Most home sellers qualify for the capital gains exclusion: up to $250K profit excluded from taxes for single filers, $500K for married filing jointly. You must have owned AND lived in the home for 2 of the last 5 years. If you qualify, you likely owe zero federal capital gains tax on the sale.
Even if you do not qualify for the full exclusion, you may qualify for a partial exclusion or owe nothing if your gain is under the threshold.
Capital Gains Exclusion -- The 2-Year Rule
Section 121 of the Internal Revenue Code allows you to exclude up to $250K ($500K married) of capital gains from the sale of your primary residence. To qualify, you must have owned and lived in the home for two of the last five years before the sale. The two years do not have to be consecutive.
How to Calculate Your Gain
Your gain is: sale price minus selling costs (commissions, closing costs) minus your adjusted basis (purchase price plus improvements). For example: sell for $350K, pay $21K in costs, purchased for $250K, added $15K in improvements. Your gain is $350K minus $21K minus $265K = $64K gain. Well under the $250K exclusion threshold.
When You Owe Taxes
You owe capital gains tax if your profit exceeds the exclusion amount ($250K single, $500K married), or if you do not meet the ownership and use test. If you sold after living there less than 2 years, you may qualify for a partial exclusion due to job change, health reasons, or unforeseen circumstances.
Texas State Taxes
Texas has no state income tax, so you will not owe state taxes on your home sale gain. This is a significant advantage of selling in Texas compared to states with income tax.
Reporting the Sale
You report the sale on your federal tax return using IRS Form 8949 and Schedule D. Even if your gain is fully excluded, you still need to report the sale if you received a Form 1099-S from the title company. Your escrow officer provides the necessary documentation at closing.
