Taxes on Selling a House: Exclusions, Rules, and Reporting

When you sell your house, you may owe federal capital gains tax on the profit, but most homeowners can exclude up to $250,000 of gain ($500,000 for married couples filing jointly) if they meet the ownership and use tests. The tax is not on the sale price but on the gain, which is the selling price minus selling expenses and your adjusted basis. Losses on a personal residence are not deductible. If your gain exceeds the exclusion, the excess is taxed at capital gains rates. You must report the sale if you receive Form 1099-S or if your gain is not fully excluded.

How the Home Sale Exclusion Works

The IRS allows you to exclude up to $250,000 of capital gain from the sale of your main home if you're single, or up to $500,000 if you're married filing jointly. To qualify, you must have owned and used the home as your main residence for at least two years out of the five years before the sale. The two years don't have to be continuous, and ownership and use can occur at different times. You can claim this exclusion only once every two years. If you don't meet the two-year requirement, you may still qualify for a partial exclusion if you sold due to a change in employment, health, or unforeseen circumstances.

For married couples filing jointly, the full $500,000 exclusion requires that either spouse meets the ownership test, both spouses meet the use test, and neither spouse has used the exclusion in the past two years. If each spouse owns and occupies a separate home, each may exclude up to $250,000 on their respective sales. Special rules apply for surviving spouses, divorced taxpayers, and members of the military or foreign service.

Calculating Your Gain or Loss

Your gain is not simply the sale price minus the original purchase price. You can reduce your gain by adding certain costs to your basis and subtracting selling expenses. Your basis includes the purchase price plus capital improvements (such as a new roof or addition) and certain closing costs. Selling expenses include real estate commissions, legal fees, advertising, and inspection costs. Repairs made within 90 days of sale to make the home more saleable may also be treated as selling costs. If you used part of your home for business or rental, you may need to recapture depreciation and allocate gain between the residential and business portions.

If your home sells for less than your adjusted basis, you have a loss. Losses on the sale of a personal residence are not deductible. However, if part of the home was used for business or rental, a loss on that portion may be deductible.

When You Must Report the Sale

You do not need to report the sale if your gain is fully excluded and you did not receive Form 1099-S. However, if you receive Form 1099-S, you must report the sale even if the gain is excludable. You also must report if your gain exceeds the exclusion amount or if you choose not to claim the exclusion. Report the sale on Form 8949 and Schedule D (Form 1040). If you have taxable gain, it is generally taxed at long-term capital gains rates if you owned the home for more than one year.

If you had canceled mortgage debt, such as from a foreclosure or short sale, you may need to report that debt as income unless an exclusion applies. The exclusion for qualified principal residence indebtedness applies to debt discharged before January 1, 2026, or under a written agreement entered into before that date.

Special Situations and Exceptions

Certain taxpayers may qualify for a reduced exclusion or special rules:

• Partial exclusion: If you sold due to a change in employment, health, or unforeseen circumstances (like divorce or multiple births), you may claim a prorated exclusion based on the time you lived in the home. For example, if you lived in the home for 12 months and sold due to an unforeseen event, you could exclude up to $125,000 (12/24 × $250,000).
• Military and foreign service: You may suspend the five-year test period for up to 10 years if you are on qualified official extended duty.
• Nursing home residents: The ownership and use test is reduced to one year out of five if you moved to a nursing home.
• Installment sales: If you receive payments over time, you can use the installment method to defer gain, but the exclusion still applies.

State Tax Considerations

Most states follow federal rules for excluding home sale gain, but some have differences. For example, California conforms to the federal exclusion but requires you to file California Schedule D (540) if there are differences between federal and state taxable amounts. Check your state's tax agency for specific rules.

Frequently Asked Questions

Do I pay taxes if I sell my house for a profit?

Only if your gain exceeds the exclusion amount. If your gain is $250,000 or less ($500,000 for married filing jointly) and you meet the ownership and use tests, you owe no federal tax on the sale.

How do I avoid capital gains tax when selling my house?

Meet the ownership and use tests to claim the exclusion. Keep records of improvements and selling costs to reduce your gain. If you don't meet the two-year test, see if you qualify for a partial exclusion.

What if I sell my house at a loss?

You cannot deduct the loss on your personal residence. However, if part of the home was used for business or rental, you may be able to deduct a loss on that portion.

Do I have to report the sale if I don't owe tax?

If you receive Form 1099-S, you must report the sale even if the gain is fully excluded. Otherwise, no reporting is required if the gain is excluded.

Sources

• Income from the sale of your home | FTB.ca.gov
• Tax considerations when selling a home
• Publication 523 (2025), Selling Your Home