Do You Pay Taxes When Selling Your House?

Considering selling your home and wondering just how much you're going to have to pay in taxes? Here's a breakdown of what to expect in terms of taxes when selling a house.

Georgie Mihaila
9 Min Read

If you’re a homeowner, it’s likely that you’re already highly familiar with the tax benefits of owning a home — ranging from the deductible interest you pay on your mortgage to property tax deductions you can claim when filing your taxes.

But what happens when you decide to sell your property? Do you have to pay taxes when selling your house? And are there any cases in which you could be exempt from taxes after a sale?

Today, we’re taking a closer look at the tax implications of selling your home — and giving you a breakdown of what to expect, and how to avoid paying too much in property taxes when you do decide to part ways with your home.

Paying taxes when selling your house: what to expect

If you were wondering if you have to pay taxes when selling your home, the simple answer is yes.

The Internal Revenue Service (IRS) makes the capital gains on real estate taxable — this is commonly called the capital gains tax — but that too is subject to some conditions and exclusions that can work in your favor.

If you’re new to this concept, keep reading to learn more about the taxes involved when selling a house. 

Expect to pay a capital gain tax

In its simplest terms, a capital gains tax refers to a type of tax made on the profit that results from the sale of a non-inventory asset (like real estate property).

It’s important to note that it is the gain that you make from the sale that’s being taxed, not the total amount of money you receive from the transaction.

what is a capital gain tax?

To use a more straightforward example, let’s say you bought a painting for $5,000 that you later sold for $15,000. This means you gained $10,000 as a result of the sale, and that differential is the subject of the capital gains tax. 

However, when it comes to real estate properties like your home, the application of the capital gains tax comes with several additional rules and regulations.

For example, not all house sales will be automatically subject to capital gains tax. The IRS permits a certain degree of exclusion that you should be aware of prior to selling your house:

  • If you’re single, $250,000 of capital gains on real estate can be excluded. 
  • If you’re married and filing the tax jointly, $500,000 of capital gains on real estate can be excluded. 

On the other hand, this exclusion isn’t absolute. You may still be required to pay capital gains tax on the whole gain if the following conditions apply:

  • You didn’t live in the subject house for two years within the five-year period leading up to the sale. 
  • You owned the property for less than two years within the five-year period leading up to the sale. 
  • The house wasn’t considered to be your main residence. 
  • You’re already barred to claim the exclusion because you claimed it on another home within the two-year period before selling the home that’s subject to the sale.
  • You acquired the property through an exchange in the last five years. 

Can you avoid paying taxes when selling a house?

Now that you know what a capital gains tax is, the next step is to determine whether you can avoid paying taxes during a house sale.

saving money

Well, the answer depends on your unique situation. But, if you want to know how you can protect yourself from paying hefty taxes, the following should be considered from the get-go:

  1. Be sure to live in the house for at least two years before listing it for sale— If you don’t want your gains to be taxable, then you should refrain from selling your property before you’ve lived in it for at least two years. Fortunately, the two-year period allowance doesn’t have to be consecutive as long as you lived there for two total years prior to the sale. 
  2. Check the exception — Aside from the conditions for the qualifications, you may still be able to get rid of the capital gains tax if you qualify for a specific exception, such as selling the property due to work, health, and other circumstances. 
  3. Take note of all the home improvements you’ve made over the years — Home improvements such as remodels, landscaping, new driveways, fences, and many more can reduce your capital gains tax. Be sure to keep the receipts of any home upgrades you’ve made on the property (along with the associated costs) to take advantage of the deduction. 
  4. Sell your house for cash to a local home buyer — This is another way to avoid paying expensive taxes when selling your house. Instead of dealing with the traditional house sale process which usually comes with a considerable amount of costs, you can sell your property to a home buyer for cash. By working with them, you don’t need to make home improvements as they can purchase the house as is. Dealing with them allows you to get away with your cash without paying taxes, commissions, and other fees. 

Types of home improvements you can deduct 

Since this is the easiest way to lower your capital gains tax, make sure to list all the improvements you’ve made to the house throughout the year (though please note that you’ll likely need the receipts).

The good part about this type of deduction is that it doesn’t really matter how long ago your renovation or project took place, as long as the property was in your possession. 

Here’s a quick list of the types of home improvements whose costs you can add to your tax basis: 

  • Adding an extra room (like a new bedroom, bathroom, or even a garage)
  • Installing new insulation, pipes, or ductwork or even replacing walls and floors
  • Updating the heating and/or air conditioning system in your home
  • Installing new built-in appliances that will be included in the sale 
  • Outdoor improvements, like new fences, adding a patio, porch, or deck
  • Replacing or repairing the roof, doors, windows 
  • Adding new carpeting

Bottom line

It’s true that dealing with taxes can be complicated and confusing, especially if you don’t understand or know all of the nuances. Therefore, if you’re selling a house, it’s important to note that you may have to pay capital gains tax depending on your situation. 

Here’s a good resource that can help you get a better understanding of this type of tax, when it applies, and what the tax brackets are by income.

It’s also important to note that, while this article and further online reading can help you get a better understanding of what you should expect in terms of taxes when selling a house, it’s always best to work with a professional that can help you navigate the complicated, often confusing tax roadmap ahead of you — and save you more of your hard-earned money, not to mention tons of headache along the way.

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With a decade-long career as a digital content creator, Georgie started out as a real estate journalist for Multi-Housing News & CPExecutive. She later transitioned into digital marketing, working with leading real estate websites like PropertyShark, RENTCafé and Point2Homes. After a brief but impactful stint in the start-up world, where she led the marketing divisions of fintech company NestReady and media publisher Goalcast, Georgie returned to her first passion, real estate, and founded