What happens to your profit when you sell property

When you sell property for more than you paid for it, the difference is called a capital gain, and the federal government taxes it. The tax you owe depends on three things: how much you made, how long you owned the property, and your income that year. You do not pay tax on the full sale price — only on the profit.

The calculation starts with your basis, which is usually what you paid for the property plus the cost of major improvements (a new roof, an addition, a foundation repair). Subtract your basis from the sale price. That number is your capital gain. The tax rate on that gain is either 15%, 20%, or 0%, depending on your total income for the year and how long you held the property.

If you owned the property for more than one year before selling, it counts as a long-term capital gain and gets the lower tax rates. If you owned it for one year or less, it is a short-term capital gain and is taxed as ordinary income — which can be much higher, anywhere from 10% to 37% depending on your tax bracket.

Key Takeaways

  • Capital gains tax applies only to your profit (sale price minus what you paid plus improvements), not to the full sale price.
  • Long-term capital gains (property owned over one year) are taxed at 0%, 15%, or 20% based on your income; short-term gains are taxed as ordinary income at your regular rate.
  • Your basis includes the purchase price and the cost of major improvements, but not routine maintenance or repairs.
  • If you lived in the home as your primary residence for at least two of the last five years, you may exclude up to $250,000 (single) or $500,000 (married filing jointly) of the gain from tax.
  • You report capital gains on Schedule D (Form 1040) when you file your federal tax return.

How to calculate your basis

Your basis is the starting number for the entire calculation. In most cases, it is the price you paid for the property. If you inherited the property, your basis is usually its fair market value on the date of death, not what the previous owner paid. If you received it as a gift, you generally use the giver's basis.

After you establish the purchase price, add the cost of capital improvements — permanent upgrades that add value or extend the life of the property. Examples include a new roof, a room addition, a new HVAC system, a deck, or a foundation repair. Do not include routine maintenance like painting, fixing a leak, or replacing worn carpet. The IRS distinguishes between improvements (which raise basis) and repairs (which do not).

Subtract from your basis any depreciation you claimed if you rented out the property or used part of it for business. If you owned a rental property and deducted depreciation on your tax returns, you must reduce your basis by that amount, even though it lowers your basis and increases your gain.

Long-term versus short-term capital gains rates

The holding period determines which tax rate applies. If you owned the property for more than one year before the sale, the gain is long-term. Long-term capital gains receive preferential rates: 0%, 15%, or 20%, depending on your taxable income for the year.

The 2024 long-term rates apply as follows: 0% if your taxable income is below $47,025 (single) or $94,050 (married filing jointly); 15% if your income is between those amounts and $518,900 (single) or $583,750 (married filing jointly); and 20% if your income exceeds those thresholds. These income brackets adjust each year for inflation.

If you owned the property for one year or less, the gain is short-term and taxed as ordinary income at your regular tax bracket rate, which ranges from 10% to 37%. Short-term gains are much more expensive to the seller. A person in the 24% tax bracket who has a $50,000 short-term gain pays $12,000 in tax; the same person with a $50,000 long-term gain pays $7,500 (at the 15% rate).

The primary residence exclusion

If you lived in the home as your primary residence for at least two of the five years before the sale, you can exclude part of the gain from tax. Single filers can exclude up to $250,000; married couples filing jointly can exclude up to $500,000. This is one of the largest tax breaks available to homeowners.

The two years do not have to be consecutive, and you do not have to own the home for two years — you only have to have lived there as your main home for two of the last five years. If you owned the home for 10 years but lived there for only one year, you do not may have access to. If you lived there for two years and then rented it out for three years before selling, you still may have access to.

You can use this exclusion only once every two years. If you sold a home and used the exclusion in 2022, you cannot use it again until 2024. If you are married and file jointly, both spouses must meet the two-year residency test to claim the full $500,000 exclusion.

What to report on your tax return

You report the sale of property on Schedule D (Form 1040), which is the capital gains and losses form. You will need the sale date, the sale price, your basis, and the holding period. If you used the primary residence exclusion, you report that on Schedule D as well.

The IRS also requires you to file Form 8949 (Sales of Capital Assets) if you have capital gains or losses to report. Form 8949 feeds into Schedule D, so you complete 8949 first. If you sold the property through a real estate agent or broker, they will send you a Form 1099-S showing the sale price; keep this for your records and match it to your Schedule D.

If you have a capital loss (you sold for less than your basis), you can use it to offset capital gains from other sales. If your losses exceed your gains, you can deduct up to $3,000 of the loss against ordinary income in that year. Any remaining loss carries forward to future years.

State and local taxes on property sales

Federal capital gains tax is only part of the picture. Many states also tax capital gains, and the rates vary widely. Some states tax capital gains as ordinary income; others have separate capital gains rates. A few states do not tax capital gains at all.

Some cities and counties also impose transfer taxes or sales taxes on real estate transactions. These are usually paid by the seller at closing and are separate from capital gains tax. A transfer tax might be 1% to 2% of the sale price and is paid to the local government, not the IRS.

Check your state's tax authority website or speak with a tax professional to understand what you owe in your location. State and local taxes can add significantly to your total tax bill on a property sale.

Frequently Asked Questions

Do I owe capital gains tax if I sell my home at a loss?

No. If you sell your primary residence for less than your basis, you have a capital loss, and you cannot deduct it on your personal tax return. Capital losses on personal residences are not deductible. However, if you sold a rental property or investment property at a loss, you may be able to use that loss to offset other capital gains.

What if I inherited property and then sold it?

Your basis is the fair market value of the property on the date the previous owner died, not what they paid for it. This is called a "step-up in basis." If the property was worth $300,000 when you inherited it and you sold it for $310,000 a year later, your gain is only $10,000. This rule applies to most inherited property and can result in little or no capital gains tax.

Can I deduct real estate agent commissions from my capital gain?

Yes. Selling expenses, including real estate agent commissions, title insurance, and closing costs you paid, reduce your sale proceeds and therefore reduce your capital gain. These are not deducted separately; they lower the net amount you received, which lowers your gain.

What if I sold property I used partly for business and partly as my home?

You can use the primary residence exclusion only for the portion of the property that was your main home. If you had a home office or rented out part of the house, you must allocate the gain between the personal and business portions. Only the personal portion qualifies for the exclusion. Consult a tax professional for the correct allocation.

Do I have to report the sale if my gain is below a certain amount?

You must report all capital gains, regardless of the amount. Even a $1 gain must be reported on Schedule D. However, if your total gain for the year is small and you have no other income, you may owe no tax due to the standard deduction or the 0% long-term capital gains rate.