Paying Capital Gains Taxes When You Sell Your Home

If you're like most homeowners in the United States, you're probably aware that you might not need to pay capital gains tax when you sell your property. After all, up to $500,000 of the profit earned when selling real estate with a spouse is tax-free, or $250,000 if a single person sells. Nevertheless, $500,000/$250,000 isn't as much money as it used to be. These limits were set 25 years ago and have never been adjusted for inflation. Between that and skyrocketing home values, more and more homeowners find they must pay capital gains taxes after selling their property.

If you want to cash in on your substantial home equity today, there might be no getting around paying capital gains tax. Here's how to not only figure out what you owe, but actually pay these taxes when they come due. Definitely don't wait until April 15 to start thinking about this—you might owe estimated taxes long before.

How to Figure Out the Amount of Your Profit That Will Be Taxed

For starters, you have to pay capital gains taxes only if you have a so called "taxable gain" from your home sale.

To figure your gain, start with your home's selling price. This amount will be listed in your real estate purchase and sale agreement. The sales price will also be reported to the IRS, so that you can't avoid paying any tax due on the sale. If you sold your home for $500,000 or more and you're married filing jointly (or for $250,000 if you're single), either your title company, real estate broker, or mortgage company will file IRS Form 1099-S, Proceeds from Real Estate Transactions and send you a copy by February 15 of the year after the sale. Your property's sales price will be listed in Box 2; make sure it matches the price listed in your sales agreement.

Next, you'll need to calculate the "amount realized" from the sale: Subtract the selling expenses you paid from the sales price. These include real estate broker's commissions, owner's title insurance, abstract fees, recording fees, transfer or stamp taxes, legal fees, advertising costs, escrow fees, and inspection fees.

After that, determine your gain: Subtract your home's adjusted basis from the amount realized. For most homeowners, adjusted basis consists of the home's original purchase price plus purchase expenses, plus the cost of capital improvements made during the time they owned the home, such as adding a new roof or room addition (not counting home maintenance costs). Some homeowners must subtract certain items from their home's basis—for example, depreciation claimed for a home office, and any casualty losses deducted or insurance payments received after a casualty such as a fire. For further discussion, see Determining Your Home's Tax Basis.

Finally, figure out the amount of gain that is actually subject to tax: Subtract from your gain the amount of the home sale tax exclusion you qualify for. Again, married taxpayers who file jointly get to keep, tax free, up to $500,000 in profit on the sale of a home used as a principal residence for two of the prior five years. Single taxpayers (as well as home co-owners if they separately qualify) and married taxpayers who file separately get to keep up to $250,000 each (again, assuming they meet the ownership and use criteria. For more on the home sale tax exclusion, including various exceptions that might help you qualify, see The $250,000/$500,000 Home Sale Tax Exclusion.

How Big a Bite Will Capital Gains Taxes Take Out of Your Home-Selling Profits?

If you have a taxable gain from your home sale, the applicable capital gains tax rate will be lower than for your personal income tax; provided that you owned the home for more than one year, as the vast majority of home sellers do. If you owned the home for less than one year, you pay tax on your gain at your personal ordinary income tax rate, which can be as high as 37%.

There are three long-term capital gain tax rates: 0%, 15%, and 20%. The rate you pay depends on your tax filing status and your total taxable income as shown in the following chart:

Do You Have to Pay the Net Investment Income Tax?

In addition to capital gains tax, you might have to pay what's called the net investment income tax (NII tax) on a portion of your taxable gain. This tax helps fund the Affordable Care Act (also called Obamacare). It is imposed only on relatively high income taxpayers. You'll be subject to it if your adjusted gross income (AGI) for the year exceeds $200,000 if you're single, or $250,000 if you're married filing jointly (the threshold is $125,000 for married couples filing separately).

If you sell your home for a taxable gain, the amount must be included in your net investment income for that year. This can make you subject to the NII tax that year, even if your AGI is ordinarily less than the threshold.

If you are subject to the NII tax, you will need to pay a 3.8% tax on the lesser of either:

• your net investment income, or
• the amount by which your AGI exceeds the applicable $200,000/$250,000 AGI threshold.

Your net investment income includes the taxable gain earned from the sale of your home and other investment income.

