them. The ownership test asks whether you owned the home for at least 24 months of the 5 years ending on the date of sale. The use test asks whether you lived in it as your main home for at least 24 months of that same window. The two periods do not have to overlap.

Married couples filing jointly get the $500,000 figure when either spouse meets the ownership test and both meet the use test on their own. You also cannot have excluded gain on another home sale in the 2 years before this one.

A loss on a personal residence works the other way from what many sellers expect. Publication 523 says you cannot deduct it, although you owe no tax on the proceeds either.

How do I figure the gain on my house?

Gain is the amount realized minus your adjusted basis. The amount realized is the contract price less selling expenses, which Publication 523 lists as costs tied directly to the sale: brokerage commissions, advertising, legal fees you pay as the seller, and loan charges you paid that would normally fall on the buyer.

Basis starts with what you paid and adds certain settlement costs from your own purchase, such as abstract and recording fees, survey fees, transfer taxes, and the owner's title insurance policy. Charges tied to getting the loan, such as points and origination fees, do not count, and neither do fire and casualty insurance premiums.

Then add improvements. Work that adds value, extends the life of the house, or adapts it to a new use raises basis: an addition, a new roof, a replaced air conditioning system, a remodeled kitchen. Painting and fixing a leak are repairs and do not, unless they were part of a larger remodeling project. The receipts and permits from that work are what support the number if the IRS ever asks, so keep them with the closing statement.

What if I sell before I have lived there two years?

You may still qualify for part of the exclusion if the main reason for the sale was work, health, or an unforeseeable event. Publication 523 counts a new job location at least 50 miles farther from the home than the old one, a move to get or provide medical care, and events such as a casualty, a condemnation, a death, a divorce, multiple births from one pregnancy, or a change in employment that leaves you unable to pay housing costs and basic living expenses.

The partial exclusion is a fraction of the full one. Take the shortest of your time living there, your time owning it, and the time since you last used the exclusion, divide by 24 months, and multiply by $250,000. A single seller who owned and lived in the house for 12 months before a qualifying job move can exclude up to 12 / 24 x $250,000 = $125,000.

Members of the uniformed services, the Foreign Service, and the intelligence community on qualified extended duty can elect to suspend the 5-year window for up to 10 years.

What if I rented the house or claimed a home office?

Depreciation does not get the exclusion. Any depreciation you claimed, or were allowed to claim, for rental or business use of the home after May 6, 1997 is taxable when you sell, even if the rest of the gain is excluded. IRS Topic 409 taxes that piece, called unrecaptured section 1250 gain, at a maximum rate of 25 percent.

Time the house was not your main home also matters. Gain allocated to periods of nonqualified use after 2008, such as years it was a rental before you moved in, generally cannot be excluded. Publication 523 has the worksheet and the exceptions, and a CPA should run them for any house that was ever a rental.

Will I get a Form 1099-S, and do I have to report the sale?

The person responsible for the closing, normally the settlement agent named on the Closing Disclosure, files Form 1099-S. The IRS lets that agent skip the form when you certify in writing, under penalties of perjury, that the house was your principal residence, that the full gain is excludable under Section 121, and that there was no nonqualified use after 2008, and the gross proceeds are $250,000 or less, or $500,000 or less for a married seller.

You must report the sale on your return if you receive a 1099-S, even when every dollar of gain is excluded, and you must report it if any of the gain is taxable. The sale goes on Form 8949 and carries to Schedule D of Form 1040.

Gain on a house held more than one year is long-term. For most individuals the federal rate on net capital gain is no higher than 15 percent, with a 0 percent bracket below that and 20 percent at higher incomes, and the net investment income tax can apply on top for sellers with significant investment income.

Does Florida or Louisiana tax the gain from a home sale?

Florida does not. Article VII, Section 5 of the Florida Constitution limits any state tax on the income of natural persons who are residents to what federal law would let them credit or deduct, and Florida levies no personal income tax.

Louisiana does. For tax periods beginning on or after January 1, 2025, the Louisiana Department of Revenue applies a flat 3 percent individual income tax rate, replacing the old graduated brackets. The Louisiana resident return, Form IT-540, starts from federal adjusted gross income, so gain the federal exclusion removed never reaches it, and any taxable gain that remains does.

If you moved out of Louisiana before selling a house there, the nonresident and part-year return is Form IT-540B. Ask a CPA who prepares Louisiana returns whether the gain counts as Louisiana income for you.

What does the math look like on a real sale?

An illustration with made-up figures. A married couple bought in 2014 for $420,000, paid $8,000 in settlement costs that count toward basis, and put $112,000 into an addition, a roof, and a new air conditioning system. Their adjusted basis is $420,000 + $8,000 + $112,000 = $540,000.

They sell in 2026, and the amount realized, after selling expenses, is $1,150,000. Gain: $1,150,000 - $540,000 = $610,000. Both lived there the whole time, so they exclude $500,000 and report $110,000 of long-term gain on Form 8949 and Schedule D.

Living in Winter Park, they owe no Florida tax on it. Living in Baton Rouge, the $110,000 is part of the federal adjusted gross income their Louisiana return starts from, and at 3 percent the state tax on that amount is at most $3,300 before Louisiana deductions. A single seller with the same numbers would exclude $250,000 and report $360,000.