Tax Considerations When Selling Property
Selling property—whether it’s your primary residence or an investment property—can have significant tax consequences. Understanding the tax laws that apply can help you minimize your tax liability and avoid costly surprises. This guide outlines the key tax considerations when selling property, based on U.S. federal tax law.
Capital Gains Tax Explained
One of the most important taxes to consider when selling property is capital gains tax. Capital gain is the difference between the selling price and your property’s adjusted basis (generally the purchase price plus improvements, minus depreciation).
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Short-term capital gains apply if you owned the property for one year or less and are taxed at ordinary income tax rates.
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Long-term capital gains apply if the property was held for more than one year and are taxed at lower rates (0%, 15%, or 20%), depending on your income.
Selling a Primary Residence
If you’re selling your primary home, you may qualify for the Section 121 exclusion under the Internal Revenue Code:
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Up to $250,000 of capital gains can be excluded for single filers
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Up to $500,000 for married couples filing jointly
To qualify, you must have:
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Owned the home for at least two years, and
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Lived in it as your primary residence for at least two of the last five years before the sale
This exclusion can significantly reduce or eliminate capital gains tax.
Selling Investment or Rental Property
Investment properties do not qualify for the primary residence exclusion. In addition to capital gains tax, sellers may also face:
Depreciation Recapture
If you claimed depreciation on a rental property, the IRS requires depreciation recapture, which is taxed at a maximum rate of 25%.
Net Investment Income Tax (NIIT)
High-income taxpayers may also owe an additional 3.8% Net Investment Income Tax on capital gains from investment property sales.
State and Local Taxes
In addition to federal taxes, many states impose their own capital gains or income taxes on property sales. Rates and rules vary widely, so it’s important to review your state’s tax regulations.
1031 Like-Kind Exchanges
A 1031 exchange allows investors to defer capital gains taxes by reinvesting proceeds from the sale of an investment property into another “like-kind” property. Strict IRS rules and timelines apply, so professional guidance is essential.
Reporting the Sale to the IRS
Property sales are typically reported on:
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Form 8949 (Sales and Other Dispositions of Capital Assets)
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Schedule D (Capital Gains and Losses)
If you receive Form 1099-S, the IRS is aware of the transaction, making accurate reporting critical.
Why Tax Planning Matters
Proper tax planning before selling property can:
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Reduce overall tax liability
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Help you time the sale strategically
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Ensure compliance with federal and state tax laws
Consulting a tax professional can help you identify exclusions, deductions, and deferral strategies that apply to your situation.
Contact Us
If you’re planning to sell property and want personalized tax guidance, we’re here to help.
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Contact us today to schedule a consultation and ensure your property sale is tax-efficient and compliant with current tax law.