Example: Art and Agnes from the above examples earned $200,000 in wages in 2022, as well as a $600,000 taxable gain from the sale of their home. Their AGI is $800,000. They must pay the 3.8% NII tax on the lesser of (1) their $600,000 of net investment income from their home sale, or (2) the amount their $800,000 AGI exceeds the $250,000 threshold for married taxpayers—$550,000. Since $550,000 is less than $600,000, they must pay the 3.8% tax on $550,000. Their NII tax for the year is $20,900 (3.8% × $550,000 = $20,900).

Do You Need to Pay Estimated Taxes Rather Than Waiting for April 15 to Pay?

No income tax is withheld from real estate sales proceeds, whether by the escrow company or anyone else. However, the general rule is that one must pay tax on income as it's earned throughout the year. You can't wait until April 15 to pay all you owe. If you expect to owe at least $1,000 in tax on the profit from your home sale, you might need to pay estimated taxes to the IRS during the year. Failure to do so can result in a underpayment penalty being imposed by the IRS.

But you might be able to avoid paying estimated tax on your home sale gain if you work and have income tax withheld from your pay, or already pay estimated taxes because you're a business owner. You won't have to pay any additional estimated taxes if your total withholding and/or estimated tax payments are equal to the lesser of:

• 90% of your tax liability for the current year, or
• 100% of what you paid the previous year (or 110% if you're a high-income taxpayer—those with adjusted gross incomes of more than $150,000, or $75,000 for married couples filing separate returns).

Example: Art and Agnes from the prior examples both have regular, salaried jobs, and have tax withheld from their wages throughout the year. Last year they paid $40,000 in income and payroll taxes. They both got pay raises and expect to have $45,000 withheld this year. They don't need to pay any estimated tax for their home sale gain because their withholding is more than 110% of what they paid in tax the prior year.

If you do need to make an estimated tax payment, you should pay it in the quarter in which you receive your home sale proceeds. Estimated taxes are paid April 15, June 15, September 15, and January 15. For example, if you receive the proceeds from your home sale on May 31, make your estimated tax payment on June 15. The easiest way to pay estimated tax is by electronic withdrawal from your bank account. Visit IRS.gov/payments to view all your payment options.

If you don't make an estimated tax payment, be sure to keep enough money from the sale to pay the taxes that will be due when you file your return by April 15 of the following year. Art and Agnes from the above example would have to keep $140,900 to pay the taxes they'll owe.

Paying Capital Gains Taxes When You File Your Tax Return

When you sell your home for a taxable gain, you must include two forms with your tax return for the year to report the sale: Form 8949, Sales and Other Dispositions of Capital Assets and Schedule D (Form 1040), Capital Gains and Losses. You list on Form 8949 the sales of all your capital assets during the year. In addition to your home, these could include other capital assets such as stocks, rental property, or cryptocurrency. Short-term and long-term capital gains are listed separately. You must provide the following information:

• property address
• dates you purchased and sold your home
• sales proceeds
• tax basis of your home
• amount of home sale exclusion (if any), and
• total gain (or loss) on the sale.

You may deduct capital losses from capital gains, subject to complex rules. You then report your total short-term and long-term capital gains (or loss) on IRS Schedule D. Your total capital gain or loss is then listed on the first page of your IRS Form 1040 (line 7).

If you owe the Net Investment Income tax, you will need to report it on IRS Form 8960, Net Investment Income Tax Individuals, Estates, and Trusts.

You should have a tax professional complete these forms for you or at least use tax preparation software. Refer to IRS Publication 523, Selling Your Home, for the details on reporting your sale on your income tax return.

Will You Have to Pay State Income Taxes on Your Gain?

Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming have no state income taxes, so you don't have to pay any state tax on your gain from selling your home in these states. If your home is in one of the other 41 states with income taxes, you might have to pay state income tax on the taxable gain from your real estate sale.

Each state's income tax rules are different. Most states don't have special tax rates for capital gains. Instead, you pay tax on your gains at the regular state income tax rate, which varies from state to state. Five percent is about average, but some states have much higher tax rates—for example, the top tax rate in California is 12.3%. Some states allow you to deduct your federal taxes from your state taxable income or have special tax treatment of capital gains income. Check with your state tax agency or a tax professional for details.