You pay capital gains tax when you sell real estate for more than you paid for it, and the tax is due in the year of the sale
Capital gains tax on real estate is triggered by a sale or exchange of the property. The tax applies to the profit — the difference between what you paid for the property (your basis) and what you received when you sold it. You owe the tax in the tax year when the sale closes, not when you list the property or sign a contract.
The timing of when you actually pay depends on your tax situation. If you owe federal capital gains tax, you typically pay it when you file your tax return for that year, which is due April 15 of the following year. Some states also tax capital gains on real estate, and those are due on the same filing important date. If the gain is large enough, you may owe estimated tax payments before the year ends.
Key Takeaways
- Capital gains tax is owed in the year you close the sale, calculated as the sale price minus your original purchase price and certain improvements you made.
- Long-term capital gains (property held over one year) are taxed at lower federal rates than short-term gains, which are taxed as ordinary income.
- You may exclude up to $250,000 of gain if you are single, or $500,000 if married filing jointly, if you meet the primary residence test.
- State capital gains taxes vary widely — some states do not tax capital gains at all, while others tax them at rates up to 13 percent.
- The tax is due when you file your return in April, but large gains may require estimated tax payments during the year of sale.
How your purchase price and improvements affect what you owe
Your basis is what you paid for the property plus the cost of permanent improvements. If you bought a house for $300,000 and later spent $50,000 on a new roof, foundation work, or an addition, your basis is $350,000. If you then sell for $500,000, your taxable gain is $150,000, not $200,000.
Improvements must be permanent and add value to the property. Painting, landscaping, and routine repairs do not count. A new kitchen, bathroom renovation, deck, or structural repair does count. Keep receipts and invoices for any work you do — you will need them to document your basis if you are audited.
If you inherited the property, your basis is stepped up to the fair market value on the date of death, not what the previous owner paid. This is one reason inherited real estate often has little or no capital gains tax owed when sold shortly after inheritance.
Long-term versus short-term capital gains rates
How long you owned the property determines your federal tax rate. If you held it for more than one year before selling, you have a long-term capital gain, taxed at 0 percent, 15 percent, or 20 percent depending on your income. These rates are much lower than ordinary income tax rates.
If you sold within one year of purchase, you have a short-term capital gain, taxed as ordinary income at your regular tax bracket — potentially 10 percent to 37 percent federally. Short-term gains are rare in real estate because most people own homes or investment properties longer than a year.
The one-year clock starts the day after you purchase. If you bought on January 15 and sold on January 16 of the next year, you may have access to for long-term treatment. The exact date matters, so check your closing documents.
The primary residence exclusion and who qualifies
If the property was your primary residence, you may exclude $250,000 of gain from tax if you are single, or $500,000 if you are married filing jointly. This exclusion is available once every two years.
To may have access to, you must have owned the home and lived in it as your main home for at least two of the five years before the sale. The two years do not have to be consecutive. If you owned it for three years and lived there for two of those years, you may have access to. If you owned it for five years but lived there for only one year, you do not.
If you sell a primary residence and your gain is less than the exclusion amount, you owe no federal capital gains tax on that sale. If your gain is $600,000 and you are married, you exclude $500,000 and owe tax on $100,000.
State capital gains taxes on real estate
Federal capital gains tax is only part of what you may owe. Many states also tax capital gains on real estate sales. The rules and rates vary significantly by state.
Some states — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — do not tax capital gains at all. Others tax capital gains as ordinary income at rates that can reach 13 percent or higher. A few states, including California and New York, have separate capital gains tax rates that explore only to gains above a certain threshold.
Your state tax is due on the same April 15 important date as your federal return. If you sell property in a state where you do not live, you may owe tax to both your home state and the state where the property is located, though most states allow a credit for taxes paid to another state to prevent double taxation.
When you must pay estimated taxes during the year
If your capital gain is large, you may owe estimated tax payments before April 15. The IRS requires estimated payments if you expect to owe $1,000 or more in federal income tax for the year after accounting for withholding.
Estimated taxes are due in four installments: April 15, June 15, September 15, and January 15 of the following year. If you sell late in the year and realize a large gain, you may owe the fourth quarter payment by January 15. You can also pay the full amount when you file your return in April without penalty if you did not know the gain in advance.
If you are unsure whether you need to make estimated payments, a tax professional can calculate your liability based on the sale price and your other income for the year.
Capital gains tax on investment property and rental homes
Investment property and rental homes do not may have access to for the primary residence exclusion. Any gain is fully taxable, though long-term rates still explore if you held the property over one year.
If you have been depreciating a rental property for tax purposes, you also owe depreciation recapture tax at 25 percent on the depreciation you claimed. This is in addition to capital gains tax on the appreciation. For example, if you claimed $100,000 in depreciation over ten years and the property appreciated $200,000, you owe 25 percent tax on the $100,000 depreciation and long-term capital gains tax on the $200,000 appreciation.
Some investors use a 1031 exchange to defer capital gains tax by reinvesting the proceeds into another investment property. The rules for 1031 exchanges are strict — you must identify a replacement property within 45 days and close within 180 days — but if done correctly, no capital gains tax is owed at the time of the sale.
Frequently Asked Questions
Do I owe capital gains tax if I sell my home at a loss?
No. If you sell for less than you paid, you have a capital loss. You cannot deduct a loss on the sale of your primary residence. On investment property, you can use capital losses to offset capital gains from other sales, and up to $3,000 of excess loss against ordinary income in a single year.
What if I sell real estate I inherited?
Your basis is stepped up to the fair market value on the date of death. If the property was worth $500,000 when the person died and you sell it for $510,000 a year later, your gain is only $10,000. The step-up in basis is one of the main tax advantages of inheriting property.
Can I deduct real estate agent commissions from my capital gain?
Yes. Selling costs — including agent commissions, title insurance, transfer taxes, and closing costs you paid — reduce your sale proceeds and therefore reduce your taxable gain. Keep all closing documents to document these expenses.
What happens if I sell real estate in another country?
You still owe U.S. federal capital gains tax on the gain. You may also owe tax to the country where the property is located. The U.S. allows a foreign tax credit to prevent double taxation, but the rules are complex and depend on tax treaties. A tax professional familiar with international real estate is essential.
Do I have to report the sale if my gain is under the exclusion amount?
If you are selling a primary residence and your gain is fully covered by the exclusion, you do not have to report it on your tax return. If you have any gain above the exclusion, or if it is investment property, you must report the sale on Form 8949 and Schedule D, even if you owe no tax.