What Taxes Do I Pay When Selling My House?

Selling a home feels like progress, but figuring out what you’ll owe in taxes can make things feel murky fast. If you’ve owned your house for a while, made a profit, or turned it into a rental at some point, you might be wondering what the IRS will expect from you. The truth is, not everyone has to pay taxes after a sale, but the rules aren’t always clear. This guide breaks down what actually triggers a tax bill when you sell your house, how much you might owe (if anything), and what you can do to reduce it. Whether you’re selling your family home or an inherited property, knowing the facts upfront can save you time, money, and stress later.

Do You Always Have to Pay Taxes When You Sell a House?

Not necessarily. Many homeowners don’t pay any taxes at all when they sell their house, thanks to something called the Capital Gains Tax Exclusion. Let’s explain. When you sell a house for more than what you originally paid (plus the cost of certain improvements), the IRS considers the profit a capital gain and it could be taxable. But, if the house was your primary residence, the government gives you a pretty generous break.

What Is the Capital Gains Tax Exclusion?

Under current IRS rules, you can exclude up to:

• $250,000 of profit if you’re single
• $500,000 of profit if you’re married filing jointly

That means if you bought your home for $200,000 and sell it for $450,000, and you’re married, that $250,000 gain is completely tax-free.

To qualify, you must:

• Have owned the home for at least 2 out of the last 5 years
• Have lived in it as your primary residence for 2 out of the last 5 years
• Not used the exclusion on another home sale in the past 2 years

If you meet these three conditions, you likely won’t owe anything in capital gains taxes. Nice, right?

What If I Don’t Qualify for the Exclusion?

If the home wasn’t your main residence or you didn’t meet the time requirements—you may have to pay capital gains tax on the profit from the sale.

The rate depends on how long you owned the home:

• Short-term capital gains (owned for 1 year or less): taxed at your regular income tax rate
• Long-term capital gains (owned for more than 1 year): taxed at 0%, 15%, or 20% depending on your income bracket

Most homeowners fall into the 15% bracket, but check with your accountant to be sure.

Common Situations Where Taxes Might Apply

Here are a few scenarios where you might owe taxes when selling:

1. You Inherited a Property and Sold It

If you inherit a home and sell it, you don’t pay capital gains on the original purchase price. Instead, your cost basis is “stepped up” to the home’s value at the time you inherited it. You’re only taxed on the difference between that value and your selling price.

Example: You inherit a home worth $220,000 and sell it later for $240,000. You’d only be taxed on the $20,000 gain (if applicable).

2. You Rented the House Out Before Selling

If you used the home as a rental or second property, the exclusion likely doesn’t apply. You’ll pay capital gains tax based on how long you owned the property and how much you profited.

3. You Sold a Fixer-Upper or Vacant Property You Never Lived In

If it wasn’t your residence, the capital gains exclusion doesn’t apply. Many Birmingham homeowners who inherited a family home or bought a distressed property to flip fall into this category.

Are There Any Other Taxes or Costs to Expect?

Besides capital gains, here are a few other potential tax-related costs or responsibilities:

1. Property Taxes

If you haven’t paid your full year’s property taxes by the time you close, a portion of it will be taken from your proceeds. This isn’t really a new cost—it’s just what’s owed for the time you lived in the house.

2. Depreciation Recapture

If the home was ever used as a rental, and you claimed depreciation on it for tax purposes, you may have to pay depreciation recapture tax when you sell. This is a bit more complex, so it’s best to speak with a tax pro in this case.

3. Reporting the Sale

If you receive a Form 1099-S from your title company after closing, you’ll need to report the sale on your tax return, even if no taxes are due. Always check your closing paperwork and keep copies.

How to Lower Your Tax Burden Legally

Nobody likes paying more taxes than they need to. Here are a few ways to lower the amount you might owe:

1. Track Home Improvement Costs

Major upgrades like a new roof, kitchen remodel, or HVAC replacement—can be added to your cost basis. This reduces your capital gains and could help you stay under the exclusion limit.

Keep receipts and records if you’ve done big improvements.

2. Time the Sale Smartly

If you’re nearing the 2-year mark of living in your home, waiting until you hit that milestone could mean you qualify for the exclusion. Talk to a tax advisor about timing your sale to your advantage.

3. Consider a 1031 Exchange (Investment Property Only)

If you’re selling a rental or investment property, you may be able to defer capital gains taxes by using a 1031 exchange to buy another similar property. This strategy requires careful planning, so work with a real estate attorney or CPA who’s familiar with the process.

Selling to a Cash Home Buyer? Here’s What You Should Know About Taxes

Many homeowners in Birmingham who are dealing with inherited properties, fixer-uppers, or time-sensitive sales turn to cash home buyers for a simpler way to sell.

Here’s how that affects your taxes:

• The process is faster, but you still report the sale like any other transaction
• You don’t avoid taxes just because you sell to a cash buyer
• However, working with someone like We Buy Houses Birmingham means you skip repairs, agents, and fees, which can put more money back in your pocket overall

Even if you owe some taxes, you’re avoiding months of holding costs, uncertainty, and upfront expenses. For many sellers, that tradeoff is worth it.

Selling your home doesn’t automatically mean you’ll owe taxes. Thanks to the capital gains exclusion, many homeowners pay nothing at all. But if you’re selling a rental, inherited property, or home you didn’t live in recently, it’s worth getting informed. Understanding your tax responsibilities now can help you avoid surprises later and make smart choices when the time comes to sell.

Need help selling your house fast in Birmingham—without the confusion or delays? Call We Buy Houses Birmingham at (702) 850-8001. We’ll give you a fair, no-pressure cash offer and help you move forward on your schedule.